Machinery Breakdown coverage – ISR vs standalone insurance
We are often asked by clients what type of Machinery Breakdown cover is more effective. Is the cover included under an Industrial Special Risk (ISR) policy sufficient, or is better protection available under a standalone Machinery Breakdown Insurance policy? Here, we address the differences between these two types of cover and when they should be applied.
What is Machinery / Equipment cover and why is it required?
In the event of an unforeseen loss to your machinery or equipment due to breakdown, a property policy will not indemnify you for any repairs or replacements required to the damage parts. The property section of a Business Pack or ISR will only cover for accidental damage and other perils excluding Machinery/Equipment Breakdown cover. As such, Machinery Breakdown cover will need to be specifically requested to indemnify you for these unforeseen losses.
When considering purchasing a Machinery Breakdown policy, the client must disclose the type of machinery they are responsible for. Keeping track of your machinery under an asset schedule is highly recommended to ensure your assets are fully and accurately disclosed to insurers.
A key condition of Machinery Breakdown cover is that the owner must regularly maintain their equipment. A maintenance plan with a contractor is essential in demonstrating to the insurer that you are being proactive in looking after your equipment. Some equipment may also need to be registered with the local government bodies (lifts, escalator – SafeWork, and chillers – Local Councils).
Coverage available
Machinery/Equipment breakdown insurance is usually optional under a Business Pack or ISR policy. Under a Business Pack policy it is usually a separate section and under an ISR it is sub-limited.
There is another option available to the market. A standalone Machinery/Equipment Breakdown policy.
Depending on the risk appetite of the insurer, Business Pack Insurance may offer limited cover for office equipment only. Any other equipment would remain the responsibility of the insured.
Under an ISR policy, cover would be sub-limited, however Business Interruption cover will be included in the form of expediting expenses (up to 50% of the repairs to bring the insured back to where they were prior to the loss. This would cover expenses incurred to continue production (for manufacturing risks) in order to minimise any reduction in output and income. The exclusions under ISR are more restrictive. Of utmost importance here, is the definition of machinery and equipment breakdown in the policy wording.
- Size/age restrictions on motors can arise in package policies.
- Refrigerant costs can be excluded or costs sub-limited, and the costs of necessary retrofitting of air conditioning systems to accommodate current refrigerants may be excluded.
- Settlement restrictions are common (obsolescence clauses are prominent, but depreciation or actual values clauses are still present in some cases)
- ISR – general perils exclusions for design/workmanship/vermin etc leading to a breakdown event can mean certain events leading to breakdown will not be covered.
- Limits of liability are important to consider in case of an unforeseen event.
Under a standalone Machinery/Equipment Breakdown policy, there are more options available to the client and a broader definition in policy wording.
- Type of machinery/equipment to be insured.
- Age/motor size limitations.
- Type of coverage – blanket or specified.
- Is Consequential Loss or Business Interruption required?
- Coverage confusion: In today’s world a machine may contain the electronic components of a computer and vice versa (for example an x-ray machine). Questions can arise as to whether to select MB (Machinery Breakdown) or EDP (Electronic Date Processing Equipment) extensions and which one applies when a machine/computer breaks down given they have different settlement basis and limits applied.
- Specific equipment exclusions: Electrical wiring is still typically excluded. Assets like poker machines, lighting, power circuits, fibre optic cables etc can be subject to gaps in cover. See claim examples below for further explanation. ISR will exclude other assets such as turbines over a certain size.
- Broader coverage triggers and additional auto extensions are often present in a standalone wording. Service interruption, accidental failure of supply for DOS, equipment upgrades extensions (extra 50%/$50k in some instances), broader data restoration extensions, ammonia contamination are some examples.
- No Emergency Services Levy (ESL), Fire Services Levy (FSL), or Terrorism Risk is applicable.
Standalone Policy Coverage
- Equipment breakdown coverage, based on a single broad definition of 'equipment' which incorporates today's technologies.
- Service interruption, due to failure of utility, landlord or other 3rd party equipment used to supply services such as gas, water, electricity or internet.
- Extensions included for customers and suppliers, fines and penalties, and public relations fees.
- Green upgrade enhancement (up to +50% of repair or replacement).
- Restoration of data (including software and licenses) made incompatible due to a breakdown, including whilst in 3rd party data centres anywhere in Australia.
- No distance restriction on spoilage due to breakdown of 3rd party equipment.
- Spoilage due to accidental failure of electrical utility.
- Coverage extensions available include: business interruption, spoilage of stock, data restoration and additional expenses.
- Generous limits of liability on all coverages.
Claims Examples:
At approximately 7:00 p.m. the building superintendent of an apartment building discovered that a power failure has shut down all equipment in the mechanical room. An electrical contractor is called and proceeds to replace a blown 400 Amp fuse.
The contractor then restores power without first determining the cause of the blown fuse. Upon switching on the 400 Amp breaker which controlled the power supply to the air conditioning unit, a small explosion resulted, completely destroying the panel.
The control panel had not been fitted with a moisture barrier and was not of weather proof construction. Moisture accumulation, combined with insulation deterioration between the penthouse distribution panel and the chiller control switch are the suspected causes of the loss.
During the operation of the 24 car stacker, a variance developed between the speed of the cart and the speed of the cable drum retraction/rewind unit which caused the retracting cable to come off its runner and loop over one of the rollers. The cart’s drive motor continued to operate, pulling the cable against the rewind drum and the resistance stripped the motor and sheared the gear teeth.
The trailing data cable was also pulled completely out of the cart control panel, necessitating its replacement. The system was temporarily rigged to allow all cars to be removed manually and was then inoperable until the repairs could be completed.
During the day shift at a licensed club, a sudden failure of mains power supply to a club resulted in damage to two compressors in a two chiller centralised air con system.
The cause of the power supply interruption was established to be the operation of the electricity provider’s Network Protection System.
Upon investigation, it was identified that fusion of electrical motors had occurred in two compressors, one on each chiller. Most likely when they drew excessive current before the failure of the power supply occurred, leading to the breakdown. There was also damage to the refrigeration circuits and electrical damage to their overload, contactors and other protective devices.
After power to the premises was resumed, the Insured noticed damage to the 50” plasma TV that was connected to 5 gaming machines. Upon inspection, it was confirmed that the plasma TV screen had suffered excessive voltage during the event and had been damaged beyond repair.
No recovery was pursued from the electricity provider as it was deemed, based on previous experience, that the Insured should have had protective devices installed to mitigate against such an event.
Conclusion
When approaching renewal time or to obtain an initial quote, Bellrock recommends undertaking a comprehensive review of all machinery and equipment assets. Keeping an up to date asset schedule is key to obtaining the right cover, so too is an effective maintenance plan. As most buildings contain a wide range of machinery and equipment, the cover and limits required must be carefully evaluated to ensure appropriate coverage is obtained. Your broker is critical to the process of determining the nature and level of cover required and can provide tailored advice based on your situation.
For more information or to obtain a quote for Machinery Breakdown Insurance please contact us via the form below.
