What Is Equipment Breakdown Anyway?
When you think of equipment breakdown, do you usually think of machinery-intensive industries, such as steel mills, pulp and paper manufacturing, or electrical power generation?
What about “Main Street” occupancies – apartment buildings, office buildings and stores, or small manufacturers such as machine shops, bakeries and printers? Often overlooked, they can have equipment breakdown exposures, too, including heating boilers, hot water heaters, elevator controls, air conditioning and electric lighting.
In its simplest form, an equipment breakdown covers a piece of machinery when it stops working due to an internal malfunction or a broken part(s), requiring the repair or replacement of that equipment. The insurance policy will cover the physical damage to the equipment itself as well as the resulting business interruption from the loss of that equipment.
For example, consider the impact if the air conditioning equipment for a resort hotel breaks down during a summer holiday weekend. Even two days without air conditioning could result in lost income, as patrons may not want to stay at a hotel in the summer with no air conditioning. During a busy holiday weekend, when the resort is fully booked with overnight guests, banquets or weddings, such a breakdown could be devastating – both in terms of the hotel's loss of income and damage to the resort’s reputation. To avoid this, the hotel would need to repair the equipment as quickly as possible, potentially resulting in additional costs to expedite repairs.
Or perhaps a candy manufacturer that specializes in treats for the holiday season suffers the loss of a specialized molding machine during peak production time. The candy couldn’t be made and customers would have to shop elsewhere for their novelty products. Alternatively, maybe that manufacturer uses an ammonia-cooled system to solidify their candies and there is a leak. All of that candy would need to be discarded and the facility cleaned before production can begin again. In either case, the result would be lost income and potentially expensive repairs or replacement of equipment.
Finally, an interesting new development in Equipment Breakdown insurance is the increase in installations of small solar power facilities in small commercial buildings. Costs for these facilities have dropped by about half and installations have tripled since 2010. When a small commercial building has solar panels on their roof, the owner of the panels generally sells back the electricity to the power company, providing an additional income stream. An equipment breakdown loss to the panels or any of the supporting equipment would result in the loss of this income stream as well as a property damage loss of replacing the damaged equipment.
When underwriting these small commercial risks, equipment breakdown is as serious a threat as fire, tornado or vandalism. Your insured should have plans in place to reduce equipment breakdown exposures – knowing, for instance, who to call when something breaks, where to get a needed spare part or how to implement a plan to move production to another plant.
Equipment breakdown is often overlooked by risk management professionals and underwriters. At Gen Re, we're here to help you evaluate your exposure.