Skip to main content

14.1 Equipment Breakdown Protection Coverage Form

Commercial property insurance covers damage to property, including machinery and equipment, caused by external perils such as fire and lightning. However, it generally excludes losses caused by steam boiler explosions and other internal equipment failures. To fill this gap, Equipment Breakdown insurance—formerly known as Boiler and Machinery insurance—provides coverage for these losses.

Today, Equipment Breakdown insurance covers losses resulting from the breakdown of many types of equipment, including boilers, machinery, refrigeration systems, air conditioning systems, and electrical equipment. It protects the insured's property, as well as property in the insured's care, from damage caused by equipment breakdown or explosion, and may also provide coverage for certain indirect losses.

Equipment Breakdown coverage may be written as part of a Commercial Package Policy (CPP) or as a stand-alone (monoline) policy. The primary coverage form is the Equipment Breakdown Protection Coverage Form, although policy wording varies by insurer. Coverage may also be added by endorsement to the Causes of Loss – Special Form. This endorsement removes the policy's equipment breakdown exclusions, providing coverage similar to that of the Equipment Breakdown Protection Coverage Form.

Definitions​

Breakdown​

A breakdown is a direct physical loss that requires covered equipment to be repaired or replaced. Covered breakdowns include:

  • Failure of pressure or vacuum equipment
  • Mechanical failure, including rupture or bursting caused by centrifugal force
  • Electrical failure, including arcing

A breakdown does not include:

  • Malfunctions, such as adjustment, alignment, calibration, cleaning, or modification
  • Defects, erasures, errors, limitations, or viruses affecting computer equipment or programs
  • Leakage at a valve, fitting, shaft seal, gland packing, joint, or connection
  • Damage to a vacuum tube, gas tube, or brush
  • Damage to a structure or foundation supporting covered equipment
  • The normal operation of a safety or protective device
  • Cracking of any part of an internal combustion gas turbine exposed to combustion products

If one breakdown causes additional breakdowns, all resulting damage is treated as one breakdown. In other words, all breakdowns at the same premises that occur at the same time and result from the same cause are considered a single breakdown.

Under the Equipment Breakdown Protection Coverage Form, the only covered cause of loss is a breakdown of covered equipment.

Covered Equipment​

Covered equipment includes equipment designed to operate under internal pressure or vacuum, communication and computer equipment, and electrical or mechanical equipment used to generate, transmit, or use energy. In most cases, the equipment must be located at the described premises and be owned, leased, or controlled by the insured. Covered equipment also includes qualifying equipment owned by a public or private utility that is used solely to provide utility services to the insured's premises.

Covered equipment does not include:

  • Electronic data processing or storage media, such as films, tapes, or discs
  • The portion of pressure or vacuum equipment that is not under internal pressure or vacuum
  • Insulating or refractory materials
  • Catalysts
  • Certain structures supporting or containing covered equipment, such as foundations or cabinets
  • Underground piping or similar equipment that requires excavation for removal
  • Vehicles, aircraft, self-propelled equipment, and floating vessels
  • Felt, wire, screens, chains, belts, or other parts subject to periodic replacement
  • Equipment used solely for research, diagnosis, or similar purposes, unless designated in the Declarations
  • Equipment or parts manufactured by the insured for sale

Covered Property​

Covered property means property the insured owns, as well as property in the insured's care, custody, or control for which the insured is legally liable.

Coverages​

The Equipment Breakdown Protection Coverage Form provides the following coverages when they are shown on the Declarations page. Each coverage is subject to its own limit of insurance.

Property Damage​

The Equipment Breakdown Protection Coverage Form pays for direct physical damage to covered property located at the premises described in the Declarations.

Expediting Expenses​

The form pays the reasonable extra costs the insured incurs to make temporary repairs and to expedite permanent repairs or replacement of covered property.

Business Income and Extra Expense​

The form pays the actual business income loss sustained during the period of restoration and the necessary extra expense incurred to continue operations during that period. The insured may elect Extra Expense coverage only, in which case Business Income coverage does not apply.

Business income means the net profit or loss before income taxes that would have been earned, plus normal operating expenses, including payroll.

Extra expense is the additional cost the insured incurs to continue operating the business that exceeds the expenses the insured would have incurred during the same period if no breakdown had occurred.

The period of restoration begins at the time of the breakdown or 24 hours before the insurer receives notice of the breakdown, whichever is later.

Example

An insured's equipment breaks down at noon on Friday, and the insurer is notified later that day. Because notice is given promptly, the period of restoration begins at the time of the breakdown.

If the equipment breaks down at noon on Friday but the insurer is not notified until noon on Monday, the period of restoration begins 24 hours before notice is received—that is, noon on Sunday.

The period of restoration ends 5 consecutive days after the date the damaged property is repaired or replaced with reasonable speed and similar quality.

Spoilage Damage​

The form covers spoilage damage to raw materials, property in process, and finished products while they are in storage or being manufactured. The spoilage must result from a lack of or excess power, light, heat, steam, or refrigeration caused by a covered breakdown.

Note

When selected, Spoilage coverage applies only to spoilage damage to covered materials caused by specified conditions, such as a loss of power resulting from a covered breakdown. Other types of damage caused by a lack of or excess power, heat, light, steam, or refrigeration are not covered.

Utility Interruption​

If the insured carries Business Income, Extra Expense, or Spoilage coverage, it may be extended to cover losses resulting from the interruption of utility services. The interruption must result directly from a breakdown of covered equipment owned, operated, or controlled by a public or private utility that supplies electric power, communication services, air conditioning, heating, gas, sewer, water, or steam to the insured's premises.

Newly Acquired Premises​

If this option is selected, coverage automatically extends to newly acquired premises that the insured purchases or leases, beginning on the date the property is acquired.

Ordinance or Law Coverage​

Ordinance or Law coverage provides limited protection when a loss is increased because of the enforcement of building laws or ordinances governing the demolition, construction, repair, or use of a building. It covers:

  • The loss in value of the undamaged portion of the building.
  • The cost to demolish the building and clear the site.
  • The increased cost to repair or reconstruct the building to comply with applicable laws or ordinances.

Errors and Omissions​

Errors and Omissions coverage pays for loss or damage that would otherwise be excluded because of an unintentional error or omission, including:

  • An error in the description or location of covered property.
  • Failure to list an owned and occupied premises on the Declarations at policy inception.
  • An error or omission by the insured that results in the cancellation of coverage for a premises.

This coverage does not apply to errors or omissions in reporting property values.

Brands and Labels​

If branded or labeled merchandise is damaged by a covered breakdown, the insurer may take all or part of the property at an agreed or appraised value. If the insurer does so, the insured may stamp the merchandise "salvage" or remove and replace the labels, with the cost paid by the insurer.

Exclusions​

The Equipment Breakdown Protection Coverage Form excludes the following:

  • Ordinance or law, except as provided by Ordinance or Law coverage when selected.
  • Indirect loss caused by a lack of or excess power, light, heat, steam, or refrigeration, except as provided by Spoilage coverage when selected.
  • Earth movement, including earthquake, landslide, mine subsidence, and volcanic action.
  • Water, including flood, tidal water, mudslide or mudflow, sewer or sump backup, underground water seepage, sprinkler leakage, and water used to extinguish a fire.
  • Nuclear reaction, radiation, or radioactive contamination.
  • War or military action.
  • Explosion, including fire or combustion explosion resulting from a breakdown and explosions within the furnace of a chemical recovery boiler.
    • Exception: Coverage applies to the explosion of covered equipment, such as steam boilers, electric steam generators, steam engines, gas turbines, and similar equipment.
  • Damage to covered equipment while undergoing a pressure or electrical test.
  • Breakdowns caused by windstorm or hail.
  • Deliberate acts or sabotage involving utility equipment.
  • The insured's neglect to protect covered property from further damage.
  • Deterioration, corrosion, or wear and tear.
    • Exception: If these conditions result in a covered breakdown, the resulting damage is covered.

Example

A pressurized storage tank develops cracks, corrosion, and other signs of wear and tear, but it continues to operate. The Equipment Breakdown Protection Coverage Form does not cover the cost to repair this deterioration. However, if the weakened tank later explodes, the resulting breakdown damage is covered, even though the breakdown was caused by wear and tear.

Limits of Insurance​

The Equipment Breakdown Protection Coverage Form includes a limit of insurance that is the maximum the insurer will pay for loss or damage resulting from any one breakdown. Depending on the coverages selected, their limits may be included within the one-breakdown limit or provided with separate individual limits.

If covered equipment is owned by a public or private utility, is used solely to supply utility services to the insured's premises, and is not in the insured's care, custody, or control, coverage is subject to a $1 sublimit.

Unless a higher limit is shown in the Declarations, the following coverages are each subject to a $25,000 sublimit, which is included within the one-breakdown limit of insurance:

  • Spoilage of covered property contaminated by ammonia.
  • Additional costs to clean, repair, replace, or dispose of covered property damaged by a hazardous substance other than ammonia.
  • Consequential loss, meaning the reduction in value of undamaged stock that becomes unmarketable because of physical damage from a covered breakdown.
  • The cost to research, replace, or restore damaged data or media.
  • Water damage that is not otherwise excluded.

Selected Conditions​

Although the Equipment Breakdown Protection Coverage Form includes many conditions found in other commercial property policies, it also contains conditions that are unique to Equipment Breakdown coverage.

Suspension Condition​

If covered equipment is found to be in, or exposed to, a dangerous condition, the insurer may immediately suspend coverage for the breakdown of that equipment. Advance notice is not required, but the insurer must provide written notice to the insured's last known address or the address where the covered equipment is located. Once suspended, coverage can be reinstated only by endorsement.

If coverage is suspended, the insured is entitled to a pro rata refund of the premium for the suspended coverage.

Valuation​

The value of covered property is based on the lesser of:

  • The cost to repair, rebuild, or replace the damaged property with comparable property at the same or another location.
  • The amount actually and necessarily spent to repair, rebuild, or replace the property.

If the insured does not repair or replace the property within 24 months after the breakdown, the insurer pays the lesser of the cost to repair or replace the property or its actual cash value (ACV).

Coverage does not apply to damaged property that is obsolete or no longer useful to the insured.

Business Income and Extra Expense Conditions​

If the insured selects Business Income and Extra Expense coverage, they must submit an Annual Report of Values each year for the insurer's approval. The report must be filed within 3 months of the date shown in the Declarations. After reviewing the report, the insurer adjusts the premium as needed. If the report is not submitted on time, a coinsurance provision applies.

Selected Endorsements​

Actual Cash Value Endorsement​

The Actual Cash Value Endorsement changes the method used to value property damage. The insurer pays the lesser of:

  • The cost to repair or replace the damaged property with comparable property at the same or another location, whichever is less costly.
  • The property's actual cash value (ACV).

These values are determined as of the time of the breakdown.

The insurer does not pay for damaged property that is obsolete or no longer useful to the insured.

Business Income – Report of Values Endorsement​

Although no longer widely used, this endorsement allows the insured to satisfy the Annual Report of Values requirement for Business Income coverage. The insured reports the actual net profits, fixed charges, and expenses for the ending 12-month policy period, signs the form, and submits it to the insurer. These figures are then used to estimate the same values for the upcoming 12-month policy period, helping determine the amount payable if a business income loss occurs.