What are the distinctions between Business Personal Property Insurance and Equipment Breakdown Coverage?
We recently started working with a business owner who operates an indoor go-kart facility. In the past, he had been responsible for repairing or replacing air-conditioning equipment after the units were struck by lightning. That kind of experience is a good reminder of something that can be easy to overlook in commercial insurance:
Some businesses depend on equipment that is extremely expensive, and extremely important, to their daily operations.
For an indoor entertainment facility, it may be HVAC and electrical systems. For a restaurant, it could be refrigeration. A manufacturer may depend on one critical machine on the production line. A dental office may rely on X-ray or other specialized equipment. Most business owners understand that this equipment should be included somewhere in their commercial property insurance. But there is another question that matters just as much:
What actually has to happen to that equipment for the insurance policy to pay?
That is where the distinction between Business Personal Property and Equipment Breakdown coverage becomes important.
Business Personal Property Answers One Question
Commercial property policies commonly provide coverage for Business Personal Property, often shortened to BPP. Depending on the business and policy, BPP can include things such as furniture, inventory, computers, machinery, tools, equipment and other property the business owns. Suppose a manufacturer has a machine worth $100,000 and that value is properly included within the company’s property limits.
That’s important.
But having the machine insured as property doesn’t necessarily mean every reason the machine could be damaged or stop working is covered. Commercial property insurance responds to covered causes of loss. A machine damaged by a covered fire presents one type of claim. A machine that suffers an internal mechanical or electrical breakdown presents another.
Same machine. Different cause of loss. Potentially different coverage.
That’s Where Equipment Breakdown Can Come In
Equipment Breakdown coverage is designed to address certain types of sudden mechanical, electrical and pressure-system failures that may not be covered by the standard property portion of the policy. Historically, this type of insurance was often called Boiler and Machinery coverage, which can make it sound like something only a large factory would ever need. That’s no longer a very useful way to think about it.
Modern businesses depend on electrical and mechanical equipment everywhere. A sudden breakdown could involve a motor, compressor, electrical panel, refrigeration system, HVAC equipment, production machinery or another critical system. And that’s why Equipment Breakdown isn’t just a manufacturing coverage.
Think About the Equipment Your Business Actually Depends On
A restaurant can have a serious problem if its refrigeration equipment fails. A manufacturer may have one machine that is essential to a particular stage of production. A dental practice could have a significant investment in X-ray or treatment equipment. A commercial building owner or tenant is responsible for HVAC, electrical or other building systems.
Even a business that doesn’t think of itself as “equipment intensive” may be much more dependent on machinery and electrical systems than the owner realizes. That’s one of the reasons underwriters frequently ask questions about the age and condition of building systems such as HVAC, electrical and plumbing. Those systems matter both from a property-maintenance standpoint and because failures can become expensive very quickly.
A Simple Example
Let’s go back to that $100,000 manufacturing machine.
Scenario 1: A fire damages the machine
If the machine is damaged by a covered fire, the commercial property portion of the policy may respond, subject to the policy’s limits, valuation provisions, deductible and other terms.
Scenario 2: The machine suffers an internal electrical failure
Nothing else happened to the building. There was no fire from an outside source, no theft and no storm damage. An internal electrical or mechanical problem damages the machine. Now the coverage question may shift toward Equipment Breakdown. That distinction is why simply knowing that a piece of equipment is included in your BPP value doesn’t necessarily tell you everything you need to know.
Equipment Breakdown Is Not a Maintenance Contract
There is also an important limit to this idea. Equipment Breakdown coverage does not mean that insurance pays every time an old piece of machinery wears out. Normal wear and tear, deterioration and routine maintenance issues are different from a sudden covered breakdown.
If a 20-year-old compressor gradually reaches the end of its useful life, replacing it is not the same type of event as a sudden covered electrical or mechanical failure. Businesses still need proper maintenance, inspection and replacement schedules. Insurance is intended to respond to covered losses and not replace ordinary maintenance.
You May Already Have Some Equipment Breakdown Coverage
One reason many business owners are unfamiliar with Equipment Breakdown is that it may not always appear as a completely separate insurance policy. On many Business Owners Policies, Equipment Breakdown can be included automatically, added by endorsement or incorporated into a broader coverage-enhancement package.
Carriers such as Travelers and The Hartford, for example, may make Equipment Breakdown available as part of a broader BOP structure depending on the product and account. That can be convenient, but it creates another reason to actually review the policy. Seeing that some Equipment Breakdown coverage exists doesn’t automatically answer questions such as:
- What equipment is contemplated?
- What limits apply?
- What deductible applies?
- Are there sublimits for certain types of loss?
- Are spoilage or other related losses included?
- Is the amount of coverage appropriate for the equipment the business actually owns?
The wording and limits can vary from one policy to another.
BPP and Equipment Breakdown Should Be Looked at Together
This is the part that can get confusing, even for people who are newer to commercial insurance. It isn’t necessarily a question of choosing Business Personal Property or Equipment Breakdown. They can address different parts of the same overall property exposure.
BPP helps establish the property and values being insured. Equipment Breakdown can address certain causes of damage to machinery and equipment that ordinary property coverage may not. That’s why I like to think about the two questions separately:
1. Is this piece of equipment properly included in the business’s property values?
2. What happens if it suffers a sudden mechanical or electrical breakdown?
A business can have a good answer to the first question and still need to take a closer look at the second.
What Should a Business Owner Review?
If your company depends heavily on equipment, I would start by identifying the pieces that would create the biggest problem if they suddenly failed. That might include refrigeration, HVAC equipment, machinery, electrical systems, medical equipment, production equipment or other specialized property.
From there, review whether those values are accurately reflected in the commercial property policy and whether Equipment Breakdown coverage is included with appropriate limits and terms. There is also a business interruption component to many equipment losses if the failed equipment stops operations, but we covered Business Income in more detail recently. For this conversation, the first question is more fundamental:
Will the policy help repair or replace the equipment itself if the loss is caused by a mechanical or electrical breakdown?
The Bottom Line
Business owners often ask:
“Is my equipment insured?”
That’s a good question. But it shouldn’t be the last one. A better follow-up is:
“What causes of damage is my equipment actually insured against?”
A restaurant refrigerator, manufacturing machine, dental X-ray unit or commercial HVAC system can all be properly listed within a business’s property values while still presenting different coverage issues depending on how the damage occurs.
If your business depends on expensive equipment and you’re not sure how your current property policy handles mechanical or electrical breakdowns, we can help review the coverage and identify where there may be gaps worth addressing.