Many business owners make assumptions about what is included under their property policy. Property policies are designed to cover damage to equipment caused by external means; however, in the case of an internal malfunction, are you covered? Equipment breakdown insurance (EBI) may be critical.
Forms of policies
EBI is formerly known as “boiler and machinery” insurance. This coverage is provided in two forms of policies:
- Standalone EBI policy
- Combined property/EBI policy or EBI coverage added by endorsement – review your declaration page to determine if EBI coverage is added to a property policy
For an EBI policy to be triggered, you need to have an accident occur to an object.
These terms should be described in the policy. Here are the basics.
The definition of accident will list the perils insured or exclusions:
- The EBI policy is not intended to replace regular maintenance of the building or equipment, but to cover unplanned events.
- For the EBI policy to be triggered, the source of the accident would be from within the object/equipment.
- A property policy would cover (subject to exclusions) damage to the equipment if it was from an external source (e.g. fire or water damage).
The EBI policy has typical exclusions to the definition of an accident as follows:
Accident shall not mean:
- Depletion, deterioration, corrosion, or erosion of material
- Wear and tear
- The cracking of any part of a gas turbine exposed to the products of combustion
- Leakage at any valve, fitting, shaft seal, gland packing, joint or connection
- The breakdown of any vacuum tube, gas tube or brush
- The breakdown of any electronic computer or electronic data processing equipment, unless used solely to control, operate, or monitor an object
- The breakdown of any structure or foundation supporting the object or any part thereof
- The sudden and accidental explosion of gas or unconsumed fuel within the furnace of the object or within the gas passages therefrom to the atmosphere
- The functioning of any safety device or protective device *
The object is also specifically described in the policy:
- Object could be considered under the property policy contents or equipment, but typical property policy peril exclusions would remove coverages that fall under the EBI accident
Therefore, the excluded perils under the property policy are brought back into coverage under the EBI policy.
Standard property policies have peril exclusions that remove coverage and should be reviewed carefully. Some examples are as follows:
- The standard exclusion of explosion in a property policy – this would fall under the definition of accident in standard EBI wording.
- The property exclusion of mechanical breakdown – this excluded peril in the property policy is often brought back into coverage under the EBI accident
While it may appear that a property policy should cover equipment, upon closer review of excluded perils, it shows they are in fact, not covered, and instead should fall under an equipment breakdown insurance policy.
Therefore, an EBI policy is an important coverage for internal damage to equipment that may not be covered by the property policy. Keep this in mind as you review your own coverage.
Lee Powell, BA, CIP, CRM
Vice President, Complex Loss Division, Vericlaim Canada
*Source: Encon Group Inc. Specimen Endorsement