Equipment breakdown insurance includes two primary coverages:
- The cost to repair or replace equipment or machinery that malfunctions or breaks
- Lost income and property damage resulting from the downed equipment
For example, if one of the freezers in a food warehouse or grocery store stops working because the compressor malfunctions, the policy would cover the cost of the repair and any spoiled inventory. However, it’s likely that the overall operations could still continue, so lost business income might not apply.
The difference between equipment breakdown and commercial property insurance
While commercial property insurance also helps repair damaged equipment, it only protects against harm caused by external perils named in the policy. Common examples include fires, explosions, unnamed storms, burst pipes, vandalism and theft. It does not cover damage caused by exclusions named in the policy, including breakdowns or malfunctions.
Equipment breakdown insurance is a specialized coverage, or “endorsement,” that you can add to your commercial property policy. It is an important protection for any business that relies on certain machinery or building systems for its operations. While it’s easy to imagine the value of this coverage for a manufacturing plant, no business should overlook its importance. Think of a pizza parlor: no oven, no pizzas.
Using a food warehouse or grocery store as an example, let’s consider three separate loss scenarios:
- A fire damages the freezer. The loss is covered by commercial property insurance.
- A flood damages the freezer. Since floods are excluded from commercial property insurance, the repair claim is denied. (However, it would be covered if the business had flood insurance.)
- A power surge blows the freezer's compressor. The claim is covered by equipment breakdown insurance.
In all three cases, the freezer was damaged, but the coverage depended on the policy type and the source of the loss. This is why it’s so important to work with us. We'll consider your full risk scenario. We can recommend complementary policies that protect your financial health from many angles.
Incidents covered
While you’ll need to check individual policy details, there are several primary equipment categories and types of loss covered by equipment breakdown insurance.
- Mechanically-driven equipment: Manufacturing machinery, motors, water pumps, generators, engines, ovens, copiers and cash registers
- Technology: Computer hardware, phones, fire alarms and security systems
- Electrical issues and related equipment: Cables, transformers, circuitry and damage resulting from power surges
- Heating and cooling, refrigeration, air control and ventilation issues: Changes in temperature, moisture, or air flow that damage equipment or inventory
- Boilers and related equipment: Pressure gauges, valves and damage caused by failed boiler units
- Operator errors that result in damage
Consider the list above to be a general guideline. Compare your equipment inventory with the itemized categories covered by the policy to ensure they align.
Common equipment breakdown exclusions
As a general definition, mechanical breakdowns usually occur suddenly. However, if your equipment simply wears out due to age, this would not be covered by the policy. Issues due to normal wear and tear, such as a broken fan belt, are also excluded.
Damage or breakdowns caused by rust, mold or pests would also be denied coverage, as would issues resulting from failure to maintain your equipment. An example of this could be neglecting routine replacement of air filters, leading to overheating.
Know that insurers sometimes mandate you follow a maintenance schedule. They may even ask you to provide records of equipment upkeep.
Policy selection
Every equipment breakdown policy has choices for certain aspects of coverage, so your business can choose the features that best suit your risk profile. The following are some of the most common choices.
- Actual cash value versus replacement cost: Your payout can be based on either:
- Actual cash value: The value of your equipment at the time of the loss, which takes depreciation into account
- Replacement cost: The cost to replace your equipment with something of equal quality
- Leased and vendor-owned equipment or rented building space: If you have leased or vendor-owned equipment that breaks and interrupts your operations, you’ll need an equipment breakdown policy. It will cover lost business income while those items are being repaired or replaced. Or, imagine your business operates in a building owned by someone else, and their machinery or equipment malfunctions. As a result, you are forced to shut down your operations. The building owner would be responsible for the repairs, but you’d still need an equipment breakdown policy to cover your lost income.
- On-site equipment versus transported equipment: If your operations require moving or transporting equipment off-site, you may need a policy addendum for full protection.
- Replacement upgrades: Some policies allow equipment upgrades at the time of replacement to account for improvements in environmental standards, efficiency or safety. If this is of interest to you, it can be a valuable policy feature.
Of course, other details can also impact how you tailor your equipment breakdown policy. We can help you find comprehensive protection and provide detailed recommendations based on your equipment inventory.