Property and Casualty Insurance · Property Insurance · 6 min read
Equipment Breakdown and Cyber Costs
- Identify how equipment breakdown insurance fills standard commercial property coverage gaps for pressure, mechanical, and electrical failures.
- Explain key equipment breakdown coverages, common exclusions, and policy conditions such as the suspension clause.
- Describe first-party cyber insurance coverages, including incident response, cyber extortion, and business interruption resulting from system outages.
The Need for Equipment Breakdown Coverage
Equipment breakdown coverage was historically known as boiler and machinery insurance. Standard commercial property causes of loss forms generally do not cover mechanical breakdown, damage to electrical apparatus from electrical arcing, or the rupture or bursting of steam boilers or steam pipes. The specific wording and exceptions depend on the form, but these standard exclusions leave a significant coverage gap for commercial operations that rely on heavy machinery and utility systems.
Equipment breakdown coverage fills the coverage gap created by exclusions for mechanical, electrical, and pressure failure in standard property policies. The standard ISO form used to insure these exposures is the Equipment Breakdown Protection Coverage Form. Under the standard ISO Equipment Breakdown Protection Coverage Form, a breakdown is a specified pressure or vacuum equipment failure, mechanical failure, or electrical failure that causes direct physical damage to covered equipment requiring repair or replacement, subject to the form's definition and exceptions.
Covered equipment spans several primary categories of business machinery. Pressure equipment includes fired boilers, unfired pressure vessels, and associated piping. Electrical equipment includes transformers, switchboards, circuit breakers, and electric motors. Mechanical equipment includes pumps, compressors, turbines, engines, and air conditioning and refrigeration systems. Communication and computer systems equipment used in business operations can also be included as covered equipment under equipment breakdown forms.
Consider a manufacturing facility where a large electric motor suddenly suffers severe internal electrical arcing, destroying its inner coils and halting assembly. If the applicable commercial property causes of loss form excludes the motor's arcing damage and no exception or endorsement restores coverage, that form would not pay for the motor. Equipment breakdown coverage can pay for the motor's repair or replacement if it is covered equipment and the arcing qualifies as a covered breakdown, subject to the policy's terms, deductible, and limits.
Common mistakes
- Assuming standard commercial property causes of loss forms cover damage from steam boiler explosions or electrical arcing; these forms generally exclude that damage, so check for equipment breakdown coverage, applicable exceptions, and coverage for resulting damage.
- Believing that an equipment breakdown policy covers damage caused solely by ordinary wear and tear or corrosion.
- Confusing expediting expenses with extra expense coverage; expediting expenses specifically fund temporary repairs and rush transportation such as express freight, while extra expense covers costs to keep the business operating.
- Assuming all cyber policies use standardized ISO wording; cyber insurance is less standardized than commercial property, and insurers frequently use proprietary forms.
Key points
- Equipment breakdown insurance, historically called boiler and machinery insurance, fills coverage gaps left by standard property exclusions for mechanical, electrical, and pressure failure.
- Under the standard ISO form, a breakdown is a specified pressure or vacuum equipment failure, mechanical failure, or electrical failure that causes direct physical damage to covered equipment requiring repair or replacement, subject to the form's definition and exceptions.
- Equipment breakdown forms generally exclude fire, lightning, earth movement, flood, and normal wear and tear, and insurers may suspend coverage if equipment is found in a dangerous condition.
- Optional and supplementary coverages include expediting expenses, business income, extra expense, utility interruption, spoilage, and brands and labels coverage.
- Standard property policies generally exclude or sharply limit electronic data losses; first-party cyber insurance or other applicable coverage can address specified digital risks.
- First-party cyber policies may cover incident response costs such as forensic investigations, legal advice about notification duties, credit monitoring, and public relations, depending on the policy's terms.
- Cyber insurance can also cover cyber extortion payments, data restoration costs, and cyber business interruption, which may include contingent interruption and waiting periods.
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