This is the fourth in Viewpoint’s series of guest essays
submitted by organizations that are associate members of AAIS. For information on associate membership, contact Rick Maka, director of marketing, at
rickm@AAISonline.com or by calling 800/564-AAIS.
It was an hour before closing when the lights
flickered inside a wireless telephone store. A utility power spike
surged through the lines, shorting out equipment as smoke poured
from electrical outlets. Printers, scanners and computers were
damaged, but it was the loss of electronic cash registers, several
credit card readers and a computer server used to program new cell
phones that shut the store down.
A power outage might have been an
inconvenience in years past. Today a power surge can damage
sensitive equipment and cost even more in business interruption
losses and extra expense. Like the phone store, many businesses
depend on data connections and links to inventory and accounting
systems. That loss totaled $10,225, including more than $600 in
lost income, but it was covered by equipment breakdown insurance.
When it comes to equipment, nothing is simple
any more. Whether it’s Silicon Valley, or a shop on Main Street,
we all depend more than ever on new technology. It used to be that
commercial clients worried about equipment “in the basement and
on the roof.” That meant the boiler downstairs; maybe a large
rooftop air conditioning unit. Now, computers and other electrical
equipment are everywhere, in every type of business and location.
It follows that electrical and electronic
equipment is the No. 1 category of commercial loss - 10 or more
years ago, boilers, air conditioning and refrigeration were the
types of equipment most likely to break down. Mechanical
breakdowns of boilers and other equipment still account for many
expensive losses, but power surges and other electrical line
disturbances have become the top cause of equipment claims.
Equipment breakdown insurance is also changing
to keep pace with new equipment risks and the need for new types
of coverage. Once known as boiler and machinery insurance, and
mostly limited to larger manufacturers and
municipalities, equipment breakdown coverage is an increasingly
important part of most commercial insurance programs. After all,
your clients may not even have a boiler, but it’s likely they
rely on a range of equipment for sales, production, communications
and other essential functions.
Here are some typical losses that were covered
by equipment breakdown insurance.
-
Office Building — a power surge
was transmitted through an office communications network,
destroying 200 computers. Total paid loss: $100,000.
-
Law Firm — electrical arcing
knocked out power for a week. Attorneys and staff had to
relocate until repairs were completed. Total paid loss:
$176,000, including $114,644 in business interruption and
$60,356 in extra expense.
-
Retail Store — a voltage spike
damaged the store’s telephone system, printers and computer
circuitry. Total paid loss: $46,640.
-
Service Station — a short circuit
caused a surge that damaged 14 credit card readers on gasoline
pumps. An employee had to bill credit cards by hand. Total
paid loss: $27,881.
Equipment breakdown coverage protects against
the unique causes of equipment breakdown, just as property
coverage protects property damaged by fire or windstorm. Virtually
any type of business equipment is covered and equipment breakdown
insurance can be designed to fit with any commercial property
program. Equipment breakdown coverage will pay for the cost of
repair or replacement, spoilage and expenses incurred to protect
property, or to speed up the restoration of normal operations.
Business interruption coverage is an important
option, since high-tech means high risk, not only for equipment
damage, but business interruption losses and extra expense.
Business income exposures that were once low to moderate for many
businesses have increased as clients become ever more dependent on
equipment. Surveys show that up to half of all equipment breakdown
claims have business income expenses.
Equipment breakdown insurance continues to
evolve with new products and coverage. Since business interruption
risks are higher, more coverage is available for income losses due
to breakdowns. The list of covered equipment is greatly expanded
to include many types of electrical and electronic devices. Some
equipment breakdown policies offer extensive coverage for personal
computers, voice mail and other computer equipment, and for the
recovery or restoration of data lost because of a breakdown.
An important feature of some equipment
breakdown policies is contingent business income coverage. It
recognizes the interdependence of today’s economy by paying for
business interruption losses and expenses that result from a
covered equipment breakdown at the separate location of a key
supplier or customer. Some policies also include off-premises
coverage for an insured’s own equipment that breaks down when
used away from the insured’s building or property.
Perhaps the most significant change is that
equipment breakdown insurance is becoming a standard coverage.
Once offered primarily as a stand alone policy, dozens of insurers
are embedding the coverage into their property-casualty packages,
now including farmowners policies. By adding equipment breakdown
automatically, the risk is spread among many policyholders to
broaden the coverage, keep prices affordable and eliminate extra
paperwork. Research shows that agents prefer to package equipment
breakdown coverage.
Equipment breakdown insurance has changed
drastically over the years. It has adapted in response to
technology and the marketplace. What new exposures lie ahead? Who
can know for sure? Perhaps totally wireless offices, or buildings
that generate all their own electrical power. Past experience
shows there will be equipment we can’t yet envision and risks we
don’t foresee. As an industry, we must continue to improve
coverage and services to reflect the ways that our clients do
business.
Paul Henault has
been with HSB for 25 years, specializing in underwriting,
marketing and reinsurance. He is currently responsible for new
client company acquisition and is HSB’s Industry Affairs
officer. Paul is the product manager for HSB’s farm initiative
which focuses on the equipment breakdown needs for property
casualty companies specializing in the agricultural industry. He
has a BA in Economics from Boston College and an MBA in Finance
from the University of Hartford.
|
by Paul Henault, vice president,
