Captive Resource Center

Businesses and Associations

Research & Information

Equipment Breakdown Insurance:

It's Not Just About Boilers Anymore

Captive insurers bring real value to the marketplace, including specialized products for those with similar insurance needs. But captives that write homogeneous risks and include Property Coverage may be missing a very cost-effective enhancement. Equipment Breakdown insurance — often called "boiler and machinery" insurance — can improve coverage and help show that captives have a better understanding of the customers they serve.

High-Tech Equipment — High-Tech Risk

Few producers understand the way so-called boiler and machinery exposures have changed over recent years. It's not just about "boilers" anymore. The key exposures covered by Equipment Breakdown insurance today are electrical: telephone systems, elevators, computer controlled environmental systems, security and fire protection systems, office equipment, and many other types of high-tech devices.

That's why many companies have set up programs that automatically include Equipment Breakdown coverage in their property policies. These companies have outsourced the Underwriting, Inspection and Claims work of this specialty coverage area. This strategy simplifies the coverage and the rating approach, improves claim processing and eliminates much of the paperwork. Outsourcing also can provide help with state rate filings, inspections, loss prevention and control, and product marketing.

Better Coverage That's A Better Fit

What is the advantage of adding Equipment Breakdown coverage? Only a very small percentage of commercial insureds have traditionally purchased boiler and machinery insurance. With this new approach, the intent is to add Equipment Breakdown coverage to all insureds, gaining a much-improved spread of risk. That leads to a very competitive price for Equipment Breakdown coverage. In fact, for some books of business, full participation means the cost of coverage is such that it is just rolled in. It is no longer necessary to market and negotiate the coverage risk-by-risk.

Equipment Breakdown coverage is also a better fit than traditional boiler and machinery insurance. The coverage can be added through a simple endorsement which adds back to coverage the mechanical, electrical and pressure vessel exclusions of the property policy that create the need for Equipment Breakdown coverage in the first place. An alternate approach is to remove these exclusions from the property policy.

The new Equipment Breakdown coverage approach provides the insured the same protection for breakdown loss that they would have for a fire or windstorm. If the insured has the right property coverage, they also will have the right Equipment Breakdown protection. The Equipment Breakdown coverage also follows the property deductibles for small and medium sized risks. Not only does this approach improve coverage, it also greatly simplifies handling and lowers processing expenses.

Case Study

A captive was having a problem with frequent losses to key heating and cooling equipment. The losses, while not large dollar amounts, caused difficulty for their customers and resulted in lost income. The TPA adjusting Property Losses was not experienced with Equipment Breakdown losses.

The Captive had the following issues:

1. TPA did not have the expertise to settle the losses. So the Captive was not comfortable with retained loss reserves and uninsured exposure above the retained amount.
2. The Captive wanted to prevent these losses where possible, but needed engineering help on prevention ideas.
3. The Captive wanted quick repairs so they could avoid loss of business.
4. Many of the locations needed annual third party certification of equipment before the state would allow operation of this equipment.

Each of these issues was resolved when the Captive incorporated the Equipment Breakdown Perils into the Property Policy and reinsured the insurance above the retained amount and service work with a leading Equipment Breakdown reinsurer.

The reinsurer had the engineering expertise to adjust the losses, and make practical recommendations on prevention of future losses. The reinsurer's Preferred Provider Network of repair firms dramatically reduced the downtime when there was a loss. The certification problem was solved with the reinsurer's National Network of company –employed state certified inspectors.

For more information, contact Don Hartford of The Hartford Steam Boiler Inspection and Insurance Company (www.hsb.com) at donald_hartford@hsb.com, or by phone at 1-800-345-1122 ext. 2311.

Read another News/Library Article