Equipment breakdown insurance

Rough Notes, Oct 2003 by Malecki, Donald S

Insurance company engineers can help inspect clients' boilers and other equipment

One of the major selling points of equipment breakdown insurance (also known as boiler and machinery insurance) is loss prevention and control. Engineers employed by insurers are supposed to inspect the objects being covered so as to prevent any explosion or breakdown.

The fact that boilers, other fired and unfired vessels, generators and kindred equipment explode or break down despite inspections by qualified insurer personnel to prevent such events means that insurance often may be the necessary alternative to cushioning against losses that entities might not otherwise be able to retain.

Laws currently exist that require habitational structures of over a certain number of families, public buildings, and privately owned business establishments containing steam or hot water heaters to be state-inspected, unless owners or operators maintain insurance.

The downside to state inspections is that if an accident still occurs, no insurance may be available, unless the object is not otherwise excluded under property (including businessowners) policies. At one time, the cost of state inspections was a little lower than the price of insurance. Whatever the situation is today, offering prospective clients the opportunity of inspections plus insurance seems like a better deal, at least from the standpoint of peace of mind.

Opening doors to profit

One enterprising producer I know of, bent on developing new clientele and building his commission income, got the permission of building owners to allow their boilers and other equipment to be inspected free of charge by an insurance company engineer. An insurance company underwriter accompanied the producer and the engineer.

Some of these places were state-inspected, whereas others were covered by insurance. As each place of business was inspected by the engineer, the underwriter prepared a quote upon which the producer based his sales pitch. This may be an extreme measure to increase production, but it opened many doors for the producer beyond this particular coverage.

At the other extreme, there are situations where equipment breakdown coverage is overlooked. Granted, it's somewhat of a specialty, but it doesn't take much effort on a producer's behalf. Simply find out what equipment exists and inform the underwriter.

The producer, of course, is under no obligation to inquire about the equipment servicing a business or habitational establishment. Unless its owner or operator requests a quote or coverage, it may turn out where: (1) a state inspection is sufficient to prevent a loss, (2) the equipment simply doesn't break down, or (3) the breakdown isn't serious enough to result in a financial dislocation.

In one recent case, a motel owner (who, as it turned out, should have known better), sustained a loss when the motel's six low-pressure hot water boilers failed, causing the motel to close until repairs could be made. When the motel owner submitted his business interruption claim to his property insurer, it was denied because he didn't have an equipment breakdown policy or an endorsement to his package policy for direct and indirect losses.

Following denial of his claim, the motel owner did what many disgruntled people do, and that was to file a claim against his insurance agent. During the trial, the motel owner testified that he had a learning disability and "could only read and write a little," and therefore relied on his agent's advice.

In this case of The Island House Inn, Inc. v. State Auto Insurance Company, 782 N.E.2d 156 (Ct. App. OH 2002), the court held that, while an insurance agent has a duty to act with reasonable diligence to obtain the insurance that the customer requests, the owner, here, never requested boiler insurance.

The court also noted that the motel owner was vastly experienced in business and irrefutably knew from an inspection, which he commissioned, that there was some problem with the boilers. The court also stated that, when an agent knows that a customer is relying upon his or her expertise, the agent may have a further duty to exercise reasonable care in advising the customer.

But having said that, the court went on to say that the customer nonetheless has a corresponding duty to examine the coverage provided and is thereby charged with knowledge of the contents of his or her own insurance policies.

Avoiding problems

Once the client requests equipment breakdown insurance, the door is opened for the producer to mention the need for business interruption and other consequential coverages commensurate with the client's need.

The more aggressive or enterprising producer who wants to develop a book of business will need to take chances and not wait for a prospect's inquiry about a certain type of coverage. Completion of a detailed application may be all that's necessary.

Not to be overlooked, either, is the ability to cover a wide variety of equipment, not just steam and hot water boilers. It is, of course, important here for the producer to understand the extent to which a property policy will or will not cover certain equipment from breakdown.