Equipment Breakdown, Spoilage, Off Premises

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Test YOUR Knowledge• After class you will receive a quiz

flash on today’s topic

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Your Instructor Today

Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRISPresident and Co-Founder of

The Insurance Community Center


Course Objectives1. Review the exclusions and limitations in the

Commercial Property forms that create the need to purchase Equipment Breakdown

Coverage2. Review Spoilage on EB and Property

3. Review EDP vs EB and the off premises exposures both direct and indirect

4. Review the Equipment Breakdown form


Let’s Begin with a Claim


Blast at O.C. Eatery Kills 1, Injures 5 : Victims: Debris and darkness trap

the injured, who mourn the death of prized bartender.

Los Angeles TimesAugust 02, 1993

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El Torito Grill

A Blast that killed one man and injured five others caused by an exploding boiler. Pressure built up inside the boiler and the only way to relieve it was to explode. It shot the boiler through the roof like a missile.

http://images.google.com/imgres?imgurl=http://www.webtransact.com/hotelimages/1004260_3.gif&imgrefurl=http://www.webtransact.com/hotel/brochure.html?hotel_id=1004260&af_id=524408&h=179&w=253&sz=37&hl=en&start=27&tbnid=PPBnTJxG58wjFM:&tbnh=79&tbnw=111&prev=/images?q=+El+Torito+GRill+&start=18&ndsp=18&svnum=10&hl=en&lr=&sa=N


El Torito Grill• The explosion occurred to the El Torito

located in Newport Beach, California in Fashion Island Shopping Center. The El Torito was located across an access road from the shopping center. The explosion demolished the restaurant’s equipment room knocked down a wall to an adjoining wall to the men’s locker room and killed Antonio De Santiago, a bartender who was changing his cloths at the time.


El Torito Grill

• The building inspector said the building permit was issued 21 year ago. He suspected that the problem may have been twofold: a plugged pressure relief valve and a malfunction in the unit designed to shut off the gas supply when the boiler got too hot.


El Torito

• What really happened?• The maintenance person removed the

safety valve from the unit causing pressure to build up with the resultant explosion.

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Polling Question #1

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On an Equipment Breakdown Form is there coverage for the damage to

the Boiler?


Polling Question #2

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Is there coverage for the damage to

the building that El Torito occupies?


Polling Question #3

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Is there coverage for the damage done to Fashion Island located across the

street?


Polling Question #4

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Is there coverage for the damage to the customer’s vehicle that El Torito’s valet parked in the El Torito lot?


Polling Question #5

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Is there coverage for the death of Antonio De

Santiago?



Course Objective #1

Review the exclusions and limitations in the Commercial Property forms that create

the need to purchase Equipment Breakdown Coverage

.

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My Hawaiian Vacation

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Typical QuestionAir Conditioning Units on a Building

• Question: Why do we have to have an Equipment Breakdown Policy to cover air conditioning units on a building?

• Answer: The units are covered under building coverage but ONLY for the perils of the policy


The Purpose Of Equipment Breakdown Insurance• The purpose of this coverage is to

provide coverage for perils that are excluded or not covered in Commercial Property Policies.


The Purpose Of Equipment Breakdown Insurance• Special Form has exclusions that

necessitate EB coverage• On a “named perils” policy EB

coverages are not within the listing of covered perils


Four Major Areas of ExclusionsM.E.S.S.• Mechanical• Electrical• Steam Boilers Exploding• Spoilage


Four Major Areas of Exclusions

M.E.S.S.

MECHANICAL

ELECTRICAL

STEAM BOILERS

SPOILAGE

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Polling Question #6

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See Slide


Electrical Exclusion

• 80% of all claims are from electrical or air conditioning equipment.

• http://www.jrfco.com/INSURANCEPRODUCTS/EquipmentBreakdown/tabid/190/Default.aspx

http://www.jrfco.com/INSURANCEPRODUCTS/EquipmentBreakdown/tabid/190/Default.aspx



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Electrical Exclusion

• The majority of Equipment Breakdown losses

• The majority of losses include the element of Business Income.

• Business Income losses can exceed the amounts of the direct damage


Electrical Exclusion in PropertyWe will not pay for:Artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires. But if loss or damage by fire results, we will pay for that resulting loss or damage

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Mechanical Exclusion

We will not pay for:Mechanical Breakdown including rupture or bursting caused by centrifugal force. However, this does not apply to any resulting loss or damage caused by elevator collision

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Steam Boiler Exclusion• We will not pay for:• Explosion of steam boilers, steam pipes, steam

engines or steam turbines owned or leased by you, or operated under your control. But if loss or damage by fire or combustion explosion results, we will pay for that resulting loss or damage. We will also pay for loss or damage caused by or resulting from the explosion of gases or fuel within the furnace of any fired vessel or within the flues or passages through which the gases of combustion pass.

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Spoilage Exclusion

• There is no specific “spoilage” exclusion in the standard ISO forms. There is, however, language in the form that constitutes a “spoilage” exclusion along with “inherent vice”.

• Discussed in more detail in Learning Objective #2


Other Exclusions or Limitations in the Commercial Property Forms

• Building Ordinance• Business Income• Off Premises discussed in Objective

#3


Ordinance or LawExclusion:The enforcement of any ordinance or law:(1)Regulating the construction, use or repair of any property:

or(2)Requiring the tearing down of any property including the

cost of removing its debris.

• This exclusion is found in “almost” all property type forms including EB; EQ; Flood; DIC and more.

• Each type of policy must be endorsed to cover the Ordinance or Law coverage incurred as a result of the “perils” of that policy.


Ordinance or Law

• An air conditioning motor burned out in a high-rise, senior citizen's apartment building. Ninety-plus degree temperatures necessitated setting up four rented "spot coolers." Overtime was required to get the motor back on line.Property Damage: $ 83,557Extra Expense: $ 16,794

• Additional Cost to bring the facility up to code

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Ordinance or Law• Look to response if it is only building or

equipment, as well• In Commercial Property the only coverage

available is for “Building Ordinance” none for equipment

• Some policies contain limited coverage automatically

• Verify Business Income Response under Equipment Breakdown Coverage


Business Income

• Business Income is a coverage part in Commercial Property

• Business income is as important for an equipment breakdown loss. Nearly half of all equipment breakdown claims now include an element of loss of business income or incurred extra expenses.

• Losses are more difficult to measure


Course Objective #2

Review the need for “Spoilage” Coverage offered in Property

Insurance and Equipment Breakdown

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Spoilage Exclusion

• There is no specific “spoilage” exclusion in the standard ISO forms. There is, however, language in the form that constitutes a “spoilage” exclusion along with “inherent vice”.


“Spoilage” Exclusion

We will not pay for:Decay, deterioration, changes in temperature, rust, corrosion, fungus,decay, deterioration, hidden or latent defect or any quality in propertythat causes it to damage or destroy itself: (a) Dampness or dryness of atmosphere; (b) Changes in or extremes of temperature

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Spoilage• The Spoilage exclusions give rise to the need for

specific coverage referred to as Spoilage, Consequential, or Refrigeration Loss depending on the form.

• Spoilage coverage can be provided on both the Equipment Breakdown Form and the Commercial Property Forms.

• There is a significant difference in the coverages provided under each of the forms.


Polling Question #7

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A control failed on a medical clinic's refrigerator, causing the temperature

to dive into single-digit temperatures. Drugs, which

normally are stored between 36 to 43 degrees, had to be discarded.


Polling Question #8

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There was a temperature spike in a warehouse storing radish seeds.

Spike caused the radishes to germinate and the entire crop was

lost.


Equipment Breakdown Spoilage

“Breakdown”“Accident”

On Premises

RC/SELLING PRICE

Sub-limited or Dec driven

Property Spoilage

Perils Beyond Your Control

On or off the premises

Selling Price

Full Limit


Course Objective #3

Review EDP vs EB and the Off Premises exposures both direct and indirect

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Polling Question #9

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Your insured’s data was destroyed due to a virus and they did not have a backup. They lost valuable data

they had to reconstruct and business income loss.

Computer Hardware and Software CoverageBy Form

PropertyForm

Property Perils Issues

Software issue

Equipment Breakdown

Computers “may”Be covered

ComputerizedEquipment is

Within definition

Software Limitations

Perils of the Policy

“accident”

EDP CoverageInland Marine

Broader DefinitionOf Property

Broader DefinitionOf Perils


Off Premises (Utility Interruption) ExclusionWe will not pay for:The failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises. But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.

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Why Does A Client Need “Off Premises” Coverages

• Most insurance policies require that damage occur at a premises described.

• Most insurance policies do not automatically cover “off premises” but they may have sub-limits included or optional coverages activated on the Declarations Page.


Why Does A Client Need “Off Premises” Coverages• The causes of loss to off premises utilities

varies from such situations as fire, earthquake, flood, windstorm, vehicle damage, transformers malfunctions, etc.


Commercial Property Off Premises

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Wind to Power Lines

Wind is a “Cause of Loss” on a Commercial Property Form. Covered on Utility Interruption Endorsement to a CPP

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Equipment Breakdown Off Premises

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Transformer Overloads causing damage

Covered on Utility Interruption on an Equipment Breakdown Form


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Off Premises Applies to ALL Property Policies• Commercial Property• Equipment Breakdown• EDP• Earthquake• Flood• Wind• Other+++++++++++++++++

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Course Objective #4

Review the Equipment Breakdown Form

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Polling Question #10

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Who needs to purchase Equipment Breakdown

Coverage?


Who Needs EB Coverage?

• Owner of a building• Tenant of a building

– Contractual requirement– For damage to their own equipment– For Business Income as a result of damage

to the building or damage to their property


Reasons Coverage Is Often Not Purchased

• In-house Maintenance Program• Reliance on Equipment Warranty or

Maintenance Contract (There is no loss of use coverage)

• Banks seldom requires it• Not offered by the Agent – this is a

potential errors and omissions exposure


Ways of Writing Equipment Breakdown

Written as a EB Coverage Part

with SAME carrier

Written as EB Endorsement SAME carrier

Covered because NOT excluded

(New Endorsement)

Written with the SAME carrier on a separate policy

Written with a DIFFERENT care on a separate

policy

Electrical Equipment

UTILITY-OWNED TRANSFORMER

INSURED’R TRANSFORMER

MAIN ELECTRICAL PANEL BACK-UP

GENERATOR

Air Conditioning Or Refrigeration

Heating Systems

COMPRESSORS FANS, MOTORS

CHILLERS, PIPES

STEAM BOILER

PUMP, MOTORS

HOT WATER BOILER

PUMPS, MOTORS

HEAT PUMPS

COMPRESSOR, MOTORS,

FANSHOT

WATER HEATERS

Other EquipmentSMALL

COMPRESSORSDEEP WELL

PUMPS

FANS, MOTORS

ELECTRIC HEAT TRANSFORMER

MISC. ELECTRICAL APPARATUS

AUXILIARY STEAM PIPING

*PRODUCTION MACHINERY


Why Equipment Breakdown Is Written

• Mechanical, Electrical or Steam Equipment on Premises

• Inspection Service - the insured also has the advantage of using an inspection service provided for certain types of equipment that can assist in preventing serious losses. Typically an insurance company will provide this service as part of the premium charged.


Limitations and Exclusions on Commercial Property Form

A. Explosion of Steam BoilerNo coverage for loss of or damage to steam boilers, steam pipes, steam engines or steam turbines

B. Mechanical BreakdownNo coverage for loss or damage caused by or resulting from mechanical breakdown, including rupture or bursting caused by centrifugal force.

C. Electric Arcing (Injury)No coverage for loss or damage caused by or resulting from artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires.


Inspections

• The various state and municipalities are principally responsible for the inspections and maintenance of the log for boilers and unfired pressure vessels that are subject to inspection by the state jurisdiction.

• In most jurisdictions, insurance company inspections are acceptable in lieu of inspections made by a state inspector.


Contract Maintenance or Damage MA EBMaintenance (MA)

1. Remedial Maintenance on site2. Clean, oil, adjust3. Repair defective parts due to

normal usage

YesYesYes

NoNoNo

Equipment Breakdown (EB)

1. Damage from an accident or other damage not due to wear and tear

2. Damage to electrical apparatus or any property external to the equipment

3. Power surge damage4. Indirect losses such as BI, EE,

Spoilage or Power Interruption

No

No

NoNo

Yes

Yes

YesYes


New EB EndorsementEquipment Breakdown Cause of Loss EB 10461012• Similar approach to some insurance

company forms (Chubb first)• Eliminates major EB exclusions in the

property form

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There are “Other” Limitations that could affect coverage on CP• CAUTION:

– If EB endorsement “just” removing “EB” exclusions still have other exclusions that could affect coverage

• Flood• EQ• Animal• ETC

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Policy Overview

• The Equipment Breakdown Protection Coverage Form provides coverage on a comprehensive basis by incorporating optional coverages into the form.

• It is its own form and not an simply endorsing a property form

• These are activated by inserting a limit, number of days, or the word “INCLUDED” on the Declarations Page.


Covered Cause of Loss

• Covered Cause of Loss is a "Breakdown" to "Covered Equipment".– Caution: Must Review Definitions– Used to say “Accident to an Object”– This is the TEST

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“Breakdown”

• Means the following direct physical loss, that causes damage to "Covered Equipment" and necessitates its repair or replacement:

• NOTE: Used to say “sudden and accidental”.

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“Breakdown”

(1)Failure of pressure or vacuum equipment;(2)Mechanical failure including rupture or bursting caused by centrifugal force; or(3)Electrical failure including arcing;unless such loss or damage is otherwise excluded within this Coverage Form

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“Breakdown” Exclusions Examples• Malfunction—Calibration, etc• Defects, erasures, errors, limitations or

viruses in computer equipment and programs

• Leakage at any valve, fitting, shaft seal, gland packing, joint or connection

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“Covered Equipment”

Equipment built to operate under internal pressure or vacuum other than weight of contents;(2)Electrical or mechanical equipment that is used in the generation, transmission or utilization of energy;(3) Communication equipment, and "Computer Equipment"; and

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“Covered Equipment”

(4) Equipment in Paragraphs (1), (2) and (3) that is owned by a public or private

utility and used solely to supply utility services to your premises. CAUTION: there is always a HOWEVER after these paragraphs that lists what they do NOT intend to cover.

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“Covered Property”

a. You own; orb. Is in your care, custody or control

and for which you are legally liable.

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Equipment Breakdown Coverage Triggers

Covered Cause of Loss Breakdown to “Covered Equipment”

Business IncomeContingent

Business Income

Utility Interruption

Damage to “Covered Property”

Damage to Property of Others Legal Liability

Spoilage or Consequential

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Coverages Available IF on Dec or says INCLUDEDa. Property Damageb. Expediting Expensesc. Business Income and Extra Expense OR

Extra Expense Onlyd. Spoilage Damagee. Utility Interruptionf. Newly Acquired Premises

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Coverages Available IF on Dec or says INCLUDEDg. Ordinance Or Law Coverageh. Errors And Omissionsi. Brands And Labelsj. Contingent Business Income And Extra

Expense Or Extra Expense Only Coverage

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Equipment Breakdown ProtectionBuilt in Coverages

Errors and Omissionsa. Protects the insured for an oversight on

premises that should have been insured in the policy

b. Does not extend to errors or unintentional omissions committed by insured in the reporting of values or requesting coverage


Equipment Breakdown ProtectionBuilt in Coverages

Brand and Labelsa. Extends property damage coverage to

allow insured to stamp the word SALVAGE on or remove the label from damaged merchandise at the insurer’s expense

b. Not to exceed the limit of insurance on such property


Exclusions

• Ordinance Or Law• Earth Movement• Water• Nuclear Hazard• War or Military Action

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Exclusions

• Fungus, wet Rot and Dry Rot• Any virus, bacterium or other

microorganism that induces or is capable of inducing physical distress, illness or disease– NOTE: Some states have forms for this

coverage– Some limited coverage is provided

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Exclusions

• Depletion, deterioration, corrosion, erosion, or wear and tear. However, if a "Breakdown" occurs, we will pay the resulting loss or damage

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Equipment Breakdown Sub-Limits ($25,000)

Ammonia Contaminatio

n

Hazardous Substance

ConsequentialData & Media

Water damage

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“Hazardous Substance”

• "Hazardous Substance" means any substance other than ammonia that has been declared to be hazardous to health by a government agency.

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“Consequential Damage”

• The reduction in value of undamaged stock parts of a product that becomes unmarketable

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Data and Media

• Your cost to research, replace or restore damaged "Data" or "Media" including the cost to reprogram instructions used in any "Computer Equipment".

92



Hazardous Substance

• Any additional expenses incurred by you for the cleanup, repair or replacement or disposal of "Covered Property" that is damaged, contaminated or polluted by a "Hazardous Substance".

93



Water Damage

• The damage to "Covered Property" by water including any salvage expenses.

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Valuationa. Replacement Cost in most casesb. Up to an additional 25% of the property

damage loss to “Covered Property” for repairing equipment in a manner that does not harm the environment, increases its efficiency or enhances its safety


Valuationc. Provides for the loss in value of an extended

warranty d.“Covered Property” may be valued at its

selling pricee.“Data” and “Media” have limitation on

replacement and valuation


Valuation

• Underwriters often restrict coverage on older boilers and machines. Some firms agree to exclude certain kinds of equipment or insure at ACV and/or have high deductibles on categories.

• Actual Cash Value Endorsement


Coverage Territory

1.United States of America (including territories and possessions); Puerto Rico; and Canada


Deductibles

• Dollar Deductible• Time Deductible

– If a time deductible is shown in the Declarations, we will not be liable for any loss under that coverage that occurs during that specified time period immediately following a "Breakdown".

99



Deductibles

• Multiple of Daily Value Deductible– Determine the total amount of Business

Income that would have been earned during the Period of Restoration

– Divide the result by the number of days the business would have been open during the period of restoration. Result is daily value.

– Multiply the daily value by number of days on the declaration

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Deductibles

• Percentage of Loss Deductible– If a deductible is expressed as a percentage

of loss in the Declarations, we will not be liable for the indicated percentage of gross amount of loss or damage (prior to the applicable deductible or coinsurance) insured under the applicable coverage.

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Suspension Clausea. Permits insurer to suspend coverage if

found in dangerous conditionb.Suspension is immediate

(1)Written notice to insured(2)Could be handwritten at address

where “ Covered Equipment” is locatedc. Reinstated only by endorsementd.Pro rata refund will be processed but

suspension in force even if refund not made or offered


Joint or Disputed Loss Agreement

1. An important provision when coverage is written separately from the Commercial Property.

2. Pays 100% of loss portion that is covered under this form.

3. Pays 50% of loss portion that is disputed between the Commercial Property coverage and this coverage.

4. Add the Loss Adjustment endorsement to the Commercial Property coverage for this provision to work properly


Some “interesting endorsements”

• Optional Valuation Clause EB99649• Product Withdrawal Coverage EB 99659• Off Premises Equipment Coverage EB

99639

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Upcoming ClassesUpcoming University/Paid CE Classes

FREE to University Members$50.00/charge for non university members

7/18 OCIP/CCIP

7/24 and 25 Errors and Omissions

7/30 Personal Auto Policy Problems & Solutions

105

Upcoming Community Classes FREE to University Members$25.00/charge for non university members

7/16 New Commercial Property Form (1 hr CE)

Join the University TODAY. www.insurancecommunitycenter.comClick Join University at the top of the bar

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Equipment Breakdown, Spoilage, Off Premises