Ross Gow looks at a US equipment breakdown coverage which will soon be offered in the London market.
Equipment breakdown coverage (EBC), formerly known as boiler and machinery coverage, may sound like a specialist reinsurance class appropriate only for companies involved in industry and manufacturing, but in fact it is much more extensive. Any company with mechanical and electrical exposures - essentially any company that owns or rents either buildings or equipment in the course of its business activities - which doesn't have EBC is exposing itself on a daily basis to potentially crippling risk.
As companies automate more and more of their businesses and business processes, the networked world of supply chains and process that is created as a result is increasingly fragile. In a largely automated, real-time economy the 'just in time' nature of business means that a break in the corporate chain can bring an entire enterprise to a halt in seconds. In the aftermath of September 11, Dell Computers quickly reconfigured its supply chain to meet the spike in demand for PCs to replace those lost in the disaster. By contrast, Compaq missed out on shipping 300,000 units due to its inability to adapt its network of supply.
As the nature of industry and of risk itself has changed, so this previously esoteric class of insurance has shifted focus. EBC originally derived from the need to treat exposures created by the use of steam vessels in industry as a separate and distinct item. Until the 1950s, most manufacturing and service firms relied on boilers as a source of power. If these vessels exploded, catastrophic damage resulted and extended repair times resulted in major production losses. British insurance companies began to exclude losses caused by this exposure in the 1850s and their underwriting expertise was directed to outside forces such as windstorm and fire. Hartford Steam Boiler, founded in 1866, was the first US company to specialise in underwriting the coverage, at a time when steam was still the main power source of the Industrial Revolution.
21st century coverage
In 2003, EBC addresses the far broader markets - with correspondingly greater insurable values - of technology and fragile electrical and computerised equipment, which are vital to today's business environment. Mike Fusselbaugh, Senior Vice President of International Insurance at the Hartford Steam Boiler Inspection & Insurance Co (HSB), which controls 50% of the US equipment breakdown market, argued that smart providers will look beyond the name to the essentials of the product beneath. "These days, the term boiler and machinery is really a misnomer, in that modern policies cover much more than just boilers and production machinery. The coverages have been broadened to cover not just what's in the basement but what's in the boardroom. The truth is that just about any business you can think of needs equipment breakdown coverage."
Even more importantly, electrical exposures have grown dramatically in recent years as companies have automated and integrated their operations through electronic networks. Even the smallest firms are dependent on computer networks and other forms of electronic equipment for inventory management or to store customer account and product information, and they also rely on scanners, fax machines, card readers and the like. Such equipment is exposed to power surges, short circuits and to general electrical disruption that can cause extensive losses. It is important to emphasise, too, that standard commercial property and most multi-peril or package policies contain exclusions for electrical disturbance, mechanical breakdown, and explosion of steam boilers and piping.
"As equipment exposures increase due to increasingly complex technologies, it's a constant struggle to keep coverage design ahead of the game," said Mr Fusselbaugh. "It's not just the physical damage caused by the explosion or breakdown that's of concern. While repairs are being made, valuable time and profits are being lost and frequently the business interruption and extra expense losses can be more extensive than the damage to the equipment itself. "
In the UK, the provisions of the Health and Safety at Work Act 1974 impose a number of statutory obligations on businesses to inspect plant and machinery and mitigate the risk of accidents.
In an age when the nature of risk is ever-changing, equipment breakdown insurance providers can offer a specialist inspection service for policyholders which aids compliance with the legislation and also benefits the insured by providing sound loss control recommendations to ensure efficient operation and longer equipment life. "Inspection service is still an important component of equipment breakdown insurance," said Tim Cramphorn, Managing Director of HSB Haughton Engineering Insurance in the UK, whose clients include NIG, Ecclesiastical, AXA (UK) and Lloyd's groups. "Equipment breakdown coverage is a unique line of insurance within a commercial insurance arena that's focused on prevention; trying to keep accidents from occurring so that we don't have potentially catastrophic events. HSB Haughton has 225 dedicated engineers and surveyors in the UK and 30 in Europe, to ensure that clients observe their legal requirements and also embrace appropriate risk management methods; we're very familiar with the concept that prevention is far less costly than cure."
By Ross Gow
Ross Gow is a director of Cubitt Consulting.