Ever been at the office when there’s a power cut or the internet goes out? Everything stops, and no one can get anything done. Not even the water cooler or the coffee machine is working.

While the average insurance agent’s basic apparatus consists of a computer, a phone, the internet and a power source, imagine if the tools most important to your profitability were a freezer full of $150 million worth of fresh fruit, a custom-designed patented machine that was built in Japan, or a 100-pound air conditioning unit keeping hundreds of guests at your hotel cool.

Without these types of equipment, businesses stop in their tracks. And in some industries, the costs can be huge, often with few alternatives. Every business relies on their equipment to keep their business running, which means explicitly designed equipment breakdown coverage is crucial.

The coverage is fast becoming a must-have for all businesses. Half of agencies “always or often” sell commercial equipment breakdown coverage, according to the 2018 Future One Agency Universe Study—making it the most frequently sold specialty coverage, above terrorism insurance, cyber liability and flood. But why?

“If you look at the commercial space, the reliance on equipment is getting stronger and stronger every day,” says Bill Murphy, vice president, global product owner, Hartford Steam Boiler. “Today, there is simply more equipment and more equipment of higher value located in commercial spaces.”

Compounding the issue is the fact that “this equipment is becoming very sophisticated and complex, which makes it more difficult to repair quickly, often requiring specialized forms to address it,” Murphy explains. Additionally, “this equipment is growing to be more interconnected, sensitive and fragile, which makes it more prone and vulnerable to damage.”

For a commercial insured, coverage for commercial property is a given. But according to Dain Wise, sales manager, INSURICA Express in Norman, Oklahoma, the main cause of loss form used by almost all commercial property insurers is the CP 1030.

“In that form, there is a specific exclusion for artificially generated, electrical, magnetic or electromagnetic energy that damages or otherwise interferes with any electric or electronic wire, device, appliance, system or network,” Wise explains.

And because “almost all business property is plugged in, all it takes is one power surge to fry that whole system,” Wise says. “If that happens, not only are you out the cost to replace that system, but you’re also out lost income while you’re down and in the process of replacing that equipment.”

Coverage Solutions

Of agents that sell equipment breakdown coverage, 94% sell it as part of a package, according to the Agency Universe Study. However, due to the intricacies of individual businesses, plenty of commercial insureds need a customized equipment breakdown policy to ensure they’re getting the full breadth of coverage to keep their business running if their equipment breaks.

Agents can make sure their commercial insured’s property, equipment and income are properly covered by paying attention to two key coverage components.

“First and foremost, you want to have coverage with a broad definition of a ‘covered cause of loss,’” Murphy says. Second, “regardless of industry, you need a broad definition of ‘covered equipment.’ You need something as broad as covering all equipment that generates, transmits and utilizes energy.”

Beyond basic physical property damage, an equipment breakdown policy can be tailored to include business interruption, extra expense, expediting expense, spoilage, service interruption, data restoration and contingent business income. It can even extend as far as public relations coverage, environmental safety efficiency improvements and drying coverage.

Therefore, writing equipment breakdown on a monoline basis “provides a policy that is specific to the needs of the customer,” says James Eades, executive vice president, chief brokerage officer with Arlington/Roe in Indianapolis. “We often offer it as a standalone quote because of the uniqueness of coverage.”

Often, “equipment breakdown is misunderstood because people assume some of the most important coverages are included in their commercial property coverage, when they are not,” Eades adds. “Equipment breakdown can be the glue that connects many different areas of a really great insurance program.”

When Eades reviewed a report on standalone equipment breakdown coverage sales at Arlington/Roe, he found that the three biggest verticals for the coverage were agriculture, hospitality and manufacturing. Here’s a closer look at the coverage in each of those three industries:

Agriculture

Jeff Widdows, Agribusiness Practice technical specialist, Agriculture Division, PayneWest Insurance in Yakima, Washington, writes business solely for the tree fruit and hops industries. From growers, pickers and packers to shippers, dealers and processors, “we couldn’t function without equipment breakdown coverage,” he says.

“We have warehouses that can have upwards of $100 million worth of fruit in refrigerated storage at any given time,” Widdows explains. “Those systems are all reliant on refrigeration equipment and sensors that are monitoring carbon dioxide and oxygen levels, temperature, fan speed, air flow humidity and all sorts of different variants.”

As Widdows’ clientele becomes more reliant on computer-based monitoring systems, “equipment breakdown is one of the few policies that can truly provide coverage for all the idiosyncrasies of the failure of these systems,” he says. “It’s a unique blend of coverage because not only can it take care of property damage or income loss, it can also take care of spoilage to perishable goods. It’s a cornerstone of what we do.”

Eades notes that Arlington/Roe is seeing more agricultural accounts supplement their power with wind, solar and biofuels, and points out that wind farms are a vital source of power for farms situated off the grid. “If a turbine or a blade breaks and a farm lost all that capacity for power, it would be a big loss,” he says.

Another aspect of agriculture that’s relying more and more on equipment: the cannabis space, Eades says. “There’s a need for customized coverage, because Hydroponic growing and extraction facilities use specialized equipment” and because they rely heavily on high-tech equipment to capture specific data—“especially for any facility processing products intended for medical marijuana use.”

Hospitality

In a time of crisis, equipment breakdown is vital to businesses in the hospitality sector, such as hotels and restaurants. “If a refrigeration unit or main air conditioner breaks down, it can result in your business being interrupted. The property damage might be minimal, but business interruption could be a really big deal,” Eades says.

Eades recalls a claim on a hotel with several hundred rooms. “Suddenly, guests started complaining about the heat. Guests in the dining room started leaving and a number of customers said they’d never go back there again. It was complete chaos,” he says.

Eventually, the hotel found out that “one of the motors driving a 75-ton air conditioning compressor had broken down,” Eades says. “It was just a simple piece of equipment that broke down, but it cost them in both loss of income and public relations expense.”

Or imagine a steakhouse that dry ages their beef, Wise says: “They’ve got a supply of 1,000 60-day dry-aged steaks and the electricity goes out because of a power surge—those steaks are ruined.”

In the time it takes for the restaurant to replace their inventory, they’re not able to run a full-service menu and they lose a lot of business, as well as potential return business. “But that’s where the coverages come in,” Wise says. “If we’re really looking to indemnify our clients and make them whole, we have to consider the loss of income that results from a breakdown claim.”

One caveat is that “a lot of carriers have a three-day waiting period on business interruption claims,” Wise cautions. “Depending on the insured, those three days might mean the entire claim has to come out of pocket. You can pay more premium to waive it, but it can be really important, and it tends to get overlooked.”

Manufacturing

Like other industries, manufacturing has been revolutionized by technology. As a result, the equipment used to produce a product has become intensely technologically oriented and highly specific for its intended purpose—which means the associated equipment breakdown coverage must be crafted to fit, too.

“Manufacturers have so much equipment, which is all sensitive electronics,” Eades explains. “You just don’t call a repair guy to get in there and fix them. Some of these products were made in Europe. Some require a certified mechanic, and it may take you weeks to get somebody in there to make repairs.”

For manufacturers, equipment is the heart of their business. If the machine or control panel has a problem and stops working, it can cause a major loss. But what if there are no detectable signs of damage?

“Typically, when it comes to equipment breakdown, you need to be able to see or witness physical damage,” Murphy says. However, “when you’ve got equipment that is very sensitive and very integrated, the electronic circuitry components are almost impossible to see and touch.”

But now, “there is coverage in the marketplace for electronic circuitry impairment where you don’t necessarily have to see physical damage within that electronic circuitry,” Murphy explains. “If you remove it and replace it and the equipment goes back to operating as it was, that can be a covered cause of loss.”

Overall, “as we move forward with advances with technology, frequency and severity of breakdown losses are on the rise,” Murphy says. “That means there is a far higher potential for breakdown and increased downtimes, resulting in a larger financial impact on commercial property owners and managers.”

Will Jones is IA assistant editor.