Changing Equipment Risks
Equipment Has Changed, So Have the Risks
Technology has brought many benefits to our modern society. But accompanying the increased functionality and usefulness it gives equipment are increased risks. In a world where elevators talk and machines can think; things are going to break down from time to time. Consider these risk factors.
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 PBX phone systems to 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. Skeptical? Consider this fact: “line disturbances” such as power surges and other conditions are now the leading cause of equipment breakdowns we see at HSB BI&I.
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. Think about it. What would be the impact if equipment you depend upon for telecommunications, e-mail or e-commerce broke down? How about heat and hot water boilers?
Cumulative values of equipment have grown as businesses and institutions have acquired more technology and advanced machinery. Common risks such as power surges and fluctuations in electrical current can threaten multiple systems simultaneously. We see many cases where a power surge doesn't just take out computers but at the same time also damages phone systems, security alarms and other electronic business equipment.
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. Complex equipment requires greater skill to operate and human error can cause things to happen that result in a breakdown. And more equipment is foreign made. In the event of a breakdown it can take much longer to obtain needed parts or replacements adding to the business income loss.
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 manufacturer or processor might use one high production machine where once they had three. If that machine or its output is critical to operations, when it breaks down so do business operations. Just-in-time inventory techniques can save a business the cost of carrying excess inventory, but system breakdown can more easily lead to interruptions in production and sales.
Equipment breakdowns can be very costly because you can't see what's happening to the equipment and you can't always head off a threat before it strikes. Electrical arcing is the term used to describe short circuits in an electrical system. Many arcing events involve the gradual overheating of components that, over a period of time, spread sight unseen to larger areas of the system. When the arcing finally causes the insulation to completely degrade, a massive short finally trips circuit breakers or other protective devices but 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 the building's value, the physical damage can be huge. Often worse is the business income loss because the building owner can no longer supply power to tenants for an extended time.
Equipment and machinery is often located in more difficult to access areas. Electrical distribution systems are integrated within the walls and structure of a building. A major electrical arcing event may necessitate removing hundreds of yards of cable from narrow conduits that are hard to access. Removing or replacing such components then requires more time and labor cost. Sometimes equipment is located on a building's roof making a crane necessary for some jobs. And equipment can be very large and awkward to maneuver 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.
There are loss prevention steps we recommend in the Equipment Care section of this website and we advocate using this information to reduce the likelihood of loss. That said, because of the very real and sometimes unforeseeable risks that exist, we think equipment breakdown insurance should be an integral element of a sound business insurance program for any business, public entity or non-profit institution.