April 2019

The Importance of Equipment Breakdown Insurance for Manufacturers

There is nothing more important to a manufacturer than their machinery. Subsequently, when a breakdown occurs, the impact can be devastating. When equipment grinds to a halt, deliveries are delayed, and/or job orders are lost, revenue stops and the cost of continuing operations rises. Equipment Breakdown insurance is designed to help keep a shop operating and also protect the insured from mechanical and or electrical breakdowns. It should also protect the business owner from mechanical or electrical equipment damage caused by operator error, poor workmanship, or negligence.

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 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. These can include lost income, extra expenses needed to continue operations while the machinery is being repaired, or the lost value of spoiled or contaminated products.

There are several key reasons that make Equipment Breakdown insurance so critical to an operation, including:

• Mechanical and Electrical 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.
• Operator Error and Negligence is included in the Equipment Breakdown coverage. Operator error resulting in equipment damage is the most common cause of loss for any manufacturer. This can come to a surprise to most but these situations would and should be covered.

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 though the equipment may not cost a great deal to repair, the cost of missed shipments and loss in production adds up quickly.

OAK Insurance Solutions specializes in insuring manufacturers, including but not limited to the following: steel fabricators, machine shops, food and beverage manufacturing and plastic manufacturing. We partner with leading carriers that can provide comprehensive Equipment Breakdown coverage for our clients. For a consultation, please call OAK Insurance Solutions at (626) 818-8987 to speak with a member of our team.

What We Do Best – Over $150M in property insured!

Commercial Real Estate Insurance Overview:

When insuring property for commercial real estate owners, it’s important to advise them not to consider the “high level” points associated with one’s particular policy or program.

Often times, owners will be unable to look past total insured limits and the annual premium. Partnering with the right specialist, however, will help investors identify gaps in coverage and ensure the minimization of all risk exposure.

Whether a client owns hundreds of real estate assets or just a few properties, there are many common elements of a property insurance program that should be considered while placing coverage.

Insured Limits and Valuation

In the event of a disastrous claim, most owners seek to be “made whole” by their insurance policy. A policy’s ability to respond in this fashion is not automatic; most property policies will only respond up to preset limits, and will respond according to prearranged valuation methods:

• Replacement Cost: The amount required to replace damaged property completely, using new materials and furnishings.
• Actual Cash Value: Generally the Replacement Cost of insured property, with a deduction for depreciation (in other words, the age of property factors into the claim adjustment process).

Clearly, Replacement Cost is superior to ACV in most cases. The bottom line is, there is a big difference in the way claims are handled between the two methods. Accordingly,  they are both worthy of consideration.

Coinsurance

Occasionally, property owners will be tempted to assume some of the risk in order to reduce their annual premiums. When agreeing to a coinsurance clause (most are either 80% or 90%), a property insurer is stating that if the total insured limit is not at least a certain percentage of the true Replacement Cost at the time of a partial claim, then the property owner would be penalized by ratios representing the percentage by which the property is underinsured. Oftentimes, coinsurance clauses can be negotiated out of policies in exchange for a signed “statement of values,” or other evidence of insurance to value.

Deductibles

Most property insurance policies will pay out subject to a deductible, for which the policyholder is responsible. This seems straightforward, however it is important to note that deductibles may vary depending on the peril insured against. For example, a property insurance policy could have different deductibles for each of the following different perils:

• “All Peril,” or standard causes of loss like fire, water damage, etc.
• Earthquake
• Flood
• Equipment Breakdown
• Business Interruption
• Wind/Hail/Named Storm/Hurricane
• Per-Unit Deductible (for condo buildings, for example)
• Ice Dam or Water Damage Deductible

It’s very important to make sure that all deductibles are clear when placing coverage – it is not uncommon for certain deductibles to be less obvious than others when reading a policy document.

Sub-Limited or Excluded Areas of Coverage

Property insurance must be specifically tailored by an experienced insurance professional knowledgeable about the client’s business. The following is a non-exhaustive list of exposures that may or may not be automatically included within a standard commercial property insurance policy unless specifically addressed:

• Equipment Breakdown coverage
• Business Income/Business Interruption/Extra Expense Coverage
• Ordinance or Law Coverage (Loss to Undamaged Portion, Demolition Costs, Increased Cost of Construction due to Code)
• Water/Sewer Backup
• Earthquake
• Flood (or other naturally occurring water damage)
• Business Personal Property (qualifying items owned by the business but not attached to the structure)
• Production machinery or owned equipment
• Leasehold Improvements
• Property of Others in your care/custody/control

In short, while annual premium is certainly an important factor when placing insurance coverage for commercial property, there are many other factors that must be addressed to ensure that coverage responds favorably in the event of a loss. A good insurance broker will not only negotiate rates with underwriters but they will know how to properly customize coverage based off the property’s value and total exposure.

About OAK Insurance Solutions

Oak Insurance Solutions is a California-based insurance agency specializing in comprehensive protection plans that are strategically tailored to fit the needs of any business or individual. We do this through product knowledge, profitability, years of experience, and value-added services across all enterprises.

At our core is client satisfaction. We believe in treating our clients with respect and faith. We continue to grow through creativity, invention and value-innovation while integrating honesty, integrity and business ethics into all aspects of our daily business functioning and corporate culture.

We’ve created this culture by engaging with our clients on a personal level to understand what is most important to them. We’ve distilled their feedback into key performance indicators with metrics and measures in place to help increase visibility, agency focus, and improve the overall client engagement and experience. We pride ourselves in resolving issues quickly, while proactively searching to find more desirable solutions to the main points at issue.

A true leader in the insurance industry and neighboring communities located in Glendora, CA.