EB 00 20- Equipment Breakdown Protection Coverage Form Analysis

EB 00 20–EQUIPMENT BREAKDOWN PROTECTION COVERAGE FORM ANALYSIS

(June 2020)

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INTRODUCTION

The Insurance Services Office (ISO) Boiler and Machinery Coverage Form was revised with the 07 01 edition and renamed Equipment Breakdown Protection Coverage Form. This name more accurately and completely responds to insureds’ coverage needs in the 21st century. This change required developing completely new forms, provisions, and endorsements. This analysis is of the 01 13 edition of EB 00 20. Changes from the 09 11 edition are in bold.

Note: Previous editions of EB 00 20 are in the Equipment Breakdown Protection Coverage Form Archive.

Related Article: ISO Equipment Breakdown Protection Coverage Form Archive

EB 00 20–EQUIPMENT BREAKDOWN PROTECTION COVERAGE FORM ANALYSIS

The coverage form opens by stating that certain provisions in it restrict coverage. It encourages careful reading of the entire policy in order to understand the rights and duties of both the named insured and the insurance company as well as to determine what is covered and what is not covered. It also points out that the insurance company uses the terms you and your to refer to the named insured and the terms we, us and our refer to the insurance company that provides coverage. Additional terms are also defined, but their definitions are found in F. Definitions later in this analysis.

A. COVERAGE

1. Covered Cause of Loss

The only covered cause of loss is a breakdown of covered equipment.

Note: Breakdown and covered equipment are both defined terms and are explained in detail in F. Definitions.

2. Coverages Provided

Insurance applies to only coverages that have a limit or the word INCLUDED entered in the spaces provided on the declarations. There is no coverage if there is no entry in that space.

The limit of insurance entered for each coverage is the primary limit. If INCLUDED is entered next to the coverage on the declarations, that coverage is included in the total limit per breakdown.

Each coverage provided applies to only the part of any loss that results directly from the covered cause of loss. There are ten coverages.

a. Property Damage

This coverage pays for direct damage to covered property that is located at a premises listed and described on the declarations.

b. Expediting Expenses

This coverage pays for surcharges, express charges, and other similar costs incurred in order to allow the named insured to remain in operation or to return to operation more quickly. The expenses may be used to make temporary or permanent repairs happen faster. They may also be used to obtain replacement items faster than normal.

 

Example: A production boiler at Perfection Products breaks down. The damage is too extensive to repair, and a new boiler must be ordered. Delivery and installation are estimated to take three months. Ready Helper, Inc. has an identical boiler and is willing to immediately sell and ship it to Perfection at its cost plus 10%. Expediting Expenses pays the 10% additional cost so that the boiler can be installed and operations resumed immediately instead of in three months.

 

c. Business Income and Extra Expense or Extra Expense Only

Extra expense only coverage is available, a combination of business income and extra expense coverage is available, or an extra expense only coverage is available. There is no option to purchase only business income coverage.

(1) With combined business income and extra expense coverage, the insurance company pays the sum of the following:

·        The named insured’s actual loss of business income during the period of restoration

·        The extra expenses the named insured must incur in order to continue operating the business during the period of restoration

When only extra expense coverage is selected, no business income payment is made.

The payment amount is determined through an analysis of the pre-loss operations in order to estimate the operations had there been no loss.

(2) This coverage is subject to the following:

Related Court Case: Business Interruption Loss Justified

There is no coverage for loss of business income or extra expense due to media or data that will not be or cannot be replaced or restored, based on the insurance company’s determination.

Media coverage is limited to the actual loss of business income and/or extra expense sustained during the period of restoration plus no more than 30 days following restoration of operations. It is further limited to no more than $25,000. The $25,000 limit can be increased by entries on the declarations.

 

Example: The computer at Perfection Products is damaged and half of its data is destroyed. Perfection estimates it will take two months to totally restore the lost records. As the work progresses, Perfection realizes that many of the files cannot be restored. This reduces the down time for which the insurance company will pay to one month but increases the actual down time that is incurred to three months.

 

d. Spoilage Damage

(1) Coverage applies for spoilage damage to finished products, property being processed, and raw materials. Coverage is dependent on all of the following:

 

Example: Perfection Products' bad luck continues. This time a boiler breakdown causes a refrigerated line to go down for almost two hours. As a result, the raw milk product being processed spoils and must be discarded. This coverage applies to the value of the spoiled milk.

 

(2) The named insured may incur necessary expenses in order to reduce the amount of loss due to spoilage. In that case, coverage applies to those expenses but only to the extent that they reduce the loss otherwise payable.

 

Example: Instead of Perfection Products’ refrigerated lines being down for two hours, the maintenance crew contacts a nearby neighbor to borrow their generator. The line is down less than 15 minutes and product is considered uncompromised. The cost of the borrowed generator is covered because it reduced the loss.

e. Utility Interruption

This coverage is available only if one or more of the following coverages is in force:

The above coverage(s) that applies is extended to include resulting loss or damage when utility services are interrupted. However, coverage does not apply unless all of the following conditions are met:

(1) The interruption must be a direct result of a breakdown of the utility’s covered equipment used to supply the named insured’s with services.

(2) The covered equipment that breaks down must supply electric power, communication services, air conditioning, heating, gas, sewer, water, or steam to the named insured’s premises.

(3) The utility service interruption to the named insured’s premises must last longer than the number of days waiting period on the declarations. Coverage begins once that waiting period ends. However, payment is still subject to other deductibles in the coverage form.

 

Example: If Perfection Product’s interruption problem was due to an offsite utility failure, no coverage would have applied. This utility interruption coverage, if purchased, would respond though.

 

f. Newly Acquired Premises

Coverage automatically applies at new premises the named insured purchases or leases during the policy period. Coverage applies for no more than the number of days shown on the declarations for Newly Acquired Premises. The time period begins as soon as the named insured purchases or leases the property. There are important conditions that must be met for this coverage to apply:

(1) The named insured must give the insurance company written notification of the new location once it knows about it and is able to do so.

(2) The named insured must pay the additional premium the insurance company calculates for the new location.

(3) The same coverage, terms, conditions, exclusions, and limitations that apply to other locations apply to the new location.

(4) The existing locations may have different coverages and deductibles. In such cases, the broadest coverage, the highest deductible, and the highest limits for existing locations apply to the new location.

 

Example: Perfection Products has four locations. The limits are $200,000, $300,000, $400,000, and $500,000, respectively. Each location is subject to a 5% deductible. Perfection purchases a new location and a loss occurs before it can notify the insurance company. The limit for that location is $500,000 subject to a 5% deductible.

 

g. Ordinance or Law Coverage (01 13 changes)

The Ordinance or Law exclusion deletes coverage for any increase in loss that is the result of complying with ordinances or laws that regulate repairing, replacing, or rebuilding a structure or building or being subject to their enforcement. This coverage pays such costs, subject to certain conditions. Coverage applies only if such laws or ordinances were in effect at the time of the breakdown.

(1) The insurance company pays for the following with respect to damage to a structure or building as a result of a breakdown:

The named insured can choose to rebuild at another premises. If it does, the insurance company does not pay more than the increased costs of construction it would have paid to rebuild at the location that sustained the loss.

The named insured may have to rebuild at another premises because ordinances or laws require that it do so. In that case, the most the insurance company pays is the new premises’ increased cost of construction.

(2) The insurance company does not pay for any of the following:

(3) When part of the loss is a covered loss and part of the loss is not covered

When the structure or building is damaged by a covered breakdown and at the time is damaged by another cause of loss that is not covered under this form, the cost of the ordinance or law compliance or enforcement must be shared by the carriers providing insurance coverage if the reason is based on the entirety of the loss. Each company pays only the proportion of the total ordinance or law loss that the breakdown loss represents. (01 13 change/words added)

 

Example: An old covered building is valued at $500,000. It sustains $300,000 in damage from equipment breakdown and a fire. A local ordinance requires installing special upgrades any time building damage is 50% or more of its value. Enforcing this ordinance results in an additional loss of $80,000. The breakdown portion of the loss is $75,000, or 25% of the total, and the fire portion of the loss is $225,000, or 75% of the total. Because the breakdown portion of the loss is 25%, only 25% of the additional loss due to enforcing the ordinance ($20,000) is covered.

If the named insured purchased Ordinance or Law Coverage under its Commercial Property Coverage Form, that coverage would respond to the remaining $60,000 of the additional loss due to enforcing the ordinance.

 

Related Article: CP 04 05–Ordinance or Law Coverage

When the reason for the ordinance or law enforcement or compliance is based solely on the damage to the structure or building that is not covered under this coverage form, then no ordinance or law coverage will be provided even if a covered breakdown may have occurred at the same time as the other loss.

Note: The commercial property coverage form that insures the damaged building is responsible for the entire amount due under ordinance or law coverage.

 

Example: A fire damaged more than 50% of a five-story brick wood-joisted building in the downtown area. A local ordinance required that such buildings be torn down if over 50% damaged in a loss. The construction must be at least masonry noncombustible if the named insured decides to rebuild. A covered breakdown loss to the building’s boilers occurred at the same time. The breakdown loss is covered. However, this ordinance or law coverage does not apply because the fire loss on its own triggered the ordinance enforcement.

 

h. Errors and Omissions

This unusual coverage is really forgiveness for forgetfulness. The insurance company has the right to deny coverage because of any of the following the insurance carrier agrees not to exercise its right:

·         The description or the location of the property was omitted or was in error

·         An owned or occupied location as of the coverage inception date was not included

·         Coverage was cancelled at an insured premises because of an error omission of the named insured error  

Forgiveness happens only if the situations were due to the named insured’s unintentional errors or omissions. As soon as the named insured becomes aware of such error or omission, it must report it to the insurance company and pay premium back to the date when the item of property or premises should have been added to the policy.

An important exception is that there is no forgiveness when the named insured makes an error or unintentional omission in reporting values or the coverages requested.

 

Example: Perfection Products’ second location runs the same product line as its fourth location. Perfection accepts an offer from a competitor to purchase the second location and omits that location from the renewal application. Unfortunately, the sale falls through. Even more unfortunately, Perfection completely forgets to notify the insurance company that coverage on the second location should continue. To make matters worse, a significant loss occurs at the second location after the policy renews that suddenly reminds Perfection of its oversight concerning the building. However, this story has a happy ending because this coverage pays for Perfection's unintentionally omitting this location from its renewal application.

 

i. Brands and Labels

This coverage is an agreement by the insurance company to reduce the salvage value of branded or labeled covered property damaged by a covered breakdown. The named insured is permitted to remove all branding/ labeling or to stamp the word salvage on the merchandise, but only when doing so does not actually damage the property. The insurance company pays the removal or stamping expenses but the real value of this coverage is that full value is paid by the insurance company for the property even though the salvage value of the property for the insurance company is significantly reduced.

The sum of the cost of the damaged property plus the relabeling expenses cannot exceed the limit of insurance.

 

Example: Perfection Products manufactures and sells a line of toys under its own name. An accident occurs that causes smoke damage to the packaged toys. Perfection and its insurance company agree on a settlement for the damaged merchandise. The company plans to sell all of them as salvage. Perfection agrees but arranges to have all packaging stamped with the word SALVAGE before it relinquishes the property. The insurance company must accept the salvage as marked and also pay for the stamping costs.

 

j. Contingent Business Income and Extra Expense or Extra Expense Only Coverage

This coverage is subject to the same terms and conditions as Business Income and Extra Expense or Extra Expense Only coverage.

Coverage applies to any loss the named insured sustains because of breakdown of covered equipment at a premises it does not own or operate. The loss must negatively affect the named insured's ability to deliver its products or services or must result in lower sales at any insured location listed on the declarations.

Coverage applies to only contingent locations scheduled on the declarations and for only loss of income and extra expense or extra expense for the scheduled sales, services, or materials.

The named insured most do everything it can to influence the contributing or recipient business to resume its operations. It must also cooperate with contributing or recipient properties in every way possible. However, it cannot provide financial assistance that the insurance company does not authorize.

 

Example: The demand for Perfection’s toys exceeds its ability to manufacture them. Perfection enters into a contract with Teeter Totter Toys to produce additional toys under Perfection’s label in order to meet demand. Unfortunately, Teeter's production line's primary power train breaks down under the strain of the additional demand and all production ceases. Perfection unsuccessfully tries to influence Teeter to spend additional money to expedite replacing the drive train and resuming production. This is because replacement parts are not available outside normal distribution channels and time frames.

Perfection swallows hard and suffers the loss of unmet sales. Partly because of this coverage, the good news is that the loss of expected business income from the products Teeter Totter would have produced is covered.

B. EXCLUSIONS

This coverage form has 21 exclusions. They apply whether the loss event results in widespread damage or affects a significant geographical area or not and are essentially absolute. Subject to specific exceptions, each is totally excluded, regardless of any other cause or event that contributes to a loss, concurrently or in any other sequence. The insurance company does not pay for any direct or indirect loss or damage caused by or that results from any of these events.

Note: Some of the following exclusions do not have titles. We have added titles in these cases that suggest the nature and content of the exclusion.

1. Ordinance or Law (01 13 change)

There is no coverage for any increase in loss due to enforcing or complying with any rule, ruling, regulation, ordinance, or law that regulates or restricts building, installing, altering, repairing, replacing, operating, using, disposing of, or cleaning up covered property. (01 13 words added)

There is a very specific exception. This exclusion does not apply when the ordinances or laws apply to the use and operations of electrical supply and emergency generating equipment. This exception is further limited to apply to only covered property situated on a hospital premises.

 

Example: A breakdown causes a significant loss at Judson Hospital. It was built in 1980 and had been grandfathered from several changes in ordinances and laws. None of those upgrades is covered except for the five separate upgrades to the electrical and backup generating equipment.

2. Earth Movement (01 13 change)

Loss or damage due to earth movement is excluded. Earthquake, landslide, land or mine subsidence, volcanic action, tremors, and aftershocks related to earthquake are listed as types of earth movement, but this exclusion is not to be limited to only those types. (01 13 words added)

3. Water

Coverage does not apply to any of the following:

a. Any damage from flood, surface water, waves, tides, tidal water, or overflow of a body of water. Waves include tidal waves and tsunamis. A body of water is any natural or man-made river, creek, ocean, or lake. Spray from any of the above, wind-driven water, and storm surge are also excluded.

b. Damage from or related to mudslide or mudflow

c. Damage from water that discharges, overflows, or backs up in any way from sewers, drains, sumps, sump pumps, or other similar equipment

d. Damage caused when water leaks or discharges from either domestic water pipes or sprinkler systems

e. Water damage from underground water that seeps into doors, windows, floors, surfaces, foundations, and basements. There is also no coverage if water that presses against any of these items or that flows into them causes the damage.

f. Damage caused by material that waters described in a., c., and e. above carry, or by any material that mudslide or mudflow described in b. above moves or carries

 

Example: The river was flowing fast and picked up trees, shrubs, docks, and more. Mavis was relieved that the flood did not enter her warehouse but was upset that a waterborne tree crashed against its foundation and caused an opening that allowed water into the air conditioning units. There is no coverage for the breakdown of the air conditioning unit because of this exclusion.

 

There is no coverage if the water damage is due to an act of nature or in any other way.

4. Nuclear Hazard

The insurance company does not pay for loss or damage from nuclear reaction, radiation, or radioactive contamination. This exclusion applies regardless of the way that such incidents occur.

5. War or Military Action

There are three specific excluded types of warlike activity. War can be undeclared or a civil war. In addition, any action that involves military forces and/or military agents is excluded. Rebellion, revolution, usurped power, insurrection, and any government response to any of them are also excluded.

Note: Terrorism is not listed.

6. Explosion

There is no coverage for loss or damage that explosion causes. However, coverage does apply to explosions of covered equipment that consists of steam boilers, piping, turbines, or engines; electric steam generators; or gas turbines. There is also an exception for centrifugal force or mechanical breakdown that causes an explosion in moving or rotating machinery.

Note: The Commercial Property Coverage Form covers these types of explosions.

Related Court Case: Explosion Exclusion Exceptions Are Examined by Court

7. Fire or Combustion Explosion

Loss or damage caused by a fire or combustion explosion is excluded. There is no coverage even if the fire or combustion causes a breakdown. Coverage also does not apply if the fire or explosion occurs at the same time as or ensues from a breakdown.

Note: The named insured's Commercial Property Coverage Form insures these events. This exclusion prevents the Equipment Breakdown Protection Coverage Form from responding to a fire loss that results in duplicate coverage.

8. Fungus, Wet Rot, and Dry Rot

Coverage does not apply to loss or damage caused by the presence or any activity of fungus, wet rot, or dry rot. However, if such activity or presence causes a covered breakdown, that covered breakdown loss or damage is covered.

Note: C. Limits of Insurance 6. Limited Coverage for Fungus, Wet Rot, and Dry Rot, provides some coverage, and this exclusion does not preclude such coverage. However, that coverage applies only for the portion of loss or damage caused by the presence or activity of fungus, wet rot, or dry rot that result from a covered breakdown.

9. Virus, Bacterium, or Other Microorganism

There is no coverage for any loss because of any virus, bacterium, or other microorganism that causes or could cause physical distress, illness, or disease. However, if these items cause a breakdown, that loss or damage is covered. In addition, if a loss event could be considered excluded in this exclusion or in exclusion 8. above, the terms of exclusion 8. apply.

A final paragraph states that this exclusion cannot be used to try to create coverage elsewhere in the policy.

Note: This statement is unusual because it presupposes that a claimant may try to use this exclusion wording as a way to create coverage elsewhere in the policy.  

10. Furnace Explosion

Loss, damage caused by, or that results from an explosion within the furnace of a chemical recovery boiler or its piping to the atmosphere is excluded.

Note: The Commercial Property Coverage Form covers these types of explosions.

Related Court Case: Furnace Not Defined so Object Held Covered by Boiler and Machinery Policy

11. Pressure or Electrical Testing

There is no coverage when covered equipment sustains damage during either pressure testing or electrical testing.

 

Example: Air is pumped into pipes to test its strength. The air pressure gauge malfunctions so that the pressure pumped in is ten times the testing requirement. The pipes explode due to pressure. Coverage is denied. However, later the building owner sues the testing contractor for damages.

12. Fire Extinguishing Agents

Coverage does not apply to any loss or damage caused by water or any other agents used to extinguish a fire, regardless of whether or not the extinguishing attempt was successful.

Note: This is another attempt to prevent duplication of coverage. The policy covering fire should pay for fire-related damage.

13. Depletion, Deterioration, Corrosion, Erosion, Wear, or Tear

Loss or damage caused by depletion, deterioration, corrosion, erosion, wear, and tear is excluded unless a breakdown occurs. Coverage then applies to only the damage the breakdown causes.

Related Court Case: Damage to Insured Property Caused by Corrosion Held Not Covered

14. Other Insurance

There is no coverage for loss or damage that results in a breakdown if aircraft, vehicles, freezing, lightning, sinkhole collapse, smoke, riot, civil commotion, vandalism, or the weight of ice, sleet, or snow causes the breakdown. This exclusion applies only if other coverage the named insured carries insures against these causes of loss, regardless of whether or not the named insured can collect it.

 

Example: Vandals who are angry at their landlord break into the Mendleton Apartments’ boiler room, destroy piping, and rip out control panels. As a result of this activity, the boiler overheats and sustains a mechanical breakdown. Mendleton has vandalism coverage under a businessowners policy with Acme Insurance Company. Mendleton presents the claim to Acme, but Acme voids Mendleton’s businessowners policy when it realizes that Mendleton lied on the application.

Because other insurance would have been in effect except for Mendleton’s own actions, there is no coverage under this coverage for the boiler’s mechanical breakdown.

15. Windstorm or Hail

There is no coverage when windstorm or hail causes a breakdown.

Note: The Commercial Property Coverage Form insures these causes of loss.

16. Delay or Interruption

Coverage does not apply to delays or interruptions of any business, manufacturing, or processing activities. However, the Business Income and Extra Expense, Extra Expense Only, or Utility Interruption insurance this coverage form provides may cover these losses.

17. Business Income and Extra Expense, Extra Expense Only, and Utility Interruption Coverages

The following additional exclusions apply to these coverages.

 

Example: A breakdown caused by centrifugal force shattered equipment and sent fragments flying throughout Percussive Industries’ rented space and into the rented space of its neighbors. The building owner immediately cancelled Percussive’s lease because its operations did not align with the other occupants. Percussive was able to relocate, but the change increased the period of restoration by four weeks. The four weeks additional time is not covered because it was due to the lease being cancelled.

18. Power, Light, Heat, Steam, or Refrigeration Indirect Damage

Covered equipment may break down, and that breakdown causes loss or damage to covered property because of too much or too little power, light, heat, steam, or refrigeration. This exclusion eliminates coverage for property that sustained the indirect damage. Coverage provided within the Business Income and Extra Expense, Extra Expense Only, or Utility Interruption insurance under this coverage form is an exception to this exclusion.

19. Utility Interruption Coverage

With respect to only Utility Interruption Coverage, there is no coverage for any loss that is a result of any of the following.

This exclusion applies regardless of the named insured having coverage for such losses under other insurance.

20. Indirect Breakdown Damage

The Business Income and Extra Expense, Extra Expense Only, Spoilage Damage, or Utility Interruption insurance are the only indirect breakdown damage coverages available. All other indirect losses are excluded.

21. Neglect

The named insured cannot walk away from a loss without taking appropriate action to save and protect covered property from further damage during the loss and after it. If the named insured neglects to do so, any losses attributed to such inaction will go unpaid.

C. LIMITS OF INSURANCE

This section contains much more than just the Limits of Insurance. It has a unique condition for public utility entities as well as eight additional coverages.

1. One Breakdown

The Limit Per Breakdown on the declarations is a cap. It is the most that the insurance company pays for any loss or damage from a single breakdown event regardless of the number of applicable coverages or the sub-limits entered.

2. More Than One Insured

The limit is a per breakdown limit, not a per insured limit, so regardless of the number of insureds, the limit of insurance on the declarations is the most paid.

3. Per Coverage Limits  

a. A limit of insurance or the word INCLUDED must be entered on the declarations for each coverage provided. If INCLUDED is entered next to a particular coverage, the limit for that coverage is part of the limit per breakdown.

b. If a dollar limit is entered next to a particular coverage, the insurance company pays up to that limit of insurance for that particular coverage.

Note: It is important to note that a limit entered for a coverage is not an additional limit. It is a sub-limit within the per breakdown limit described in Item 1. Using the term INCLUDED provides the named insured with the most flexibility in any settlement.

 

Example: Responsible Business, Inc. has coverage for $1,000,000 per Breakdown and schedules the limits as follows:

Coverage

Scenario 1

Scenario 2

Limit Per Breakdown

$ 1,000,000

$ 1,000,000

     Property Damage

$ 1,000,000

$ 1,000,000

     Expediting Expense

$ INCLUDED

$ 25,000

     Business Income/Extra Expense

$

$

          Extra Expense Only

$ INCLUDED

$ 50,000

          Extended Period Of Restoration (Number Of Days Of Coverage)

_______ Days

_______ Days

          Data Or Media ($25,000 Limit of Insurance) or

$

$

Spoilage Damage

$ INCLUDED

$ 25,000

Utility Interruption

$ INCLUDED

$ 10.000

     Coverage applies only if services are interrupted at least

24 Hours

24 Hours

Newly Acquired Premises

INCLUDED

INCLUDED

     Number Of Days Of Coverage

_______ Days

_______ Days

Ordinance Or Law

$ INCLUDED

$ 25,000

Errors And Omissions

$ INCLUDED

$ 10,000

Brands And Labels

$ INCLUDED

$ 10,000

Contingent Business Income/Extra Expense

$ INCLUDED

$ 50,000

     Covered Premises:

$

$

     Sales, Services Or Materials:

$

$


 

Responsible has a covered breakdown loss and submits the following loss amounts:

Coverage

Actual loss

Available Coverage

Scenario 1

Scenario 2

Property damage

$850,000

$850,000

$850,000

Extra Expense

$75,000

$75,000

$25,000

Spoilage

$50,000

$50,000

$25,000

Ordinance or Law

$35,000

$35,000

$25,000

Brands and Labels

$15,000

$15,000

$10,000

Total settlement amount

$1,000,000

$935,000

The total amount of loss is $1,025,000. As a result, Scenario 1’s loss payment is capped at $1,000,000. Because of the use of sub-limits, the loss payment in scenario 2 is only $935,000.

4. Public or Private Utility Property

The Limit of Insurance for Property Damage on the declarations is replaced by the amount of one dollar ($1.00) when the property meets all of the following conditions:

If the named insured is a private or public utility, this item is changed to state that the property must be owned by a private or public utility that is not the named insured

Note: The nominal one-dollar limit exists as a technicality. Providing this limit permits the coverage form to provide indirect damage protection for consequential loss to the named insured as a result of damage to this non-owned utility equipment.

5. Coverage Limitations

The insurance company pays no more than $25,000 for such direct damage that is a direct result of a breakdown to covered equipment for each of the following. When the term INCLUDED is entered, or a higher limit is entered on the declarations, they replace the $25,000 sub-limit. These sublimits are subject to Limit of Insurance for Property Damage or the Limit per Breakdown. They provide additional coverage but not additional limits.

a. Ammonia Contamination

When ammonia contamination that occurs because of a covered breakdown and spoils covered property, this limitation applies. Any necessitated salvage expense is part of this limitation.

b. Consequential Loss

When a part or parts of a product are damaged, other undamaged parts of the product may be impossible to market. The reduction in the value of undamaged parts of a product because another part was damaged is subject to this limitation.

 

Example: Premier Cutlery sells cutlery sets. A mechanical breakdown loss results in the knives being destroyed. The forks and spoons in the warehouse are undamaged. All cutlery parts are made from the same batch of metal and cannot be properly matched to create a new batch of knives. The forks and spoons are sold as separates at a deep discount because they cannot be marketed as a set. The value of this loss is the reduction in value between the price as separates and what Premier could have been received as part of a set. The most paid for the loss in value is $25,000.

 

c. Data and Media

This limitation applies to the costs the named insured incurs to research, replace, or restore damaged data or media. It includes the costs to reprogram instructions used in any computer equipment.

d. Hazardous Substance

This limitation applies to the additional expenses the named insured incurs to clean-up, repair, replace, or dispose of covered property that a hazardous substance damaged, contaminated, or polluted.

Expenses subject to this limitation are those additional costs incurred over and above the amount that would have been paid if the hazardous substance was not present.

Ammonia is not considered a hazardous substance and, therefore, not subject to this limitation.

The coverage provided in this limitation is not subject to B. Exclusions 1. Ordinance or Law.

e. Water Damage

This limitation applies to water damage to covered property. The applicable limit of insurance must pay for both the damage and any salvage expense. Fungus, wet rot, or dry rot may result from such water damage. In that case, loss or damage from those substances is subject to the limitations described in 6. Limited Coverage for Fungus, Wet Rot, and Dry Rot below and becomes subject to the limit for Water Damage.  

6. Limited Coverage for Fungus, Wet Rot, and Dry Rot

Loss or damage to covered property caused by fungus, wet rot, and dry rot is excluded under Exclusion 8. This limited coverage gives back a small amount of coverage under very specific terms.

a. Property Damage

The limit of insurance is $15,000 aggregate over a 12 month time period. This is a per policy limit and not a per premises limit. A separate premises limit option is available but must be selected on the declarations. The limit can also be increased on the declarations. Whatever limit is entered remains subject to the Covered Property limit.

The coverage pays for loss or damage caused by fungus, wet rot, and dry rot resulting from breakdown to covered equipment but only if the fungus, wet rot and dry rot occurs in the same policy period that the breakdown occurs. The costs to tear out and replace covered property in order to access the fungus, wet rot, or dry rot is covered. Testing costs incurred after the property is restored are also covered, but only if there are reasons to suspect that fungus, wet rot, or dry rot is present. However, all of these costs are subject to the very small limit of insurance available.  

b. Business Income and Extra Expense or Extra Expense Only

This item applies only if coverage for Business Income and Extra Expense or Extra Expense Only has been selected on the Declarations.

When fungus, wet rot, or dry rot resulting from a covered breakdown causes a business income or extra expense loss, 30 days of coverage is available. This 30-day coverage is available if it is the only reason for the resulting business income and/or extra expense loss. It is also available as an add-on or add-into when it is only one of the reasons for the business income and/or extra expense loss. The 30 days are a maximum amount of time in a year, and the days are not required to be taken consecutively.

 The 30 days can be changed to whatever number of days is entered on the declarations.c. Ordinance or Law (01 13 change)

Any coverage purchased for ordinance or law does not extend to coverage to enforce or comply with any ordinances or laws that relate to demolishing, destroying, rebuilding, remodeling, or remediating property because fungus, wet rot, or dry rot is active or present. There is also no coverage for any type of required response to or assessment of the effects of fungus, wet rot, or dry rot.

7. Increased Cost of Loss and Related Expenses for Green Upgrades

One consideration when replacing damaged equipment is its environmental impact and energy efficiencies. The named insured might decide that the energy and environmental savings from using more efficient or Green items more than offsets their higher upfront costs. This coverage provides some insurance for those upgrades.

a. Property Damage

When a breakdown of covered equipment occurs during the policy period, and the insured incurs expense due to green upgrades, this extension applies. The insurance company pays for the following:

o    Reusing or salvaging the damaged property

o    Ensuring that the recyclable damaged property and construction waste is taken to appropriate disposal sites

o    Using vegetated roof sections in place of damaged roof sections but only if installed after a Green standards-setter recommends doing so

o    Fees that the Green standards-setter imposes to determine if any certification or recertification is in order according to its standards

o    Equipment testing fees required as part of the certification or recertification process

o    Cost to flush out and/or test the air of the renovated space after it is repaired or rebuilt. This cost is incurred only if the Green standards-setter recommends doing so because of air quality concerns related to repairs or rebuilding.

o    Fees to flush out and/or test the air of the renovated space after it is repaired or rebuilt. This is done according to the Green standards-setter’s recommended procedures and to mitigate deficiencies in indoor air quality that result from the repair or rebuilding.

The items described above are only for amounts that exceed the amounts the insurance company would have paid if the loss did not involve Green upgrades.

The insurance company does place some limitations on its willingness to pay green expenses. It will not pay for:

·         Green additional costs to repair or replace damaged property if it is simply a way to accumulate points towards certification or recertification

The amount the insurance company pays is 25% of the total property damage loss without any Green upgrades, subject to a maximum limit of $100,000. This can be overridden by entering a different limit or the word INCLUDED in the appropriate spaces on the declarations.

b. Business Income and Extra Expense or Extra Expense Only

This item applies only if coverage for Business Income and Extra Expense or Extra Expense Only has been selected on the Declarations.

If green upgrades used to repair or replace the damaged coverage property lengthen the period of restoration, this coverage does not pay more than an additional 30 days. The days do not have to be consecutive. The 30 days can be changed on the declarations.

c. Green Upgrades Conditions

This coverage:

 

Example: Fit and Green Health and Fitness Center is dedicated to reducing its carbon footprint. All newly purchased equipment must generate its own power, where possible. A covered loss destroys 15 bikes and 10 treadmills, damages one portion of the roof, and most of the interior walls.

  • Fit and Green finds replacement bikes and treadmills that generate and actually return energy to the power grid. The cost is 10% higher than the standard equipment. This increase is covered.
  • Fit and Green hires an architect to redesign the interior so it uses less energy and also to design a vegetated garden for the roof. These costs are covered.
  • The architect recommends green wallboard and paint for the interior repairs. The costs above replacement cost are covered.
  • The cost above replacement cost to repair the damaged roof portion with a vegetated roof is covered. The cost to replace the entire roof is not.
  • Redesigning the interior adds 15 days to the period of restoration. The additional loss of income is covered.

The one breakdown limit is $350,000. The cost of the repairs and replacement is $400,000: $275,000 to bring the club back to how it was and $125,000 for the green upgrades. Because the one breakdown limit is only $350,000, the named insured must pay the remaining $50,000 of the upgrades.

D. DEDUCTIBLES

1. Application of Deductibles

The insurance company starts to pay only after the amount of any loss or damage exceeds the deductible shown on the declarations but will pay no more than the limit of insurance. The deductible is applied per coverage with two exceptions:

 

Example: Periwinkle has a Per Breakdown Limit of $2,500,000. $750,000 Property damage loss occurs, and the business is down for three months, with a loss amount of $250,000. The first 48 hours of the loss resulted in extra expense and business income losses totaling $10,000.

Scenario 1: Periwinkle’s Property Damage Limit is $1,500,000, Expediting Expense is $50,000, Business Income/Extra Expense is $500,000, and Brands and Labels is $25,000. The Property Damage Deductible is $2,500, Business Income and Extra Expense is 48 hours.

Scenario 2: Periwinkle’s Property Damage, Expediting Expense, Business Income/Extra Expense and Brands and Labels limits of insurance are INCLUDED. The combined deductible is $3,000.

Payments apply as follows:

Coverage

Scenario 1

Loss        Deductible     Total

Scenario 2

Loss        Deductible         Total

Property Damage

$750,000 - $ 2,500 =       $747,500

$750,000 -  $3,000 =       $747,000

Business Income/Extra Expense

$250,000 -  10,000 =        240,000

$250,000  -        0 =          250,000

Expediting Expenses

$  50,000 -   2,500 =          47,500

$  50,000 -         0 =          50,000

Brands and Labels

$  15,000 -   2,500 =          12,500

$  15,000 -         0 =            15,000

Total Paid by Insurance Company

                                 $1,047,500

                                   $1,062,000

 

2. Determination of Deductibles

There are five different types of deductible.

a. Dollar Deductible

When a flat dollar amount is entered on the declarations that amount is deducted from any loss settlement before the insurance company pays.

b. Time Deductible

This type of deductible is also known as a waiting period. The insurance company does not pay a covered loss until the number of hours or days entered on the declarations passes. Loss amounts incurred between the time of the occurrence and the end of the designated time or waiting period are the named insured's financial responsibility. A day equals 24 hours.

 

Example: Lizzie owns a dry cleaning operation. She has a five-day waiting period on her Business Income and Extra Expense coverage. A critical piece of equipment breaks down at 3:20 p.m. on 08/03/20. The breakdown results in the business being shut down until the equipment is repaired. Repairs are finished on 08/08/20 at 1:45 p.m. Business does not resume until the fifth day after the accident, but the repairs are made before five 24-hour periods pass. As a result, the Business Income And Extra Expense coverage does not pay any part of this loss.

 

c. Multiple of Daily Value Deductible

Time deductibles may not be to the named insured’s advantage. The initial period after a loss frequently involves significant loss of income and extra expense. Subsequent periods involve lesser loss amounts because arrangements have often been made for the business activity to continue, and contracts are renegotiated or cancelled. This front loaded disadvantage can be mitigated by developing a more equitable time deductible. It is the Multiple of Daily Value Deductible and is calculated as follows:

Step 1. Determine the business income that would have been earned for the entire premises where the breakdown loss occurred during the period of restoration as if there was no loss.

Step 2. Divide Step 1 by the number of days the business would have operated during the period of restoration. The result is the daily value.

Step 3. Multiply Step 2. by the number of days entered on the declarations for this deductible.

Step 4. The insurance company subtracts Step 3. from the amount of the covered loss. It then pays the amount of loss or damage that exceeds this deductible amount up to the limit of insurance that applies.

d. Percentage of Loss Deductible

Percentage-of-loss deductibles are often used in place of dollar deductibles. However, the way this coverage form applies them is different from the way other coverage forms apply them. This coverage form applies the percentage to the amount of the loss instead of to the covered property’s value.

 

Example: Major Manufacturing Company has a $1,000,000 Property Damage limit on its Equipment Breakdown Protection Coverage Form. Major sustains a $300,000 loss when its primary assembling equipment breaks down. The following is what Major recovers under three different deductible approaches:

$50,000 Flat Deductible

5% Deductible used in other property forms

5% of Loss Deductible used in this coverage form

$300,000 loss

$300,000 loss

$300,000 loss

–$50,000 deductible

–$50,000 deductible (5% 0f $1,000,000 limit)

–$15,000 deductible (5% of loss)

$250,000 payment

$250,000 payment

$285,000 payment

 

e. Minimum or Maximum Deductibles

This deductible is used with both the Percentage of Loss Deductible and the Multiple of Daily Value Deductible. It gives the named insured a definite range of payment.

If the named insured selects the Multiple of Daily Value Deductible or the Percentage of Loss Deductible, the deductible amount is calculated and then compared to the minimum and maximum deductible on the declarations.

 

Example: Lizzie chooses a 10% Percentage of Loss Deductible for Property Damage and a five-day Multiple of Daily Value Deductible for Business Income and Extra Expense. Both coverages are subject to a $500 minimum deductible and a $5,000 maximum deductible. Lizzie's boiler breakdown causes $60,000 in covered property damage and $15,000 loss of income for the 30 days her operation is shut down. Her daily value is $500.

The Property Damage deductible is $60,000 X .10 (10%) = $6,000. Because $6,000 is more than the $5,000 maximum, she is responsible for only $5,000.

The Business Income deductible is $500 X 5 (days) = $2,500. Because $2,500 falls between $500 and $5,000, Lizzie is responsible for $2,500.

E. EQUIPMENT BREAKDOWN PROTECTION CONDITIONS

These conditions are in addition to the Common Policy Conditions.

Related Article: IL 00 17–Common Policy Conditions Analysis

Note: Many of these loss conditions are similar to those found in commercial property coverage forms.

1. Loss Conditions

a. Abandonment

The named insured cannot surrender or turn over property to the insurance company without its permission.

 

Example: Montgomery Metals Manufacturing's secondary production line sustains a covered equipment breakdown loss. Because business is slow, Montgomery decides it can handle all its production on its main production line, informs its insurance company that it will accept a cash settlement, and requests that the company remove the equipment from its premises. The insurance company refuses to accept the equipment. Montgomery has to rethink its decision and determine its next step.

 

b. Appraisal

The named insured and the insurance company may not be able to agree on the value of property or the amount of loss. In that case, either may make a written demand for an appraisal of the loss. Each party selects its own competent and impartial appraiser. The appraisers then select an umpire or have a judge in the court that has jurisdiction appoint one. They submit to the umpire differences in value or amount that they cannot resolve. A decision by any two parties is binding on all parties. Each party pays its own appraiser and shares the cost of the umpire equally.

The insurance company retains its right to deny the claim, even if there is an appraisal.

 

Example: Jane's production boiler breaks down. Jane and Cheapskate Mutual, her insurance company, cannot agree on its value. They agree to submit the dispute to appraisal. Jane selects an experienced appraiser who just happens to be her brother. Cheapskate selects a totally impartial party who has no appraisal credentials. Both "appraisers" are rejected because Jane’s selection is biased, and Cheapskate's selection is not qualified.

 

Related Court Case: Insurer Must Accept Decision of Its Approved Umpire

c. Defense

Owners of property may sue the named insured because of claims that involve their property. If they do, the insurance company has the option to defend the named insured, and it does so at its own expense.

Note: Defense at its own expense means the company does not reduce the amount of insurance to pay losses.

d. Duties in the Event of Loss or Damage

(1) The named insured has a number of duties to perform if a claim or demand for coverage occurs. It must:

(2) The insurance company has the right to examine any insured under oath at reasonable times concerning the claim or the insurance coverage provided. This includes questions regarding the named insured's books and records. The insured must acknowledge any examination by its signature. The insurance company has the option to examine any person alone and not in the presence of any other insured.

Related Court Case: Insured Fails to Produce Required Documents Following Fire Loss

e. Insurance under Two or More Coverages

More than one coverage may apply to a given loss. In that case, the insurance company does not pay more than the actual amount of loss or damage, subject to any applicable deductible. Duplicate payments are not made.

f. Legal Action against Us

No legal action can be brought against the insurance company until all of the following requirements are met:

·        There is compliance with all of the coverage form’s terms

·        It is brought within two years following the date of the breakdown

·        The insurance company agrees that an obligation exists when a third party alleges that the insured is obligated to it. This agreement may be the result of arbitration. However, a third party cannot include the insurance company in a legal action to establish the named insured’s obligation to that third party.

g. Loss Payable Clause

The following conditions apply to loss payees:

h. Other Insurance

There may be other insurance that is identical to the insurance that this coverage form provides that applies to the same loss. In that case, this coverage form pays on a proportional basis.

There may be other insurance written on a different basis than the insurance this coverage form provides that applies to the same loss. In that case, this coverage is excess over that other coverage, subject to the limit of coverage that applies to the loss.

Note: E. Equipment Breakdown Protection Conditions 3. Joint or Disputed Loss Agreement addresses claim situations where a commercial property coverage form and this coverage form insure the same loss.

Related Article: CP 12 70–Joint or Disputed Loss Agreement: Coordinating Equipment Breakdown Insurance with Commercial Property Insurance

i. Privilege to Adjust With Owner

Loss or damage to property of others may occur when it is in the named insured's care, custody, or control. In that case, the insurance company has the right to settle the claim directly with the property’s owner. Documentation that the insurance company paid the owner satisfies the named insured's claim against the company.

j. Reducing Your Loss

The named insured must do a number of things after a covered breakdown occurs:

(1) Resume full or partial business operations as soon as possible.

(2) Attempt to make up for lost business within a reasonable period of time. The time period to make up for lost business often will extend beyond when the operations are able to resume.

(3) Use all reasonable means to minimize or avoid a business income loss. The following are some examples:

k. Transfer of Rights of Recovery against Others to Us

If the named insured or any other covered party has rights of recovery against another entity, those rights transfer to the company at the time of payment. The rights transferred apply only to the amount the insurance company paid. Those rights must be secured and nothing done after a loss that negatively affects them. The named insured can waive its rights against others in writing under either of the following situations:

l. Valuation

This section contains eight separate paragraphs relating to valuation, but there is no tying together of the paragraphs. Each appears to stand on its own. If there is a conflict between any of them, there is no method of resolution within the coverage form wording.

(1) This first item is ambiguous because it states that one of the following is used by the insurance company to determine the value, but it doesn’t explain which will be used. Normally, a statement would be included to state that the lesser or greater of the two is to be used.

If obsolete equipment or property that has no value to the named insured is damaged, the insurance company will pay nothing for it.

(2) Improved Equipment

This is an addition to the basic valuation. Up to 25% above the amount of the property damage that is recoverable is available to pay to enhance the safety of the covered equipment. This amount is available if the named insured desires it or if the insurance company requires it.

 

Example: Maypole Metalmakers is insured under an Equipment Breakdown Protection Coverage Form with a $500,000 limit for property damage. Maypole's insurance adjuster tells Maypole's owner that its recent loss to a hydraulic press is covered. The owner is concerned about safety and decides to replace the current model that costs $42,000 with a much safer one that costs $51,000. This additional amount is covered.

(3) Warranty or Service Contract

When covered property that is subject to a maintenance or service contract or a warranty is damaged in such a way that the contract or warranty is made void, the insurance company will reimburse the named insured for the amount it had paid for the unused portion of that warranty or contract. This applies only when the warranty or contract is nonrefundable and cannot be transferred.

(4) Time to Replace

The named insured has 24 months after the date of the covered breakdown to repair or replace the property that was damaged. Unless it agrees in writing to a longer period, the insurance company pays only the cost that it would have paid to repair or replace the damaged property or the damaged property’s actual cash value at the time of the breakdown, whichever is less.

(5) Selling Price

The named insured must meet all of the following conditions before property it holds for sale is valued at selling price:

Selling price is the price the property would have sold for if there was no loss or damage. However, it is reduced by any discounts the named insured would have offered and expenses it would have otherwise incurred.

(6) Data or Media

Valuation for loss or damage to Media or Data is based on the following:

No payment will be made for damaged data or media that, based on the insurance company’s determination, cannot be replaced with similar property that serves the same function.

(7) Spoiled Property

Loss or damage to Covered Property under the Spoilage Damage Coverage is valued as follows:

Note: This section of this condition addresses only overhead. It does not address profit.

(8) Salvage Value

A named insured may obtain items to use on a temporary basis following a covered loss in order to keep operating. The salvage value of this property is deducted from the insurance valuation at settlement because it is a new asset that the named insured did not have before the loss.

m. Business Income and Extra Expense Coverage Additional Conditions

The named insured can choose to be on either a coinsurance basis or an annual reporting basis. The type of operation should be considered when deciding the best option for a particular named insured.

These are not general conditions. Instead, they apply to only Business Income and Extra Expense Coverage.

(1) Annual Reports

The annual reporting basis can provide the most flexibility for an operation and does match the premium and the exposures precisely. When this is the option selected, the named insured must complete the insurance company’s approved Annual Report of Values Form once a year. The report is required to reach the company within three months of the annual report date entered on the declarations. It is then due on each subsequent anniversary date.

Note: It is unclear if it is due on the anniversary date of the three months due date or the anniversary date of the reporting form date on the declarations.

(2) Adjustment of Premium

The insurance company calculates the earned premium for the past year after it receives the report of value. If it is more than the premium the company charged, the named insured pays the difference. If it is less, the insurance company refunds the difference to the named insured. The return premium is never more than 75% of the premium originally charged.

(3) Coinsurance

If the named insured does not submit the required reports, the penalty is that coverage becomes subject to a coinsurance penalty. However, it is difficult to see how this could apply because the report isn’t due until after the policy period is complete. This would mean that the coinsurance penalty would be applied retroactively, which could be difficult. Of course, many business income losses are not settled until after the policy period because the losses themselves often extend beyond the policy period. When the coinsurance condition applies, the insurance company does not pay the full value of any loss if the actual business income annual value is more than the estimated business income annual value. The amount paid is determined by the following formula:

Step 1. Divide the estimated business income annual value by the actual business income annual value at the time of the breakdown. The result is a multiplier factor.

Step 2. Multiply the total business income loss amount by Step 1.

Step 3. Subtract any deductible amount that applies from the amount determined in Step 2.

The insurance company pays the lesser of the amount determined in Step 3 or the business income and extra expense limit of insurance. Other insurance or the named insured's own financial resources pay any amount that remains.

Note: It does not seem to be necessary to include a statement that the named insured would have to rely on some other specified source to take care of any unpaid loss. It should be sufficient to state the maximum amount the policy pays and leave it at that.

Important: The penalty applies separately to each location when coverage applies to more than one location.

2. General Conditions

Many of these general conditions are similar to the corresponding ones in commercial property coverage forms.

a. Additional Insured

Persons or organizations designated as additional insureds are considered insureds under the Equipment Breakdown Protection Coverage Form but only to the extent of their interest.

b. Bankruptcy

The insurance company's obligations under this coverage form are not affected or changed if the named insured or his or her estate becomes insolvent or declares bankruptcy.

c. Concealment, Misrepresentation, or Fraud

This is a foundational condition because trust is an essential part of the insurance contract. When ANY insured conceals, misrepresents, or is engaged in fraud regarding certain material facts, the coverage part is void. This means that it is though it never existed. This protects the insurance company.

This is a drastic situation so to protect the named insured this condition is limited and applies only if the action is intentional, the information is material, and it is related to one of the following:

d. Liberalization

The insurance company may adopt coverage form revisions that broaden this coverage without making an additional premium charge. If it does so at any time up to 45 days before this policy’s inception date or during its term, the broadened coverage automatically applies to this coverage form.

e. Mortgageholder

Trustees are included in the term mortgageholder.

The insurance company pays the mortgageholder for direct damage to covered property caused by or that results from a breakdown to covered equipment in their order of precedence and as their interests appear.

Foreclosure or similar proceedings on covered property does not void the mortgage holder's right to receive loss payments.

The insurance company may refuse to pay the named insured's claim because of its acts or because it failed to comply with coverage terms. In that case, the mortgageholder is still entitled to receive claim payments, but it must assume the following additional responsibilities:

Once the insurance company agrees that the mortgageholder is entitled to the payments, but the named insured is not entitled, the mortgageholder becomes responsible for satisfying the coverage form’s terms. When the insurance company pays the mortgageholder and not the named insured the following apply:

The insurance company may choose to become the mortgageholder. It does so by paying the mortgageholder the entire principal plus accrued interest. In this case, the named insured must pay the insurance company the amount of mortgage debt that remains.

 If the insurance company decides to cancel, it is required to give the mortgageholder the following number of days written notice before cancellation takes effect:

Note: Statutes in many states supersede these notice periods.

 If the insurance company decides to non-renew, it is required to give the mortgageholder at least ten days written notice before the policy’s expiration date.

 If the insurance company suspends coverage, it suspends it for both the named insured and the mortgageholder. Suspension takes place immediately – see Condition i – and applies even if the mortgageholder has not yet been notified. However, the mortgageholder must receive written notice of any such suspension.

f. No Benefit to Bailee

This insurance is for the named insured’s benefit. Parties entrusted with covered property that belongs to the named insured are not entitled to that benefit.

g. Policy Period, Coverage Territory

The insurance that this coverage form provides applies to loss or damage that begins during the policy period and in the coverage territory. The coverage territory consists of the United States of America, its territories and possessions, Puerto Rico, and Canada.

h. Premium and Adjustments

The named insured must report the full 100% insurable values at each location to the insurance company every year as of the anniversary date. It must report the value for each coverage separately. The renewal premium is determined based on the rates in effect as of the renewal date for all values at risk.

The named insured must maintain the records it needs to complete these reports and have those records available for the insurance company or its representatives to examine at the following times:

i. Suspension

This feature is unique to the Equipment Breakdown Protection Coverage Form. Any insurance company representative can determine that covered equipment is in or is exposed to a dangerous condition. In that case, that representative may immediately suspend coverage with respect to that equipment by delivering or mailing written notice of suspension to the named insured's last known address or to the location of the suspended equipment.

 

Example: Practically Perfect Property Insurance Company insures Kim's Kandee Kitchen. Practically's senior equipment inspector notices that certain insured equipment is operating at considerably higher temperatures than their rating allows. The inspector enters Kim’s office and issues a written order to shut down the equipment within 30 minutes or have coverage on that equipment suspended. Kim ignores the order. Three days later, the equipment the inspector identified breaks down and starts a fire. With a copy of the inspector's written order in hand, Practically notifies Kim that coverage was and still is suspended and that the equipment loss is not covered.

 

Suspended coverage can be reinstated only by the insurance company issuing an endorsement for that covered equipment.

Note: Oral statements that authorize resuming operations are unacceptable and do not reinstate coverage.

If coverage is suspended, the named insured receives a pro rata refund of premium paid to insure that equipment. However, the suspension is effective immediately, even before any refund is offered or issued.

3. Joint or Disputed Loss Agreement

This condition keeps the named insured from being a victim of insurance companies that disagree with one another about the way to handle a loss. It provides a way to pay a loss, after which the insurance companies determine their portion of the loss payment.

This condition applies only if all of the following are met:

This condition does not apply if both carriers agree that there is no coverage or no coverage disagreements exist.

The following conditions must be met in order for the terms of this provision to apply:

If these requirements are met and the named insured requests payment under this condition, each carrier pays the insured its entire undisputed amount and half of the disputed amount.

Note: This condition does not modify or waive any rights that any carrier has against another carrier or any rights an insured holds against the carrier.

The disputed amount of loss paid by this carrier is no more than the same loss agreement in the property coverage form that it would have paid if this coverage was not in force at the time of the loss. In any event, the carrier's liability does not exceed the applicable limit of insurance on the declarations. Amounts paid that the named insured accepts do not alter, waive, or surrender any other rights it has against the insurance company.

If the insurance carriers both agree to arbitration, the named insured will be paid within 90 days. After the insured is paid, the two carriers will enter into arbitration that is to be resolved within 90 days. The disputing insurance carriers each select an arbitrator, and then the arbitrators select a third arbitrator or, if they can’t agree on a third, the parties can request a judge to select one. The carrier responsible for paying the excess amount must pay interest. This interest cost encourages the parties to resolve their differences quickly. The interest is calculated at 1.5 times the highest prime rate from the Money Rates column of the Wall Street Journal published during the period of the Liquidated Damages.

Arbitration expenses are not part of the excess contribution used to calculate the liquidated damages. The carriers pay them in the same proportion that applies to the ultimate loss payment.

Related Article: Joint or Disputed Loss Agreement: Coordinating Equipment Breakdown Insurance with Commercial Property Insurance

 

Example: Old Hotel, Ltd. uses a low-pressure steam boiler to heat its premises. It has a monoline Equipment Breakdown Protection Coverage Form written with Boiler Coverage, Inc. and a commercial property coverage form written with Fire Insurance, Inc. A small fire and explosion occur, but the damage is confined to the boiler room. The entire loss amounts to $100,000. Some of the damage is clearly a boiler loss while other damage is clearly a commercial property loss. However, a problem arises from a significant part of the loss that either coverage form may insure. Each carrier points out the parts of its form that exclude coverage and suggests that the other carrier's coverage applies instead. Old Hotel wants to resume operations quickly but cannot because the two carriers cannot agree on the amount each should pay, and neither wants to give the hotel permission to begin repairs.

Old Hotel writes to each carrier and requests payment according to the Joint or Disputed Loss Agreement.

Boiler Coverage Inc. pays $10,000 as its undisputed amount. Fire Insurance, Inc. pays $15,000 as its undisputed amount. Each then pays $37,500 as its 50% of the $75,000 disputed amount. Old Hotel is able to begin repairs.

The carriers agree to arbitration. The arbitrators determine that Fire Insurance, Inc. is responsible for 75% of the disputed amount. As a result, it must pay Boiler Coverage, Inc. $22,500 plus the interest owed on that amount starting with the date of the payment made to Old Hotel and ending on the date Fire Insurance, Inc. reimburses Boiler Coverage, Inc.

F. DEFINITIONS

Defined words are used throughout the coverage form. Restricting their meaning to those definitions allows all parties to have a clearer understanding of the coverage intended. There are 17 defined terms.

1. Breakdown

Direct physical loss that damages covered equipment to the extent that it must be repaired or replaced. It must result from one or more of the following except as this coverage form otherwise excludes:


The following are not considered breakdown:

Note: Despite this comprehensive definition, disputes arise concerning coverage intent.

Related Court Case: "Mechanical Breakdown" and "Corrosion" Interpreted by Court

2. Business Income

The net income that would have been earned added to the continuing normal operating expenses. Net income is net profit or loss before income taxes. Payroll is considered a continuing expense.

Related Court Case: Business Interruption Coverage Held Not to Pay for Use of Reserve Finished Inventory in Absence of Income Loss

3. Business Income Actual Annual Value

The net income that would have been earned if there was no breakdown loss added to incurred continuing normal operating expenses.

Net income is net profit or loss before income taxes. Payroll is part of continuing normal expenses.

4. Business Income Estimated Annual Value

The net income added to continuing normal operating expenses based on the named insured’s estimate provided in its most recent Annual Report of Values Form filed with the insurance company. Payroll is included as part of normal operating expenses.

Note: This figure is also used to calculate the coinsurance penalty.  

5. Computer Equipment

Programmable electronic equipment that the named insured owns and uses to store, retrieve, and process data. Peripheral equipment that provides communication input and output, printing, and data transmission functions is included in this definition but no media or data.

6. Covered Equipment

a. Covered equipment is the following:

Covered equipment must be at a location listed on the declarations that the named insured owns, operates, or leases. This location-based requirement does not apply to Utility Interruption, Contingent Business Income and Extra Expense, or Extra Expense Only coverages.

b. Covered equipment does not mean or include the following:

Note: As used in chemistry, a catalyst is a substance that modifies and increases the rate of a reaction without being consumed in the process.

Note: Equipment otherwise covered and only occasionally used on vehicles, aircraft, self-propelled equipment, or floating vessels is covered.

Note: Equipment otherwise covered and only occasionally used on dragline, excavation, or construction equipment is covered.

Note: The Equipment Breakdown Protection Coverage Form is not intended to insure relatively minor kinds of maintenance-type property.

7. Covered Property

Property that the named insured owns or property of others in its care, custody, or control for which it is legally liable.

8. Data

Programmed and recorded material that is stored on media. It is also programming records that are used for electronic data processing or to electronically control equipment.

9. Extra Expense

The additional cost the named insured incurs to operate its business during the period of restoration. It is those costs that are in addition to the normal costs of operations that would have been incurred during the same period had there been no equipment breakdown loss.

10. Fungus

Any type or form of fungus. Mold, mildew, mycotoxins, spores, scents, and the byproducts that fungi produces or releases are provided as examples.

Note: Mycotoxins are toxins or poisons that fungi produce.

11. Green

Enhanced energy efficiency and the use of sustainable materials or products. It is also the use of sustainable methods in construction, design, manufacture, or operations. In order for any of the above to be considered green, a Green standards-setter must recognize it as such.

12. Green standards-setter

A governmental agency or another recognized organization that establishes, maintains, and communicates standards for what is considered Green in both products and practices. The following are currently considered Green Standards-Setters, but organizations similar to them can also be considered as such:

13. Hazardous Substance

Anything that a government agency determines to be a health hazard. Ammonia is an exception.

14. Media

This is electronic data processing or storage media. Examples are films, tapes, discs, drums, or cells.

15. One Breakdown

When an initial breakdown causes additional breakdowns, the sum of the initial plus all of the additional breakdowns are considered one breakdown. When multiple breakdowns occur at one location at the same time and are due to the same cause of loss, the sum of all such breakdowns is considered one breakdown.

Note: This is important when applying limits and deductibles. One breakdown means one deductible and one limit of insurance. Multiple breakdowns mean more than one deductible and multiple limits of insurance. This is similar to the 168-hour rule in earthquake and volcanic eruption coverage.

16. Period of Restoration

The time period that begins when a breakdown occurs or 24 hours before the insurance company is notified of the breakdown, whichever is later.

Note: As a result, it is extremely important that the named insured promptly report losses. If notification is delayed, business income coverage does not begin until 24 hours before the insurance company receives the notice.

 

Example: Jacklow International's equipment breaks down on 08/01/20. The insurance company is notified on 08/15/20. The period of restoration begins at the later of 08/01/20 or 08/14/20. In this case, coverage begins on 08/14/20. The delay in reporting the breakdown costs Jacklow 13 days of coverage.

 

It ends five days after the date that the damaged property is repaired or replaced with property of similar quality on a timely basis. However, there is a condition. If the property could have been repaired or replaced sooner than what actually occurred had reasonable speed been used, coverage ends five days after that date that the repair COULD have been completed with reasonable speed.

17. Stock

Merchandise that is being held in storage or for sale. Raw materials, property in process and finished products are all considered stock. Supplies used to pack and ship the merchandise are also stock.