How to properly insure building equipment and production machinery Featured

8:00pm EDT April 25, 2010

When many people think of business insurance, they think of protecting their buildings from natural disasters such as fire, water and wind. However, most policies that insure against those dangers leave you exposed to something just as dangerous: production equipment and machinery breakdown.

“The loss of income that may be associated with a breakdown could be substantial,” says Nancy Hamilton, account executive with ECBM Insurance Brokers and Consultants. “If your operations cease, then you are not generating revenue and you’re not continuing your business.”

Smart Business spoke with Hamilton about how to ensure that your company’s revenue doesn’t come to a crashing halt if your equipment does.

What are the major risks involved with building equipment and production machinery?

The biggest risk is the loss of income associated with a breakdown loss. If your production machinery goes down, it can result in significant loss of revenue. This is especially important if your product can become spoiled and useless if your equipment fails. Refrigeration, cold storage, warehousing and food storage all have a risk of spoilage.

Most businesses rely on their equipment to maintain operations and generate income. With today’s new technology, businesses are at an even greater risk because they have become more dependent on equipment that has fragile, complex components. This high-tech equipment has a greater risk of breaking down. This is a problem because not only could new technological equipment have complex components that could cause a breakdown, but it could be more expensive to replace, as well.

How can a company protect itself against those risks?

First, it could purchase an equipment breakdown policy. These policies are formally called boiler and machinery coverage and will provide coverage that ensures a breakdown is covered.

Equipment breakdown can be prevented with proper maintenance, and most equipment breakdown policies include inspection services and loss control services. Also, companies can avoid losses from production machinery breakdowns by conducting a thorough review of their business exposure. This review should take place with the help of an insurance professional or risk manager to ensure that your company is properly covered.

How does insuring building equipment and production machinery differ from insuring other things?

One major difference is the standard property policy excludes most types of equipment breakdowns, such as mechanical breakdown, electrical current, power surge and explosion of steam boilers or pipes. A property policy covers the building and equipment for certain types of losses, such as fire or wind damage.

The equipment breakdown policy covers the same damage to building and equipment, but resulting from a sudden breakdown of the equipment. You could have your existing property policy endorsed to add boiler and machinery coverage. Depending on your current components, it could be added to a property policy.

What are some major misconceptions business owners have about boiler and machinery insurance?

The biggest misconception surrounding this insurance is that a business only needs boiler and machinery insurance if it has a boiler. This misconception is understandable because, in the past, companies always thought they had to have a boiler in their building, or an older building or institution to need this type of coverage.

But boiler and machinery coverage has expanded. Companies now rely on different, more diverse types of equipment, including high-tech devices, computers and the Internet to keep their businesses going. So to stay relevant, the boiler and machinery policy has evolved to cover more equipment exclusions.

It can cover other types of losses and equipment, including most types of production machinery. For instance, losses to electrical systems continue to be a leading type of loss in equipment breakdown insurance.

How does boiler and machinery coverage integrate with a company’s other insurance policies?

This insurance should be standard. It’s more common than it has been in the past. Whenever you are looking at your company’s overall exposure, boiler and machinery coverage should be addressed, along with property and liability, and every other insurance coverage.

One critical thing it does is provide coverage for some of the same things the property insurance covers; it’s covering your building, your contents and your loss of income, but your property insurance is covering it for all risks. Those things are not excluded. But the damage to your property caused by equipment breakdown is specifically excluded.

Just like a building fire can put you out of business and cost you significant revenue losses, an equipment breakdown loss could have the same consequences. Boiler and machinery coverage is filling the gap that is left by that exclusion on the property policy.

How can a company determine how much insurance is necessary?

Again, you should consult with an insurance professional to evaluate your exposures and determine the impact that that type of a loss would have on your operations. You would have to look at the value of your property, the equipment itself, loss of business income, any damage to product — for instance, spoilage damage, if you are producing something that can spoil. The product could be lost due to a change in temperature or damage from the loss of power.

Nancy Hamilton is an account executive with ECBM Insurance Brokers and Consultants. Reach her at (610) 668-7100 x1263 or nhamilton@ecbm.com.