Changing Equipment Risks

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High tech means higher risk

Technology has brought many benefits to society, but with increased equipment functionality and usefulness come increased risks. In a world where elevators talk and machines think, things are going to break down at times.

The threat of equipment breakdown has grown as fragile computer technology and sensitive circuitry is now used in most equipment and systems. Computer circuitry is now integral to devices from diagnostic machines to inventory control systems. This technology is so sensitive that the static charge from handling “bubble wrap” can damage them. Imagine what a real power surge can do. “Line disturbances” - such as power surges - are now the leading cause of equipment breakdowns.

When equipment stops so does your business

Think about the impact if equipment you depend upon for telecommunications, e-mail, e-commerce, heat and hot water broke down? The increased reliance upon equipment for operations and income has made more equipment “mission critical.” As a result, equipment breakdowns that interrupt operations often result in business income loss.

The value of equipment has grown as businesses and institutions have acquired more advanced technology and machinery. Common risks such as power surges and fluctuations in electrical current can threaten multiple systems simultaneously. A power surge might not just damage computers, but phone systems, security alarms and other electronic business equipment all at the same time.

Tenants depend upon the equipment of others

Businesses have equipment breakdown exposures even if they are a tenant or rely upon the equipment of others. Say you rely upon the building owner to supply heat and cool air for customer comfort. If the building owner’s equipment breaks down and your customers go elsewhere, you lose sales and income. If a transformer owned by your electric utility breaks down interrupting your power supply and your business operations stop, you just had an equipment breakdown loss.

Equipment is more complex and requires greater skill to operate - human error can result in a breakdown. With a lot of equipment being foreign made, it can take much longer to obtain needed parts or replacements in the event of a breakdown, adding to business income loss.

New business practices bring new risks

Technology has enabled new business practices that can increase the risk of a business income loss when equipment breaks down. With advances in technology a business might use one high production machine where they once used three. If that machine and its output is critical to operations, business operations break down when it does. Just-in-time inventory techniques can save a business the cost of carrying excess stock, but system breakdown can more easily lead to interruptions in production and sales.

What you can’t see can hurt you

Because you can’t always see what’s happening to equipment, you can’t always avoid an unseen threat before a costly equipment breakdown happens. Electrical arcing is caused by short circuits in an electrical system. Many arcing events involve the gradual overheating of components that spread unseen to larger areas of the system over time. When the arcing finally causes the insulation to completely degrade, a massive short finally trips circuit breakers or other protective devices.

Unfortunately, by then significant portions of the electrical system are destroyed and require complete replacement. We’ve seen cases where up to 50 percent of a building’s electrical system was damaged. Since an electrical system might be worth 10 percent of a building’s value, the physical damage can be huge. Often, business income loss because the building owner can no longer supply power to tenants for an extended time is even worse.

Property insurance does not cover costly equipment breakdown

Equipment and machinery is often located in difficult to access areas, such as electrical distribution systems that are integrated within a building's walls and structure. A major electrical arcing event may necessitate removing hundreds of yards of cable from narrow conduits that are hard to access and requires more time and labor.

Some equipment can be very large and awkward to maneuver or located in difficult to reach spots, making a crane necessary and adding to the cost of replacing it.

Most property insurance is very broad but it usually was not designed to insure for the unique technical causes of equipment breakdown. If power surges, electrical arcing, mechanical breakdown, centrifugal force cause a breakdown, you need equipment breakdown coverage to be insured.

What you can do

There are loss prevention steps HSB recommends in the Equipment Care section and we advise using this information to reduce the likelihood of loss. However, with the real and sometimes unforeseeable risks that exist, we believe equipment breakdown insurance should be an integral element of a sound insurance program for any business, public entity or non-profit institution.

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© 2019 The Hartford Steam Boiler Inspection and Insurance Company. All rights reserved. This is intended for informational purposes only and does not modify or invalidate any of the provisions, exclusions, terms or conditions of the policy and endorsements. For specific terms and conditions, please refer to the coverage form.

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