Specifics of Insuring Expensive Equipment
February 09, 2016
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Nika Melnik Associated partner
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Did you know that equipment breakdown caused by its functional defects or faulty operation by the workers either due to lack of professionalism or mere curiosity is not covered by regular property insurance policy? If such damage entails financial losses for your company, the insurance company has legal right to deny you indemnity. In a situation when your business operations depend on expensive equipment it is reasonable to consider purchasing machinery breakdown insurance policy.
Machinery breakdown is insured under “all risks” policy. However it always serves as additional coverage under property insurance agreement. On the one hand, such an extensive insurance program guarantees that you will receive indemnity for a variety of insured events ranging from a simple short circuit to those caused by man factor and defects in manufacture.
Below are several case studies which show how machinery breakdown insurance can be applied.
Case study 1.
Faulty erection of equipment at TPP (thermal power plant) caused steam pipe breakdown. The damaged totaled to nearly $ 1 mln with the cost of steam pipe repair accounting for a miniscule portion of the total indemnity. The lion’s share of indemnity was spent on repairing equipment damaged by the steam. That’s a textbook example of machinery breakdown in effect.
Case study 2.
Imagine that your business is of season nature. In June you faced machinery breakdown due to the temporary power shortage. It takes up to 2-3 months to deliver the necessary spare parts. This means that you have to stop production process for the whole season leaving you without sales revenue not for summer period only, but for the whole year since you are not able to produce the goods.
Insurance policy covering machinery breakdown and business interruption caused by it is the best solution to the abovementioned problem. You not only receive indemnity sufficient enough to repair broken assembly line, for instance, but to cover financial losses associated with the physical damage, including the lost profit. However it’s worth keeping in mind that equipment with an effective warranty cannot be insured under such policy.
Easily worn out parts of equipment such as cables, belts etc. are also not covered by the insurance policy.Besides, easily worn out parts of equipment such as cables, belts etc. are also not covered by the insurance policy. The situation is similar to CASCO insurance policy which does not stipulate for the indemnity to be paid for the worn clasp brakes.
Obviously, machinery breakdown insurance cannot be cheap one. It’s worth keeping this information in mind when choosing between several offers from the insurance companies.
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