Most business owners understand the importance of insuring their physical property.
But too many are unaware of the need for insurance to cover losses resulting from that physical damage, such as lost revenue when mechanical equipment fails, says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group.
“In a business, people will buy property insurance to cover the building, its contents and those types of things and assume they are covered, but that coverage does not includes equipment breakdowns, electrical arcing and other things that can happen to the machines that run the business,” says McTeague. “And if a critical piece of equipment goes down and you are not covered for those losses, you could be out of business.”
Smart Business spoke with McTeague about how to ensure that your business survives an equipment failure.
What is equipment breakdown insurance?
The five main items that are covered under equipment breakdown insurance are electrical; equipment, air and refrigeration; equipment, boiler and pressure vessels; computers and communication equipment; and mechanical.
Where should a business owner begin when considering this insurance?
First, find an agent who is knowledgeable about this insurance and doesn’t just throw it in as an afterthought. It’s complicated, and, too often, it is overlooked, or not written properly, because agents aren’t comfortable with it. Business owners should rely on an expert to design the program.
Once you’ve identified that person, he or she will look at the overall property profile and, based on the building and content limits, look at what kind of machinery the business relies on. Is there production machinery? Are the machines redundant? What kind of protections do they have? What kind of maintenance programs? Have you done thermal imaging studies? What are you doing to prevent a loss in the first place? Does the business have a pressure vessel — a boiler?
Everyone understands the risk of a boiler exploding, but they don’t understand that a business could have electrical arcing that could take down a call center, resulting in the loss of thousands of dollars in repair costs and lost sales. The physical damage to that equipment may be covered under property insurance, but unless you have equipment breakdown insurance, costs such as lost business income and revenue and lost production time would not be covered.
People often think if equipment breaks down it’s uncovered because it is a wear and tear issue. But while wear and tear is not a covered peril, a sudden, accidental breakdown is. And there can be really large dollar amounts involved here.
What kinds of businesses should consider equipment breakdown insurance?
Every business runs on some type of electrical apparatus, such as a computer, so every business could benefit from this coverage.
A lot of times we see property owners who don’t have coverage because they are leasing the space out. But if an electrical arc blows out the air conditioning or heating of an office building and you don’t have coverage for temporary power and to expedite the repair process, you will have angry tenants not paying the rent.
This coverage is becoming more prevalent, but we estimate that half of the companies that need it still don’t have it, or they have base form coverage that might not cover things such as lost revenue or contingent business income. Take, for example, a manufacturer that relies on another company to make half its product and uses that product to put together its own product. If that supplier has an equipment breakdown, it could break down the whole chain, and the manufacturer is no longer able to produce its product. However, there is a way to write the insurance that covers that contingency.
What would you say to business owners who say they can’t afford this type of insurance?
A business is more likely to have this type of loss than a fire, and no business would go without fire insurance. A knowledgeable agent can change deductibles and move coverages around and make it affordable. This is not an exceedingly expensive coverage, but a resulting incident could be.
If you think about a rooftop unit on a mall that is cooling the entire place, the compressor alone can cost $20,000 to $30,000. Just to repair the physical damage can be brutal, but then there is the service interruption, lost revenue and lost rent.
Another example is medical centers that either don’t have coverage or don’t have it written properly. If there is a sudden power spike that blows an MRI machine; MRIs still have to be done, only now they’re going to be done somewhere else. And without insurance, you lose the ability to get that revenue back. If it takes three months to get parts from overseas and get it rebuilt, you could be out of business. But if your policy is designed correctly, those resultant losses will be covered.
The lost income and expedited expenses of getting the equipment repaired quickly can be costly. And the extra expense of sending your customers elsewhere to get the job done is something you have to do to keep your clients happy in the interim, because if you don’t, they’ll go somewhere else permanently.
Having equipment breakdown insurance can help ensure you cover those losses to get back into business as quickly as possible.
Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or email@example.com.