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1 March 2015 | In the Press

Covering All The Bases

Equipment insurance coverage during construction provides peace of mind

By David Pivato P.Eng., vice-president, underwriting, at the Boiler Inspection and Insurance Company of Canada (HSB BI&I).

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A building’s vital equipment works hard from the time it’s installed during the course of construction. For this reason, it should be insured against damage by mechanical or electrical breakdown well before the building is complete.


Building owners may assume that equipment breakdown losses are covered by their property insurance policy or manufacturer’s warranty. This, however, is not the case. Property insurance policies typically exclude electrical arcing and mechanical breakdown. Thirty-five per cent of such equipment breakdown claims are due to operator (or human) error. Accidentally contaminating an engine’s lubricating fluid with a foreign substance, for instance, is enough to cause hundreds of thousands of dollars in damage, even in new engines.


Warranties only cover manufacturer defects. They exclude losses caused by external factors, such as temperature extremes, dusty conditions and improper installation. When warranties do apply, they often don’t cover the costs to remove the faulty equipment and install its replacement.


Course of construction equipment breakdown coverage protects a building’s equipment and its owner’s pocketbook.This type of insurance pays for the repair or replacement of equipment that has been suddenly and accidentally damaged during the course of construction. It also covers the loss of anticipated revenue if a project is delayed, and can be extended to include coverage during the commissioning and testing stages.


Equipment covered includes air conditioning, electrical systems, underground cables, building automation systems, and heating and hot water systems. Coverage must be maintained continuously from start of use or operation of the insured equipment, until 10 days after the date of substantial performance of the work.



Air conditioning systems contain a variety of parts that rely on one another. So, if one component fails, it can often affect others. Even if breakdown is isolated to one part, repair and/or replacement is pricey. For instance, failure of a compressor motor will often cost in excess of $50,000. Electrical systems represent up to 15 per cent of a building’s total value. Since these systems are interconnected, damage from a single accident can destroy vast sections, including transformers, panels, switchgear, power controls and emergency generators. If an electrical system fails, power is lost, which may impact the progress of a project.


Underground cables are susceptible to arcing and short circuiting. Removal and replacement is very costly since cables are buried and must be excavated. Modern buildings have automated energy management systems that operate boilers, air conditioning, lighting, elevators and fire detection. They use electronic circuitry that is sensitive to power surges and electrical disturbances. The boilers and pressure vessels that generate and distribute heat and hot water are vulnerable to failure, particularly during equipment testing and commissioning.



There are two phases during the construction process that are considered high-risk and, therefore, require specialized equipment breakdown coverage. These are the testing and commissioning stages. Building equipment has a higher chance of failure when it is first put into use. Any equipment that is faulty, installed incorrectly or the wrong equipment for the application is likely to breakdown immediately or within days. This is why equipment is often tested after installation.


Equipment may undergo two forms of testing: cold and hot. Cold testing checks equipment under dry run conditions. Examples include using instruments to test a circuit or filling a pressure vessel with water to detect leaks. Hot testing operates equipment under actual working conditions. Because of this, there is a higher potential for breakdown. Hot testing involves the application of heat, fuel or feedstock, or connection of equipment to a grid or load circuit. Commissioning is an intensive quality assurance process during which all building systems are checked, inspected and tested to establish they are in good working order. Typically, this occurs toward the end of construction. It is at this time that equipment is employed under normal operating conditions in order to train personnel and to ensure it performs as expected in compliance with the specifications for which it was designed. High-risk factors come into play, such as manufacturer defects, human error and interaction with other building systems.

David Pivato, P.Eng., is vice-president, underwriting, at The Boiler Inspection and Insurance Company of Canada. He can be reached at dpivato@biico.com.


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