Boiler and Machinery Insurance
There are many types of pressure vessels and machinery that may
cause a loss due to accidents.
Primarily due to the excellent inspection services provided by insurers,
boilers have a low rate of loss, but when a loss does happen, they can be very
serious. Accidents involving boilers,
other pressure vessels, piping, and machinery can result in heavy financial
losses, including business interruption, extra expense, and consequential
damage. Such accidents may also cause
severe injuries and even loss of life.
One such accident (a boiler explosion) at a branch office of the New
York Telephone Company killed 24 people and injured 94 others.
Besides the human loss, the financial toll can be enormous in a
boiler accident. For example, when a
paper mill roller was involved, it took nearly two years before a replacement
roll could be built and production resumed.
The direct property damage was $300,000 at that time, measures taken to
reduce further loss added up to $700,000, and indemnity for lost production
amounted to $2,900,000. The total loss
to the insurance companies involved added up to over $3,900,000.[1] Realize that this was a single
accident. With this in mind, it is easy
to see why insurers have developed such an excellent inspection service.
Losses involving equipment other than the boiler occur more
often, although the results are less severe.
Virtually every type of equipment that contains pressure, or generates
or transmits power, needs to be insured.
This would include piping to air conditioning compressors and deep-well
pumps that may be covered by boiler and machinery insurance.
Premium
Considering the potential of claims, premiums are surprisingly
low. The premium represents
approximately one-third of one percent of the industrys total premium volume.[2] When this information was originally printed
in 1994 that represented around $700 million.
That figure is probably low today.
The loss ratio is generally in the range of 40 to 50 percent.
Why arent premiums higher?
Perhaps the main reason is the tendency to underinsure (limiting the
insurance companys liability). Why would
they underinsure? Often, the business
is more interested in obtaining the insurers inspection service than they are
in obtaining the insurance. Obviously,
if a loss could put a company out of operation for as much as two years, they
do not want to experience a loss at all.
It is well known that the inspection services have greatly reduced loss
and that is what the company is often seeking.
As inspections reduce losses, that allows the insurers to reduce
premiums.
Although this is an ever-changing industry, relatively few
companies write Boiler and Machinery coverage.
This is probably due to the need for highly specialized underwriting,
engineering service, and loss-adjustment facilities. Only a handful of companies write enough volume to even make it
notable.
Inspection services
The inspection service performed by boiler and machinery insurers
predates indemnity for loss.[3] In fact, the actual writing of policies was
merely an out-growth of the inspection service. This can be seen in the insurers name: the Hartford Steam Boiler
Inspection and Insurance Company.
Although inspection is certainly an important aspect, there are
other functions that also help reduce the incident of loss. They range from assisting in the revisions
of the American Society of Mechanical Engineers (A.S.M.E.) boiler code that deals
with manufacturing standards for power plants, to inspection of nearly all
boilers and pressure vessels during manufacture, inspection of equipment when
installed, establishment of safe operating practices, periodic inspection of
the object, supervision of repairs after a loss, gathering and analyzing facts
after a serious loss, and promoting basic research in Boiler and Machinery loss
prevention.
Even though inspection is an important part of the insurance, the
companies make a great effort, through the terms of the contract, and through
their agents, not to promise any frequency or standard of inspection. Such liability would be foolish. Any misunderstanding on the part of the
insured regarding the protection of inspection could place the insurance
company in a responsible position. In
fact, recent cases in the field of workers compensation insurance have
stressed the potential exposure of an insurer with regard to implied
loss-prevention services.
The insurer does reserve the right to inspect the insureds
premises and the items insured at all reasonable times. Boilers are usually checked no less than
once each year, with some companies inspecting more often. If a dangerous situation is noted, the
insurer may, with written notice, immediately suspend insurance coverage on the
particular object. Coverage on
non-defective items would continue.
Coverage may be resumed only by endorsement to the policy. Any unearned premium would be returned.
Due to the inspection services, much of the premium collected is
used for service activity. It has been
estimated that more than 22 cents of every premium dollar is spent for
inspection service. Fifty cents or less
of every dollar collected is paid to the policyholder for losses.
Application for coverage
There is no standard form for Boiler and Machinery
insurance. Of course, the agent must
collect the necessary information. Few
agents have enough education in this very narrow field to do more than gather
information. The underwriter will dictate
which information is needed, and then make policy determination, including the
premium amount.
Even though there is no standard form, standard information will
be needed. That would include:
1. The
complete name of the company applying for coverage and their business address.
2. The
policy term being applied for, typically one year beginning at 12:01 a.m.
standard time at the place where the accident occurs.
3. The
kinds of equipment being insured.
4. The
limit per accident, constituting the property damage limit for any one
occurrence, even though more than one object may be involved.
5. Whether
or not business interruption and/or consequential loss coverage is being
requested as well.
6. If the
agent has access to the information, the premium amount. Otherwise, it will be listed on the
declaration page or provided by the companys underwriter.
7. Sometimes,
the underwriter will add the identification of all schedules attached to the
policy.
Direct-Damage policy
Schedules will be attached to the basic policy. The introductory paragraph of the insuring
agreement will emphasize their importance.
Because this type of machinery has maintenance costs, which the insurer
has no intention of covering, the insurer has not replaced the term accident
with the word occurrence as has been done in many other types of insurance
contracts.
Some terms that will be seen in these policies include:
Accident, as
defined by the Broad Form:
Accident means a sudden and accidental breakdown of the object or a part of the object. At the time the breakdown occurs, it must manifest itself by physical damage to the object that necessitates repair or replacement.
None of the following is an accident.
Depletion, deterioration, corrosion, or erosion.
Wear and tear.
Leakage at any valve, fitting, shaft seal, gland packing, joint, or connection.
Breakdown of any vacuum tube, gas tube or brush.
The functioning of any safety or protective device.
Turbine Units may have a separate definition of accident. If so, refer to the Declarations for the appropriate accident definition.
If a strike, riot, civil commotion, act of sabotage or vandalism results in an accident, this insurance applies. However, the War and Military Actions Exclusion and the conditions of this Coverage Part still apply.
Under the Limited Form, accident is defined as follows:
Accident means a sudden and accidental tearing asunder of the object or a part of the object. This tearing asunder must be caused by pressure of water or steam in the object.
None of the following is an accident:
1. Cracking;
2. Depletion, deterioration, corrosion, or erosion;
3. Wear and tear;
4. Leakage at any valve, fitting, joint, or connection; or
5. The functioning of any safety or protective device.
The key words in the Limited Form are sudden and accidental
tearing asunder, which means explosion. The Broad Form covers loss from accidental
bulging, burning, or cracking, but in the Limited Form, the boiler must
actually explode to trigger coverage.
The Limited Form is often the plan of choice because of the lower
premium rate. More often, the
underwriter is willing to write only the narrower coverage when the object to
be insured is old or has been poorly maintained.
Object,
as found in the Boiler and Machinery Coverage form:
Object means the equipment shown in the Declarations. Full description of specific object categories are found in the Object Definitions endorsement attached to this Coverage Form.
The object definition shown in the Comprehensive Coverage
endorsement is much more specific. It
states:
A. Object means any:
1.Boiler, fired vessel, unfired vessel normally subject to vacuum or internal pressure other than weight of its contents, refrigerating and air conditioning vessels, and any metal piping and its accessory equipment;
2. Mechanical or electrical machine or apparatus used for the generation, transmission or utilization of mechanical ore electrical power.
3. Any of the following vessels listed below are included within the provisions of this section when used with an object:
a. Condensate return tank;
b.Cushion or expansion tank used with a hot water heating boiler.
B. Object does not mean any:
1.Part of a boiler, fired vessel or electric steam generator that does not contain steam or water;
2.Insulating or refractory material;
3.Non-metallic vessel, unless it is constructed and used in accordance with the American Society of Mechanical Engineers Code (A.S.M.E.);
4.Catalyst;
5.Buried vessel piping;
6.Sewer piping, piping forming a part of a fire protection system or water piping other than:
a. Feed water piping between any boiler and its feed pump or injector; or
b. Boiler condensate return piping; or
c. Water piping forming a part of refrigerating and air conditioning vessels and piping used for cooling, humidifying or space heating purposes;
7. Part of a vessel that is not under:
a. Pressure of the contents of the vessel; or
b. Internal vacuum;
8. Oven stove, furnace, incinerator, pot or kiln;
9. Structure, foundation, cabinet or compartment containing the object;
10. Power shovel, dragline, excavator, vehicle, aircraft, floating vessel or structure, penstock, draft tube or well-casing;
11. Conveyor, crane, elevator, escalator or hoist, but not excluding any electrical machine or electrical apparatus mounted on or used with this equipment;
12. Electronic computer or electronic data processing equipment, unless used to operate one or more insured objects;
13. Media used with any electronic computer or electronic data processing equipment;
14. Machine or apparatus that is used for research, medical, diagnostic, surgical, dental, or pathological purposes;
15. Felt, wire, screen, die, extrusion, plate, swing, hammer, grinding disc, cutting blade, cable, chain, belt, rope, clutch plate, brake pad, non-metallic part or any pat or tool subject to frequent, periodic replacement;
16. Object manufactured by you for sale.
C. For any boiler or fired vessel, the furnace of the object and the gas passages from there to the atmosphere will be considered as outside the object.
D. When a vessel uses a heat transfer medium other than water or steam we will consider the medium or its vapor as substitutes for the words water or steam.
E. We will consider that theconnected ready for userequirement of the Coverage Form and its endorsements has been met by an object in this section if that object is:
1. Periodically filled, moved, emptied and refilled in the course of its normal service; and
2. Used for storage of gas or liquid.
F. For any gas turbine Accident does not include the cracking of any part of the object exposed to the products of combustion.
G. We will not pay for loss or damage to any catalyst.
H. We will not pay for:
1. Damage to media used with any electronic computer or electronic data processing equipment; or
2. Any indirect loss resulting from damage to that media.
I. For any object covered by this endorsement, Paragraph F.1.e of the definition of accident in the BOILER AND MACHINERY COVERAGE FORM is replaced by the following:
Breakdown of any electronic computer or electronic data processing equipment, unless used to operate one or more insured objects;
There is a further restriction in the
insuring agreement that the object is only insured while it is in use or
connected and ready for use at the location stated in the schedule. The policy does not intend to cover the
machine or boiler while it is in storage, because this would be a form of
personal property, which can be insured under a commercial property
contract. The policy is intended to be
a fixed-location contract. Portable
objects may be insured at various locations if the wording so specifies in the
contract. This type of equipment
(portable) is often mounted on trailers or flat cars and would, therefore,
obviously be used at different locations.
Even though it is possible to insure objects
individually, with each itemized in the contract, most policies are written as
blanket group coverage. A general
description of the group is stated. All
objects of the same class would be insured.
There is usually automatic coverage on
objects existing at any newly acquired property of the insured. It will be subject to some limitations:
1. The
object must be included by one of the object group descriptions on the policy,
and
2. The
insured must notify the company within 90 days of acquisition.
Automatic coverage does not apply to any
indirect coverage.
Primarily Property Coverage
Boiler and Machinery Coverage is primarily a
property coverage. However, some
property damage liability coverage is also provided. The coverage protects against damage to an insured object or
other property of the insured at a designated location as long as the damage
results from an accident, which must meet the definition in the policy, to an
insured object.
The form will also cover the insureds
liability for damage to property of others in the care of the insured as long
as the damage results from an accident, as defined in the policy. As previously stated, using quote marks
around a word, such as accident, indicates that the definition is stated in
the policy. Coverage would be for
damage to property, as well as the cost of investigation and defense of
claims. Payments made for investigation
and defense are made in addition to the policy limits.
Also covered are expenses incurred to
expedite repairs. This could include
such things as air shipment of needed parts and overtime payments for workers
to install the part.
Exclusions
There are three
exclusions that apply to all losses under the policy:
1.
War damage and military action;
2.
Nuclear hazard; and
3.
Increased cost due to any ordinance or law
regulating or restricting repair, alteration, use, operation, construction, or
installation.
There may be additional exclusions applying to specified types of
losses:
1. Loss caused by an explosion is excluded, but the exclusion does not apply to the explosion of a covered object of the following types: (a) steam boilers, (b) electric steam generators, (c) steam piping, (d) steam turbines, (e) steam engines, (f) gas turbines, and (g) moving or rotting machinery caused by centrifugal force or mechanical breakdown;
2. Loss caused by fire or explosion that occurs at the same time as an accident. However, with respect to electrical equipment forming a part of an object, this exclusion applies only to fire or explosion outside of the object that occurs at the same time as or ensures from an accident.
3. Loss caused by explosion of gas or unconsumed fuel within the furnace of any boiler or fired vessel or within the passages from the furnace to the atmosphere, whether or not such explosion was caused by or contributed to by a covered accident.
4. Loss caused by an accident that is the direct or indirect result of an explosion or fire;
5. Loss caused by water used to extinguish a fire, whether or not the attempt is successful;
6. Loss caused by lightning, provided the loss is covered by other insurance;
7. Loss by flood, unless an accident results from the flood, in which case the damaged caused by the accident is covered;
8. Loss resulting from an accident to any object while being tested;
9. Loss caused directly or indirectly by earthquake, landslide, mudslide, volcanic eruption, subsidence or any other earth movement;
10. Loss caused by lack of power, light, heat, steam, or refrigeration;
11. Loss caused by a delay in, or interruption of, any business, manufacturing, or processing activity; or
12. Loss caused by any other indirect result of an accident to an object.[4]
Some losses normally not covered may be by adding an endorsement.
Endorsements
There are several endorsements that may be added to the basic
Boiler and Machinery policy. These
include:
1. Business
Interruption on either a valued or on an actual loss sustained basis.
2. Extra
Expense on an actual loss-sustained basis.
This was formerly called Outage Insurance.
3. Combined
Business Interruption and Extra Expense on a valued basis.
4. Consequential
Damage for actual loss sustained.
5. Utility
Interruption on actual loss-sustained form.
It is just as important to buy appropriate coverage for
indirect-damage endorsements as it is to purchase the basic Boiler and
Machinery policy.
Business
interruption endorsement
As the name implies, Business Interruption Endorsements protect
the insured from an interruption to his or her business activities when it is
caused by an accident to an insured object.
Remember, the accident must meet the definition in the policy, which is
why accident is in quotes. In
addition to meeting the policy definition of accident, it must occur to the
object on the insureds premises. The
object must be the one described in the policy.
There are two Boiler and Machinery Business-Interruption
forms. The first is valued and
the second is loss sustained.
Under the valued form, the insurer agrees to pay the
insured a specified daily indemnity for a total interruption of their business
or a reduced amount for a partial interruption as the result of a covered
accident. Coverage is extended to pay
reasonable expenses to reduce the duration of the interruption. Any payments made to speed up the process
will cause a reduction in the insurers limit of liability. The valued form has a loss adjustment
advantage in that the insured is not required to prove the actual amount of
loss. There is only the need to show
that the business is completely interrupted and will, as a result, be entitled
to the stated daily indemnity until the limit of their policy has been
reached. The limit of loss is fixed by
the insured with the selection of the amount of daily indemnity, along with the
estimated time period that the business could be interrupted. The insured may select 90, 180, 270, or 360
days.
In the case of partial interruption of business, the insured may
receive that part of the specified daily indemnity that the business loss bears
to the business that would have been conducted had no interruption existed.
Loss-sustained forms are more popular than valued
forms. Loss-sustained forms provide
payment for the actual loss sustained as the result of a business
interruption. The insured must, of course,
prove the amount of the loss, which is defined as the loss of net profit, fixed
charges, and continuing expenses. This
may be modified to include ordinary payroll expenses. Any coinsurance clauses would apply. Coinsurance requirements can range from 25 percent to 100 percent
of the annual value. While there may be some variances, a typical
coinsurance clause states:
We will not pay the full amount of any loss if the Business Interruption annual value at the time of loss is greater than the estimated annual value shown in your latest report or if your report was received by us more than 3 months after the due date, or if your report is overdue. Instead we will determine the most we will pay by the following steps:
a. Divide the estimated annual value last reported to us by the annual value at the time of the accident;
b. Multiply the total amount of the covered loss by the figure determined in paragraph a. above;
c. Subtract the applicable Deductible from the amount determined in b. above.
Payment cannot exceed the Business-Interruption Policy
limit. The coinsurance clause applies
separately to each location insured for business interruption. Two policy definitions are important in the
interpretation of the above coinsurance clause. They are:
Annual Value means
the sum of net profits and fixed charges and expenses that would have been
earned had the accident not occurred.
Estimated Annual
Value means the sum of net profits and fixed charges and
expenses as estimated by you in the most recent annual report.
Premiums may be reduced by the use of a dollar deductible or an
extended waiting period. This is
accomplished by stating that recovery will not commence for a specified number
of hours (in multiples of twelve but not less than twelve) following the
accident. This has the same effect as a
deductible waiting period.
Alternatively, the deductible may be stated as a dollar amount. This is found by taking the number of days
to be deducted and multiplying them by an amount of daily indemnity.
There is no way to say one form is better than the other since
each form has instances in which they apply.
The form selected is usually determined by two factors: does the business
have fluctuations in earnings and how much the interruption in business will
represent an accurate measure of lost earnings. If there are wide fluctuations, the actual loss sustained form
may be best. For businesses that have
specific seasons in which most of the earnings are obtained, whether or not the
interruption would affect earnings would depend upon when it happened. In low season, the loss of earnings may be
minimal, but in high season it could mean the loss of nearly the entire years
earnings. Using an actual
loss-sustained form would probably be wisest, even though the valued form is
easier to understand.
Business interruption rates are based on $1,000 of daily
indemnity. Consequently, it is
necessary to determine:
1. When the
time indemnity is to begin following the loss;
2. The
desired dollar deductible;
3. The
amount of daily indemnity;
4. the
limit of the loss.
Extra expense
insurance
There are nearly always extra expenses following an
accident. For example, firms that are
dependent upon steam power produced by a boiler may go to considerable extra
expense to rent a portable one until the original boiler may be repaired. The purpose of the Extra Expense Form is to
pay those extras that must be covered following an accident to an insured
object. There is no loss of earnings
coverage, so there should be no real duplication, other than the $1,000 of
expediting expense, with the Business Interruption Form.
Combined business
interruption and extra expense
There are forms that combine business interruption and extra
expense protection. The combination
form is designed for the situation where part of the business can be continued
at significant extra expense, but in spite of the continuation, there will be a
decrease in sales or production that will cause a loss of income. Both a valued form and an actual
loss-sustained form are available.
Consequential damage
insurance
Consequential Damage Insurance, as endorsed on the Boiler and
Machinery Policy, is written on an actual cash value basis and applies only to
the property while at the location described in the policy. The limit of liability applies to each
accident, and there is no limitation on the number of covered accidents.
When the standard Consequential Damage Endorsement is attached to
the basic Boiler and Machinery Policy, the insured is protected against loss
caused by spoilage of specified property resulting from the lack of power,
light, heat, steam, or refrigeration due to a covered accident. Depending upon the policy, it can cover any
amount that the insured is obligated to pay to others (such as rented meat
lockers), as well as the insureds own property.
Rates will be based on each $1,000 of coverage for a one-year
policy term. The actual rates will vary
depending upon several factors, including the type of object being insured,
whether the property is insured only while in storage or at all times, and the
coinsurance percentage selected.
Utility interruption
The Utility Interruption Endorsement is for interruptions of
utility services that are off-premises. The source is typically a public utility providing electricity,
steam, water, or gas. However, it could
be any type of energy.
The accident must cause actual physical damage to the utilitys
equipment. The endorsement pays for
actual loss and is, of course, subject to any policy limitations, deductibles
and waiting periods.
Glass Insurance
Todays office buildings have more glass than ever before. More glass windows and more glass
displays. Glass insurance is actually
one of the oldest casualty lines around.
The cost of such glass is dramatic.
Considering the increased use of glass in buildings and displays,
premium volumes actually show a surprising decline in the purchase of glass
insurance. There may actually be a
valid reason for this: considering the amount of glass in buildings, relatively
little of it is actually covered by the policy and more of the glass premium is
being put into the indivisible premiums of the multiple-peril policies. It is also possible that those purchasing
the insurance do not realize some of the policy limitations that they are
buying. For example, Vandalism and
Malicious Mischief coverage typically excludes most glass breakage.
The Glass Form insures against breakage of the glass or damage
caused by chemicals accidentally or maliciously applied. Breakage is considered to have occurred when
the break penetrates through the entire thickness of the glass. How much of the pane is broken does not
matter. This type of coverage is
written to cover nearly any type of glass, including mirrors. Stained glass in lead sections are usually
excluded, however.
Policies may cover the cost to repair or replace the damaged
glass, lettering, or ornamentation, or their value at the time of loss;
whichever is less. The insurance companies
usually exercise their contractual options to replace the broken glass and take
over the salvage. Only when prompt
replacement is not possible do they pay the cash value to the insured. Since the insurers cover many companies,
they are in a position to get the best prices themselves as well as the
quickest service. It is important for
the insured to realize that lettering and ornamentation are only covered if the
policy specifically stated so.
It is
important for the insured to realize that lettering
and
ornamentation are only covered if specifically insured.
The insuring agreement covers, where necessary, the cost of
repairing or replacing damage to frames, boarding up or installing temporary
plates in openings, removing and replacing any fixtures or other obstructions,
and removal of the debris of covered property resulting from a covered
loss. Payment will be made in addition
to the policy limits.
As in all policies, there are exclusions. In the Glass Form, those limits include loss
by fire, war, and nuclear energy. There
is no specific exclusion for scratching, defacing, and so forth since the
policy clearly states that only breakage and chemical damage to the glass are
covered. Covered glass will be
specifically described in the policy.
Some types of glass will have a value stated as well. Some policies will insure all glass
of described types rather than scheduling each piece individually.
The policy will not be reduced due to payment of a broken
glass. Nor will additional premium be
necessary following a loss. Provisions
for such things as subrogation and other insurance follow the usual pattern.
Some types of glass will require special endorsement. This is typically the case for neon and
fluorescent signs. The all risks
protection is extended, but loss caused by wear and tear, mechanical breakdown,
or loss or damage to electrical apparatus caused by electricity, other than
lightning, is excluded.