Breaking down the coverage

Ever shop at Canadian Tire for something other than tires?

The concept is similar for boiler and machinery insurance. It’s a category that encompasses a wider range of products than the name might suggest.

Boiler and machinery is the original term given to specialty insurance that covers any gaps or exclusions in the standard commercial property policy related to the explosion of boilers and pressure vessels, said Derrick Hughes, vice president of reinsurance at The Boiler Inspection and Insurance Company of Canada (BI&I).

“As technology evolved, it became known as ‘equipment breakdown,’ and included the additional perils of mechanical breakdown, electrical arcing and electronic breakdown,” Hughes explains. It further evolved to cover other exclusions normally found within a standard commercial property policy.

“If you are a broker looking to expand your business into boiler and machinery, then it is the same as for property insurance,” says Abdur Malik, Toronto-based executive underwriter of engineering at Allianz Global Corporate & Specialty. “For example, if you want to insure a condo building, a condo building has a big boiler and heating, ventilation and air conditioning (HVAC).”

For years, FM Global called equipment breakdown insurance what it is — equipment breakdown. But it seems the industry was so used to the terms “boiler and machinery,” the name stuck.

“We found ourselves having to explain equipment breakdown all the time and we just surrendered and went back to boiler and machinery,” says Brion Callori, the Rhode Island-based commercial insurer’s senior vice president and manager, engineering and research.

Power generation is a major market for boiler and machinery insurance. That’s because boiler and machinery insurance covers losses arising from breakdown of turbines, generators and transformers. Other clients looking for boiler and machinery include pulp and paper plants and the metals and mining industries.

Brokers seeking to take on more boiler and machinery business should consider the risks. Take a restaurant, for example, that relies on refrigeration and HVAC. A failure could result in property damage, business interruption, extra expense, or spoilage.

“If the restaurant relies on mechanical equipment such as a pasta maker for food preparation, the breakage of a moving part could lead to downtime and hefty transportation expenses, especially if the replacement part must be flown in from overseas,” Hughes observes.

Another form of equipment breakdown may be a loose connection in an electrical panel. This could lead to severe arcing, leading to a shutdown or extra costs related to a back-up generator.

Finally, point-of-sale systems have very sensitive micro-circuitry. They could suddenly stop working without any visible evidence of a breakdown, says Hughes. Micro-circuitry appears in computer servers and electronic storage devices, as well as manufacturing equipment.

“Imagine a stamping machine in which a microchip is controlled remotely,” Malik says. “If that microchip malfunctions, the stamping machine might stop working and then the company might suffer a business interruption loss.”

One recent trend in the boiler and machinery line is to cover losses when there is no apparent physical damage, said Malik. Property insurance usually requires physical damage to trigger coverage. But sometimes when equipment breaks down, there is no apparent physical damage to the microchip.

“Technology continues to drive business, and in response, equipment breakdown coverage is evolving,” Hughes says. “With technology now the size of DNA, the presence of a mere speck of dust straddling computer circuits, when combined with humidity, can be corrosive to electrical components and cause equipment to simply stop working.”

A major risk factor is poor operator training, said FM Global’s Callori. An operator who has spent 20 years knows what to do if a piece of equipment breaks down. But what if that operator retires and is replaced by a new worker? “Clients will have emergency plans written up, but will people know how to react in the heat of the moment?”