Equipment Breakdown: Identify the Failure, Not Just the Machine

Introduction

When a business machine stops working, it is natural to ask, "What broke?" For insurance purposes, a better question is: "What made it stop?"

The same machine can fail in very different ways:

• Something outside can damage it, such as a fire.
• Something inside it can fail, such as a burned-out motor.
• It can simply wear out over time.

Each of these causes sends the loss down a different path. This lesson teaches you to identify the cause first, so you can tell which kind of coverage, if any, applies.

By the end of this lesson, you should be able to:

• Explain what equipment breakdown coverage protects and name several kinds of equipment it can apply to.
• Separate damage from an outside cause, a failure inside the equipment, and normal wear and tear when the cause is stated.
• Explain why routine maintenance is not an insured loss, and how inspection services differ from paying maintenance bills.
• Separate the different costs a breakdown can create, such as repair, lost income and spoiled goods, and check whether each has its own coverage.

Before you start: You will build on how a commercial property package is assembled and how a loss is classified and on how business income and extra expense follow an interruption. It also helps to remember from reading a loss scenario that a peril is the cause of a loss.

The businesses, policies and amounts in this lesson are fictional. Real coverage depends on the actual policy's definitions, coverage grants and exclusions. Insurers' forms are not all identical.

Equipment breakdown: coverage for a machine that fails from the inside

Equipment breakdown coverage helps pay for losses when a business's equipment suddenly fails because of a problem inside the equipment itself. The equipment is not damaged by something outside it. The machine's own parts or systems fail.

The insurer sources describe three kinds of failure:

• Mechanical failure means moving parts break. One example is a manufacturing machine that will not start after its motor burns out.
• Electrical failure means an electrical part stops working. One example is an electrical panel or circuit breakers that stop working after a power surge.
• Pressure system failure means equipment that holds steam, air or gas under pressure fails. A boiler is the classic example.

The coverage is not limited to boilers. The sources give examples such as these:

• air conditioning and refrigeration
• computer and phone systems
• elevators
• generators
• electrical panels
• manufacturing machines

One insurer source describes these internal issues as including parts failure or user error. User error means someone operates the equipment incorrectly.

Boiler and machinery: the older name

You may also see the term boiler and machinery insurance. It is the older name for this type of coverage. As the name suggests, early coverage focused on boilers.

One insurer describes equipment breakdown insurance as a broader, more modern version of boiler and machinery coverage. It reaches computer systems, electrical systems and other equipment. A state insurance guide notes that this coverage has also been sold under names such as "systems breakdown" and "machinery breakdown."

If you meet any of these names, ask the same question: did the equipment fail from within?

Check 1: Which of these is an equipment breakdown exposure? An exposure is a situation that could produce a loss.

• A) A florist's delivery van is stolen.
• B) An internal circuit in a dental office's phone system fails, so the office cannot make or take calls.
• C) A windstorm tears off part of a roof, and rain soaks a copier.

Three routes for one machine: outside damage, internal failure or wear

Commercial property insurance and equipment breakdown insurance answer different questions:

• Commercial property insurance protects buildings and business property against damage from external causes. One insurer lists fire, storms, burglary and theft.
• Equipment breakdown insurance protects equipment that stops working because of an internal problem.
• Normal wear and tear means gradual deterioration from ordinary use over time. In the equipment breakdown description from one examined insurer, a breakdown caused by normal wear and tear is not covered.

Worked example: a bakery's walk-in cooler

A Reno bakery keeps its dough in a walk-in cooler. One morning the cooler is not cooling.

That is a symptom, meaning the visible sign of the problem. A symptom does not tell you the cause. A cooler can stop cooling for many reasons. In each version below, the cause is stated. Do not guess the cause from the symptom.

Version 1: fire from outside. A fire spreads from the kitchen next door and damages the cooler's compressor.

• The cause came from outside the equipment.
• Analysis starts with the commercial property coverage for fire damage, under that policy's terms.
• Equipment breakdown is the wrong first question here. The machine did not fail on its own. Something external damaged it.

Version 2: internal failure. Change only the cause. Now the compressor's motor burns out because of an internal electrical fault.

• Nothing from outside touched the cooler.
• A part inside it failed.
• This is the type of loss equipment breakdown coverage is designed for, subject to that policy's definitions of covered equipment and breakdown and its exclusions.

Version 3: wear and tear. Change the cause again. The repair report states that the compressor's bearings wore down gradually over years of normal use until they failed.

• The failure happened inside the machine.
• But the stated cause is normal wear and tear.
• Under the wear-and-tear exclusion described by the examined insurer, this breakdown is not covered.

Notice that the machine, the symptom and even the broken part can stay the same. The stated cause is the fact that changes the answer.

Two tempting mistakes

Mistake 1: "It's a machine, so it's equipment breakdown."

Version 1 shows why this is wrong. A machine damaged by fire was harmed by an external cause. Identify the failure, not just the machine.

Mistake 2: "It's old, so it must be wear and tear."

Age alone does not prove the cause. A 15-year-old compressor can still suffer a sudden internal electrical short. If the facts state a sudden internal fault, the machine's age does not turn that fault into wear and tear.

Classify a loss as wear and tear only when the facts actually establish gradual deterioration.

Compare the neighboring terms

Each term answers a different question:

• External damage asks: did something outside the equipment, such as fire, a storm or a thief, cause the harm?
• Internal failure asks: did a part or system inside the equipment fail, such as a burned-out motor or a surge-damaged panel?
• Normal wear and tear asks: did the equipment wear out gradually from ordinary use?
• Maintenance asks: is this the ordinary upkeep needed to keep equipment running? This is covered in the next section.

Check 2: A dental office's air compressor stops working. Classify each stated cause as external damage, internal failure or normal wear and tear.

• a) A burglar smashes the compressor while breaking into the office.
• b) A valve inside the compressor's pressure tank suddenly fails.
• c) A technician's report states that the piston rings wore down gradually over years of ordinary use.
• d) The compressor is 15 years old. The stated cause is a sudden internal electrical short.

Maintenance: keeping equipment running is not a loss

Routine maintenance is the regular upkeep needed to keep equipment working. Examples include:

• changing filters
• lubricating moving parts
• replacing belts on a schedule

These are ordinary costs of running a business. They are not losses caused by a sudden failure. Insurance pays for insured losses. It does not automatically pay for the routine work of owning equipment.

Inspection services are different

Some equipment breakdown programs include inspection and risk management services. In this lesson, "services" means help from the insurer, not payment of your bills.

The examined HSB program describes two kinds of services:

• inspections of boilers and pressure vessels
• tools to help business owners improve equipment operation, maintenance and energy efficiency

These services can help a business reduce the chance of a breakdown. But receiving inspection or maintenance guidance is not the same as having the insurer pay your maintenance bills.

Do not mix up maintenance and wear and tear

These two terms are related, but they answer different questions:

• Maintenance is the upkeep you do to keep equipment running.
• Wear and tear is the gradual deterioration that happens through ordinary use.

Neither one is the same as a sudden internal failure.

Check 3: A gym owner reads that their equipment breakdown program includes risk management tools focused on maintenance. They ask whether the policy will pay for the quarterly service visit, where a technician lubricates the treadmills and replaces belts on schedule. What should you explain?

After the breakdown: each cost needs its own coverage

A single breakdown can create several separate costs. The HSB overview lists separate coverage offerings, including these:

• Direct property damage: the cost to repair or replace the damaged equipment itself.
• Business income: income the business loses while it cannot operate normally.
• Extra expense: reasonable extra costs to keep operating during the interruption, such as renting replacement equipment.
• Spoilage: perishable goods ruined because the equipment failed, such as food that spoils when refrigeration stops.

Each of these costs needs its own coverage grant. A coverage grant is the part of the policy that says what the insurer will pay for. If a policy covers repair of the equipment, that does not automatically mean it also pays for lost income or spoiled goods.

This is the same tracing skill used for business income and extra expense. First identify the cause. Then trace each effect, and match each effect to a specific grant.

Worked example: the bakery's internal failure

Return to Version 2 of the bakery example, where the cooler's motor burns out from an internal electrical fault. Assume these facts for the exercise:

• The fictional policy includes equipment breakdown coverage for equipment repair and business income.
• It has no spoilage coverage.
• All amounts are within the policy limits.
• Ignore deductibles. You practiced those in deductibles, limits and coinsurance.

The breakdown creates three costs:

Under these assumptions, the costs matched to grants total $3,800 + $2,100 = $5,900. The $900 of spoiled dough is not included, because this policy has no grant for it.

Change one fact: add a spoilage grant to the same policy. Now the $900 of spoiled dough also has a matching grant and is considered under that grant's terms. The cause did not change. Only the coverage available for one of the effects changed.

Tempting mistake: "The breakdown is covered, so everything that followed it is paid." A covered cause opens the analysis. It does not add every cost automatically. Each effect still needs its own grant.

Check 4: A print shop's equipment breakdown policy covers equipment repair only. A press motor fails from an internal fault. The shop pays $600 to rent a replacement press for a week to keep filling orders. Is the rental paid under this policy?

Practice on your own

Work each question using only the stated facts. All policies are fictional.

Question 1: A restaurant's ice machine stops making ice. The repair technician states that a power surge damaged its control board. Which route does this belong on, and why?

Question 2: A warehouse's air conditioning unit stops cooling. The owner believes it is a breakdown because "it just stopped working." No cause has been established yet. What is the correct next step in your analysis?

Question 3: A dry cleaner's 20-year-old boiler cracks. The inspection report states that the metal thinned gradually from years of normal use. The owner argues that the crack happened suddenly, so it must be covered. How should you analyze this?

Question 4: A small grocery's refrigeration unit fails from a stated internal parts failure. The store's policy has grants for equipment repair, business income and spoilage. Assume all amounts are within limits and ignore deductibles. The costs are:

• repair: $2,500
• lost income: $1,200
• spoiled produce: $700
• the owner's regular annual cleaning service for the unit, scheduled for the same week: $300

Which costs match a grant, and what is their total?

What to remember

• Ask what made the equipment stop, not just what broke. The stated cause decides the route.
• Equipment breakdown covers sudden mechanical, electrical or pressure system failures inside the equipment. It reaches far beyond boilers.
• External damage, such as fire, storm or theft, starts with commercial property coverage. Internal failure belongs on the equipment breakdown route. Normal wear and tear was excluded in the examined insurer's description.
• A symptom is not a cause, and age alone does not prove wear and tear.
• Routine maintenance is not an insured loss. Inspection and risk management services help prevent breakdowns, but they do not pay your upkeep bills.
• Each cost needs its own grant. Repair, business income, extra expense and spoilage are separate effects. The actual policy's definitions, grants and exclusions control the answer.