What is excluded in the equipment breakdown policy?
Understanding Equipment Breakdown Insurance: What’s Excluded?
Equipment breakdown insurance is a critical component of risk management for businesses that rely heavily on machinery, equipment, and systems to operate. This type of insurance provides coverage for the repair or replacement of equipment that fails due to mechanical or electrical issues. However, like any insurance policy, equipment breakdown insurance comes with exclusions—specific situations or types of damage that are not covered. Understanding these exclusions is essential for businesses to ensure they have adequate protection and to avoid unexpected financial losses.
In this article, we’ll explore the common exclusions found in equipment breakdown policies, why they exist, and how businesses can address potential gaps in coverage.
1. Wear and Tear
One of the most common exclusions in equipment breakdown policies is damage caused by normal wear and tear. Insurance is designed to cover sudden and accidental breakdowns, not the gradual deterioration of equipment over time. For example, if a machine fails because its parts have worn out due to prolonged use, the policy will likely not cover the repair or replacement costs.
Why It’s Excluded: Wear and tear is considered a predictable and inevitable part of equipment usage. Insurers expect businesses to perform regular maintenance to prevent such issues.
How to Address It: Businesses should implement a robust preventive maintenance program to extend the lifespan of their equipment and reduce the likelihood of breakdowns.
2. Pre-Existing Conditions
Equipment breakdown policies typically exclude damage caused by pre-existing conditions—issues that were present before the policy was purchased. For example, if a machine was already malfunctioning or showing signs of failure when the policy was issued, any subsequent breakdown related to that issue would not be covered.
Why It’s Excluded: Insurers aim to avoid covering risks that were already present at the time of policy inception, as these represent a higher likelihood of claims.
How to Address It: Conduct a thorough inspection of equipment before purchasing a policy to identify and address any existing issues.
3. Intentional Damage or Negligence
Damage caused intentionally or due to negligence is generally excluded from coverage. For instance, if an employee deliberately damages a machine or fails to follow proper operating procedures, resulting in a breakdown, the policy will not cover the costs.
Why It’s Excluded: Insurance is meant to protect against unforeseen events, not deliberate actions or preventable mistakes.
How to Address It: Provide comprehensive training for employees on equipment operation and safety protocols to minimize the risk of negligence.
4. External Factors
Equipment breakdown policies often exclude damage caused by external factors such as natural disasters, power surges from external sources, or acts of terrorism. For example, if a flood damages a piece of equipment, the loss would typically fall under a commercial property insurance policy rather than equipment breakdown insurance.
Why It’s Excluded: These risks are usually covered under other types of insurance policies, such as property or business interruption insurance.
How to Address It: Ensure that your business has a comprehensive insurance portfolio that includes coverage for external risks.
5. Computer Software and Data
While equipment breakdown insurance may cover the physical components of computer systems, it often excludes damage to software, data, or intellectual property. For example, if a server fails and causes data loss, the policy may cover the cost of repairing the server but not the cost of recovering lost data.
Why It’s Excluded: Software and data are intangible assets that require specialized coverage, such as cyber insurance.
How to Address It: Consider purchasing cyber insurance to protect against data loss, cyberattacks, and other technology-related risks.
6. Routine Maintenance and Repairs
The cost of routine maintenance, inspections, and minor repairs is typically excluded from equipment breakdown policies. These expenses are considered part of the normal cost of doing business and are the responsibility of the policyholder.
Why It’s Excluded: Routine maintenance is a predictable expense that businesses are expected to budget for.
How to Address It: Allocate funds in your operational budget for regular maintenance and repairs to keep equipment in good working condition.
7. Consequential Losses
Consequential losses, such as lost income, production delays, or additional expenses incurred due to equipment breakdown, are often excluded from standard equipment breakdown policies. For example, if a manufacturing line shuts down due to a machine failure, the policy may cover the cost of repairing the machine but not the lost revenue from the downtime.
Why It’s Excluded: Consequential losses are typically covered under business interruption insurance, which is a separate policy.
How to Address It: Purchase business interruption insurance to protect against financial losses resulting from equipment downtime.
8. Improper Installation or Design
Damage caused by improper installation, design flaws, or manufacturing defects is usually excluded from coverage. For instance, if a machine breaks down because it was installed incorrectly or has a design flaw, the policy will not cover the repair costs.
Why It’s Excluded: These issues are considered the responsibility of the manufacturer, installer, or designer, not the insurer.
How to Address It: Work with reputable vendors and contractors to ensure proper installation and design of equipment.
9. War and Government Action
Damage caused by war, civil unrest, or government action is typically excluded from equipment breakdown policies. For example, if equipment is damaged during a riot or as a result of government confiscation, the policy will not provide coverage.
Why It’s Excluded: These risks are considered highly unpredictable and fall outside the scope of standard insurance policies.
How to Address It: Evaluate whether your business operates in an area prone to such risks and consider specialized coverage if necessary.
10. Pollution and Environmental Damage
Equipment breakdown policies often exclude damage caused by pollution or environmental contamination. For example, if a machine leaks hazardous materials, the cost of cleaning up the spill would not be covered.
Why It’s Excluded: Pollution-related risks are typically covered under environmental liability insurance.
How to Address It: Purchase environmental liability insurance to protect against pollution and contamination risks.
Conclusion
Equipment breakdown insurance is a valuable tool for protecting businesses from the financial impact of unexpected equipment failures. However, it’s essential to understand the exclusions in your policy to avoid gaps in coverage. By addressing these exclusions through preventive maintenance, employee training, and supplemental insurance policies, businesses can ensure they are fully protected against a wide range of risks.
When purchasing equipment breakdown insurance, work closely with your insurance provider to tailor the policy to your specific needs. Review the policy terms carefully, ask questions about exclusions, and consider additional coverage options to create a comprehensive risk management strategy. With the right approach, you can safeguard your business and minimize the impact of equipment breakdowns on your operations.