Unusually named insurance covers many costly problems
By Julie Sturgeon • Bankrate.com

Chances are your commercial property insurance policy contains a costly gap.

A gas leak causes your building to explode. Property insurance covers it. Someone drives a car through your storefront. Don't sweat the claim.

But should a pressurized boiler or pipe blow, the business owner is left holding bag. Ditto an electrical arc that fries your operations or a printing press gear that grinds to a halt. The remedy: a boiler and machinery policy.

"The biggest misunderstanding these days is the name," says Charlie Nusbaum, owner of Nusbaum Insurance in Newport News, Va. "You don't have to own a boiler to need this insurance coverage."

Wide coverage for equipment breakdown
The term 'equipment breakdown' certainly covers small business's bases better.

These policies insure a wide variety of machinery, from the boilers whose name they bear to water tanks, from refrigeration systems to steam cooking kettles, from switchboards to air conditioning units, and more.

In addition to paying for equipment repair or replacement, the paperwork also promises to help cover the costs of cleaning up any breakdown-caused damage. This follow through, say the insurance's advocates, makes it superior to merely buying separate riders for named equipment.

Policyholders also cash in on business interruption charges, which account for half of the claim amounts paid by Hartford Steam Boiler Inspection and Insurance Company. In some cases, the check even includes expediting services. For example, if you need to rent a special trailer to ship the part to the factory for immediate attention, the bill doesn't come out of your pocket.

And claims adjusters aren't searching for fault, says Jerry Liebers, senior vice president in charge of these policies at CNA Commercial Insurance. This alone puts the insurance on many union shops' consideration lists, as well as those near college fraternities or high-crime areas.

Broad coverage and no-fault claims
Insurance experts say the breadth of the coverage makes it a must for a majority of businesses.

Raymond Santiso, author of Boiler and Machinery Insurance Guide published by the International Risk Management Institute in Dallas, rattles off 65 industries as examples, including banks, bakeries, candy stores, car washes, convalescent homes, country clubs, department stores, dry cleaners, funeral homes, greenhouses, hotels and restaurants.

"Even a clothing store like Men's Wearhouse that tailors suits has a high-pressure steam boiler in the back to run the pressing machine," Santiso points out.

Breakdown insurance also has become an issue between landlords and tenants, according to Nusbaum. Many strip-mall owners insist that retailers pick up coverage for their operations.

Don't over-insure
Of course, Santiso says, small businesses don't need insurance overkill.

A stand-alone stock brokerage with a dinky five-ton, portable air-conditioning unit beside the building, a hot water heater and a switchboard for the electricity probably doesn't risk enough in ripple effects to justify the premium.

And tenants in office buildings who have nothing to do with providing the steam heat fed into their offices may consider themselves poor candidates (but check the landlord's coverage during lease negotiations).

However, if you rely heavily on your office equipment in any circumstance, call an agent for an estimate.

One Milwaukee grocery store owner wishes he investigated his risk. When vandals tossed concrete blocks into his outdoor compressors and the damage interfered with refrigeration units, the state department of health condemned his ice cream supply. The businessman ate $20,000. A boiler and machinery policy would have picked up the tab that his property insurance denied.

Liebers pulls a fistful of happier endings from his customer files: $64,333 paid when condensation dripped into a switch gear causing arcing that led to transformer failure; $29,813 after electrical parts on a machine tool manufacturer's computer tape drive failed; and $127,460 to cover the gap guard for a blanket cylinder that was drawn into machinery.

"The risk and return is better than buying other insurance lines," Liebers says.

Inspections help control price
The price is right for the insurance company's bottom line as well.

Because a boiler and machinery policy requires an inspection and approval of covered equipment before a contract is issued, the carrier typically flags potential problems before they become accidents. This keeps the insurance's loss ratio low.

Policyholders embrace the inspection service component because it allows industries that must meet jurisdictional standards to circumvent paying government inspectors for clearance. "In Texas, the state fee hovers near $200 per heater for an inspection required every three years," says Santiso.

Boiler and machinery policies can stand alone or be bundled with a business package. But because all carriers use what's known as an ISO countrywide standard form to determine coverage and price schedules, independent insurance consultant Paul Dudey thinks that shopping policies is a waste of time.

Typically, the carrier determines premium based on the number and type of machines covered. The business owner then shapes his payment by deciding which equipment to include, exclude and where to set the deductible.

Get the right policy fit
However, because a conventional boiler and machinery policy -- appropriate for operations such as hospitals, utilities and manufacturers -- is too expensive for a small entrepreneur, most insurance companies offer a simplified blanket policy. For instance, CNA offers non-manufacturing and non-processing businesses coverage sans equipment inspections in two prepackaged products.

A standard policy covers against damage to your property caused by explosion, implosion, cracking, rupture and meltdown of boilers, fired and unfired pressure vessels and piping. Those who want to add refrigeration units, air-conditioning systems, telephone switchboards, computers, and mechanical or electrical machines used to generate, transmit or use power (in English, that includes utility-owned transformers supplying power to your location) can step up to the preferred form. Expect to budget between $500 and $1,250 annually for these premiums, Nusbaum advises.

Companies that fall more under the traditional 'count-the-machines' method should take existing warranties and guarantees into coverage calculations. In these circumstances, you may not need to repair or replace the equipment, but do consider potential damage and business interruption consequences.

If you fear your commercial property insurance contract and boiler and machinery policy could clash over who pays in a future accident, ask your agent to attach an endorsement to both coverages. This addition states that if the two parties disagree over who pays what portion, each pays half of the disputed loss. The endorsement should cost you nothing.

"You may determine the premium is too high or your equipment isn't sophisticated enough," Liebers admits. "You can choose not to buy, but educate yourself to your exposures and get a quote."

No substitute for maintenance
And Dudey suggests business owners drop coverage on older machines more likely to wear out before they meet an accidental fate.

"One of the biggest misunderstandings about this policy is the event must be sudden and accidental," Liebers explains. "If the machine simply wears out or rusts through, that isn't a claim."

Santiso loves to tell the story of a maintenance man at a Dallas spa store who thought the boiler and machinery policy was the perfect way to do his job. Rather than shut down the knocking air conditioning unit for a cleaning, he allowed it to shake its way into a breakdown, and laughed about the supposed loophole.

After approving payment on this technically perfect claim, Santiso had the last laugh. The policy inspection clause meant he held the power to deny coverage on all other equipment in the building, based on maintenance issues. The janitor wound up in the unemployment line.

Julie Sturgeon is a freelance writer based in Indiana.

-- Updated: Nov. 2, 2001