(June 2020)
Underwriting equipment breakdown coverage means identifying hazards, evaluating risk and controlling losses. The equipment that could breakdown must be identified, and then the properties that could be damaged must be evaluated. Loss control focuses on the identified equipment and preventing a breakdown.
The only cause of loss in this coverage form is breakdown of covered equipment. As a result, underwriting a risk requires identifying all covered equipment. The following items are covered equipment:
Underwriting must concentrate on the type(s) of equipment that the named
insured owns or operates, and this starts with the application, which should specify
all equipment that is to be covered. The named insured can request that any
combination of the following types of equipment be covered:
·
Pressure
or Vacuum
·
Mechanical
and Electrical
·
Production
Machinery
·
Diagnostic
Once the type of equipment to be insured is identified, underwriting must
focus on the equipment’s age and condition, the equipment’s importance to the
operation, and how the equipment is positioned or placed inside each building.
Property damage to covered property is the primary coverage being provided. The covered property is defined as property the named insured owns or property of others that is in the named insured’s care, custody or control and for which it is legally liable.
This definition far exceeds that of covered equipment. This means that when covered equipment breaks down there is a strong possibility that surrounding property could be damaged, and if it is damaged, this coverage form would pay for that damage too.
As a result, it is very important for the underwriter to consider the building that contains the equipment as well as the covered property that is inside the building. This evaluation should start with the building’s construction and the location of the equipment inside it.
Are appropriate safety features incorporated in the building that contains the equipment? A detailed examination may reveal that safety features should be added. How would an equipment breakdown affect the building, especially if pressure or vacuum equipment is involved? A boiler explosion can shred a building and penetrate through its roof, walls, or other structural components if the explosion’s force is not properly directed.
What personal property could an equipment breakdown damage? It is important to know the type of property in the building, who owns it, and the extent of the named insured’s legal liability for that property. There is no “property not covered” section in this coverage form, so all property is covered. Therefore, the property’s susceptibility and damageability must be evaluated carefully.
Breakdown is direct physical loss to covered equipment that requires repairing or replacing it. Unless excluded elsewhere in the coverage form, the direct physical loss must be due to one of the following categories:
Breakdown to covered equipment is the only covered cause of loss. Therefore, if breakdown can be prevented, the coverage form will sustain no losses.
Boilers are still a major exposure for many risks. If the risk has any kind of boiler, the best place to begin the underwriting process is in the boiler room. Because most issues involve housekeeping and maintenance, the presence of moral and morale hazards must be considered.
Note: Many of these comments also apply to heating systems, air-conditioning systems, pressure, vacuum, and refrigeration equipment, turbines, and some types of production equipment.
Illumination
Boiler rooms are usually in the basement or tucked away in a corner and tend to be overlooked until there is a problem. The equipment may not be taken care of properly if the boiler room is poorly illuminated. Adequate lighting is absolutely necessary in order to examine and properly service the equipment. Light switches must be accessible, and missing or burned out light bulbs should be replaced.
Storage
The boiler area should not be used for any storage because:
Inspection
Certificates
These must be current. Most jurisdictions require that the boiler operating certificates be posted near the equipment. The certificates verify that qualified representatives have inspected the boiler and its equipment, verified that it is in sound operating condition, and confirmed that it received adequate preventive maintenance. These certificates are often provided by the insurance company providing the coverage.
Control
Panels
Open boiler control panels, missing access panels, missing electrical junction box covers, or boiler circuit wiring that is in disarray should not be ignored. These conditions suggest improper servicing that could lead to injuries or breakdowns and significant loss of business income. All panels and covers should be replaced when work is done. Qualified and licensed contractors must do all electrical work, and the work performed must comply with all applicable electrical codes.
Wet Floors
Equipment or system leaks, storm water runoff, or drains that back up may cause or result in water near or around boilers. Water present in any form suggests high moisture content in the boiler room that can lead to mold, mildew, corrosion, and general boiler deterioration. These conditions could cause breakdowns or shorten equipment life. The presence of water could compromise a boiler's combustion components. Floor drains that are kept clear and work correctly and a relatively dry area usually means that the boiler and its equipment probably receive timely service and maintenance as needed.
Underwriting communication and computer equipment requires a different approach than underwriting boilers, pressure, vacuum, and energy generating or transmission equipment. Housekeeping, scheduled maintenance, and repair issues must be addressed. These issues should be handled in conjunction with a scheduled equipment replacement program that usually minimizes breakdowns.
The named insured has more ability to control equipment maintenance in this category. Maintenance does not always require using outside sources of experienced and qualified personnel, although doing so is recommended. Electrical wiring should be up to date, comply with applicable codes, and not have any detectable faults or malfunctions. Wiring should be reasonably new, and licensed electricians should regularly inspect the wiring for damage, fraying, and worn or torn insulation. Heat and sparking from defective or improperly installed wire can damage equipment as well as start fires. In all cases, wiring should be appropriate and adequate to meet the risk’s operations and anticipated electrical loads.
Good housekeeping is essential in all occupancies. Premises that are well-kept suggest an absence of moral or morale hazards.
Fire detection and suppression systems should be evaluated. Areas that contain a concentration of equipment that is sensitive to heat or water should be protected by dry chemical or non-water based extinguishing agents.
Can the named insured’s equipment be readily replaced if there is a loss? Can it conduct operations from a different location? These and other issues should be considered when evaluating potential business income losses.
Many of the statements above also apply to this machinery and equipment. However, these items must also be evaluated specifically by industry. Some items are large and similar to boiler exposures. Others are similar to electrical equipment. All equipment must be well maintained and routine maintenance documented in service logs.
Finally, the named insured should have a plan to follow if a loss should occur. Employees should be aware of emergency procedures and actions to take if there is an emergency. Alternative production facilities should be arranged or considered, as well as alternative work locations if a loss renders the insured location untenable. Advance planning and procedures usually serve to limit the consequences of even serious losses.