The lifeblood of a manufacturer is its machinery and, when a breakdown occurs, the impact can be devastating, particularly if access to other machines is not available and customers can’t wait for their goods. When equipment grinds to a halt, deliveries are delayed, job orders are lost, revenue stops and the cost of continuing operations rises, affecting a manufacturer’s bottom line. Equipment Breakdown insurance is designed to step in to help keep a shop operating and reduce potential losses.
Equipment Breakdown policies cover the cost to repair or replace key pieces of equipment. Equipment in a policy is defined as follows:
(1) equipment built to operate under internal pressure, such as boilers and pressure vessels
(2) electrical or mechanical equipment used in the generation, transmission or utilization of energy
(3) communication and computer equipment
(4) the equipment in (1), (2) and (3) used by a utility to supply its services
In addition to paying to repair or replace the equipment, a policy may pay for other expenses related to the loss, such as lost income, extra expenses needed to continue operations while the machinery is fixed, or the lost value of spoiled or contaminated products. The policy can also be designed to cover expenses incurred when normal operations are interrupted by the failure of off-site, non-owned equipment (contingent business interruption).
There are several key reasons that make Equipment Breakdown insurance so critical to a manufacturing operation, including:
- Equipment Breakdown insurance covers specific equipment damaged by mechanical and electrical failure and other events, which are typically excluded from Commercial Property policies. For example, damage to equipment from short circuits/electrical arcing, power surges, mechanical breakdown and explosion of pressure vessels is not covered under a Commercial Property policy. Equipment Breakdown insurance steps in to fill in these gaps.
Having this coverage is critical due to the technological advances inherent in today’s electronics, which have increased the complexity of equipment. Most equipment contains a range of sophisticated controls and sensors, Internet connectivity and advanced electronic sub-components. Components include transformers, panels and cables, and because these are interconnected, excessive voltage in one component can lead to significant damage to others. Arcing, for instance, can cause damage to a panel, as well as completely close down an operation. Fragile technologies today also make computer-generated machinery susceptible to electronic damage due to electrical surges, sags, etc. The cost to replace these machines can be significant. Even if the equipment may not cost a great deal to repair, the cost in terms of lost production adds up quickly. Furthermore, this new technology often requires specialized technicians to diagnose and fix the damaged equipment, increasing both downtime and repair costs.
- Insurance carriers in many instances provide inspections of insured equipment, which in turn can help reduce the frequency and severity of an accident and mitigate losses. An insurance company inspector will not only review the condition of equipment in service, but also look at such factors as plant maintenance philosophy, operator training, production flow and exposure to business interruption. In physically inspecting the equipment, the inspector may help detect dangerous conditions before potential trouble. The inspector will oversee the testing of controls and safety devices, check equipment maintenance and review operators’ “logs,” for example. Often an inspector may be able to offer suggestions that can help reduce operating costs or lengthen the usable life of equipment.
- Insurance company inspections of pressure vessels may also satisfy state and local municipalities’ inspection requirements. Most states and local municipalities require periodic inspection of boilers pressure vessels. If the Equipment Breakdown insurance policy also provides these inspections, payment for location inspection fees in the majority of jurisdictions may not be applicable; the only cost is the certificate fee.
An Equipment Breakdown policy provides broad, valuable protection while also complementing a well-designed, general Commercial Property insurance program to help ensure that a manufacturer will survive and prosper after a major loss. It’s important to work with a broker who partners with an insurer that has the experience to help define an individual manufacturer’s exposure and develop plans for managing, mitigating and effectively pricing that risk. This means working together with a carrier that has qualified, National Board-certified engineers who can help identify hazards and production bottlenecks; improve a shop’s maintenance programs, infrastructure and business continuity plans; prevent unplanned downtimes; and allow a business to quickly recover from equipment failures.
NorthStar specializes in insuring manufacturers, including printers, steel fabricators, machine shops, food and beverage manufacturing and plastic manufacturing, to name a few. We partner with leading carriers that can provide comprehensive Equipment Breakdown coverage for our clients. For a consultation, please call NorthStar’s office at (800) 301-1944 to speak with a member of our team.
About NorthStar Insurance Services
NorthStar Insurance Services provides comprehensive insurance for the real estate industry and municipalities/public entities, including broad-based Commercial Property coverage. For a consultation, please call NorthStar’s office at (800) 301-1944 to speak with a member of our team.