What Is Equipment Breakdown Coverage and Do You Need It?

Equipment Breakdown Coverage will pay for the damage to equipment as a result of an accident (sudden failure) that is excluded in your Property Policy, i.e. Mechanical Breakdown, Electrical Arcing, Steam Boiler Explosion. This includes repair/replacement of damaged equipment, damage to property caused by the malfunctioned equipment and, when the coverage is tied into your Business Income Coverage, lost revenue due to your inability to continue normal operation during time of loss.

Most business owners believe their commercial property insurance covers the equipment that runs the business. It does, but only as long as it was damaged by something external to the machinery (i.e., fire, wind or theft). However, if the damage occurs internally within the machinery (e.g. burned out compressor, electrical arc in a panel, cracked boiler), the Property Policy will not pay for repairs. That's when equipment breakdown coverage comes into play.

What does equipment breakdown coverage pay for that property insurance excludes?

Equipment breakdown coverage covers the internal equipment failures your property insurance calls out as exclusions. The Causes of Loss Special Form (CP 10 30) excludes mechanical breakdown including rupture or bursting due to centrifugal force. This form excludes damage resulting from artificially generated electrical, magnetic, or electromagnetic energy. That exclusion sweeps in the arcing and surge currents that can melt wiring, devices, and computer systems. Additionally this form excludes explosions of steam boilers, steam pipes, engines, and turbines which are owned, leased, or operated by you.

The policy will restore only some of the resulting damage. In the event of a boiler explosion, the fire damage would be restored under your property policy, but the boiler itself (as well as anything else damaged directly from the excluded cause) is on you. When a business owner requests "mechanical breakdown insurance", this is the product a commercial broker actually quotes. Hartford Steam Boiler specializes in equipment breakdown coverage. They describe the risk that your commercial equipment faces (short-circuiting of electricity, excessive mechanical force, overloading, failure of controls), which does not apply to most other types of property.^[3]

Compare the outcome for the three big excluded causes:

ISO offers two different options for purchasing Equipment Breakdown coverage. The Equipment Breakdown Cause of Loss Endorsement (CP 10 46) will add equipment breakdown coverage to your standard Property Policy's listed causes of loss. The standalone Equipment Breakdown Protection Coverage Form (EB 00 20) provides a similar type of coverage as its own coverage section. Small Commercial Risks typically purchase the CP 10 46 endorsement on their Package Policy. Large Industrial Schedules are normally written on a monoline basis through specialists such as Hartford Steam Boiler, one of the oldest names in the business. In either case, normal wear and tear remains an exclusion. What triggers coverage is a sudden, accidental breakdown, not slow deterioration.

What does equipment breakdown coverage cover?

The Boiler & Machinery coverage includes many items beyond the Boiler Room. That's why it is also referred to in the industry as Boiler and Machinery (B&M) Insurance, a nomenclature derived from the early days of the business when the first inspectors were inspecting pressure vessels. Older B&M Policies contained a listing of each piece of equipment covered by the Policy with each item listed as an "Object". That term is still shown on Equipment Schedules today. Examples of items typically included under a standard B&M Policy include:

• Boilers and pressure vessels: steam boilers, hot water heaters, and other fired or unfired vessels operating under pressure or vacuum.
• Electrical distribution equipment: panels, switchgear, transformers, and the building wiring that arcing destroys.
• Air conditioning and refrigeration: air conditioning chillers, compressors, walk-in coolers and the cooling systems that can cause spoilage of your product if they fail.
• Mechanical equipment: electric motors, fans, pumps, engines and other machines with moving parts can experience catastrophic failure due to centrifugal forces.
• Computers and communications gear: computer servers, telephone systems, and diagnostic equipment that can be destroyed or rendered useless by power surges.
• Production machinery: those pieces of equipment and machinery that ultimately produce products for sale by you.

Insurers' definitions of covered equipment vary, so review your policy schedule. Some types of equipment require specific descriptions. In addition, equipment being tested may carry separate terms.

Does equipment breakdown coverage replace lost income?

It can. A transformer failure could result in a business shut-down as well as physical damage, and many business owners find the lost earnings or income from this type of interruption to be far greater than the cost of replacing equipment. When CP 10 46 is attached to your policy, equipment failure will become an included Covered Cause of Loss under your commercial property program, so a business income form similar to CP 00 30 responds to a breakdown shutdown the same way it responds to a fire. Alternatively, the standalone EB 00 20 form carries its own options for coverage of Business Income and Extra Expenses. If neither form is attached to your policy, then if you have a transformer burnout, which shuts down your business for three weeks, you would have no property claim and no income claim.

The deductibles are structured differently on the Equipment Breakdown (EB) side of the policy. Equipment Business Income Coverage typically has a deductible for the waiting period (hours), often 24, separate from the dollar deductible applied to the equipment loss/damage. Breakdown Deductibles may be per piece/object or as a multiple of the Average Daily Value of the equipment lost. Therefore, even though you have a low dollar deductible quoted, there could be a full day of down time that is not covered. Read the deductible page of the quote, not just the limit.

This same issue applies to spoilage. The property form excludes loss due to a change in temperature or humidity caused by a breakdown of refrigeration/cooling/humidity control equipment, which is generally how a grocery store or restaurant can lose inventory. Coverage for spoilage coupled with equipment breakdown coverage addresses this gap.

Even with coverage for compressors and motors, the most common disputes in this area are still claims involving wear and tear. Wear and tear remains excluded under breakdown policies. Therefore, the first thing the insurer wants to know is was the loss caused by a failure which happened quickly (i.e., was it sudden), or did the item simply wear-out over time (i.e., was it gradual). That one word, "sudden," is the key that determines if an entire claim will be paid. At the teardown, the insurer's engineer opens up the failed component and reads what the damage indicates. A scored bearing surface along with carbonized winding insulation indicates a gradual type of wear, whereas a fractured shaft or a single clean arc mark clearly shows a quick-type failure.

Therefore, the failed component will probably be the best piece of physical evidence available to rebut an insurer's engineer who may deny the loss based on "wear and tear". Do not let the repair contractor haul the dead compressor away, because once it is gone there is nothing to put in front of that engineer.

Why does the insurer inspect your equipment?

Equipment breakdown is the rare line of insurance where the inspection is part of the product. Insurers writing this coverage employ inspectors who examine boilers and pressure vessels on a regular cycle and get failing components repaired before they burst. The targets are mundane: when the National Board of Boiler and Pressure Vessel Inspectors reviewed its incident database, low water, operator error, and poor maintenance led the causes, and the Board logged 2,087 incidents in 1996 alone.^[1]

Those visits serve as a dual purpose. Boiler Safety Laws of the States will require an Operating Certificate to be renewed based on a periodic examination conducted by an inspector who is commissioned through a National Board inservice commission, a credential the National Board issues for only this type of work.^[2] In those jurisdictions where insurers are permitted to have their own personnel perform the required periodic examinations in order to maintain the required Operating Certification, a single visit will protect the interests of both the insurer and provide ongoing compliance requirements to keep the Operating Certification valid without paying a separate fee to a third party. This particular inspection carries enforcement teeth found nowhere else in commercial insurance: if the inspector finds the subject equipment being covered is in a dangerous condition, under the EB 00 20 conditions he/she can immediately suspend coverage on the specific piece of equipment upon delivery of written notice, with no prior notification period.

This guide is for educational purposes and summarizes standard ISO policy language. Your policy's specific terms, conditions, and endorsements control. Talk to a licensed broker about your actual exposures.

The Bottom Line

A basic equipment breakdown (EB) insurance coverage protects you from a sudden, accidental failure of your mechanical and electrical equipment, the arcing, or the boiler explosion that a standard property policy leaves out. Most often the damage to your property is less expensive than the loss of revenue caused by shutting down operations while repairs are being made. Check with your agent/insurance company to see if the CP 10 46 endorsement is attached to your current property policy or if it is in place as a standalone EB 00 20 form. In either case, be certain to carefully review the business income waiting period prior to signing anything.