Managing Your Risk
Don't judge this policy by its cover

Evolving 'boiler and machinery' coverage only sounds outdated

By Michael Kelly
Risk Management Director

Boiler and machinery is a type of coverage found quite frequently today in property insurance programs even though the number of traditional boilers has diminished during the past quarter of a century. Because of the name, its purpose and typical modern utilization, it is often misunderstood. It is also called equipment breakdown coverage and is now designed to extend to additional areas of property exposure other than just boilers. Examples are direct damage to heating, air conditioning, telephone, electrical, communications and computer systems.

Originally this coverage began out of a necessity in that the standard property insurance policy excluded losses arising from steam boilers. The carriers that currently write it are among the oldest in existence, dating back to the mid 1800s. In 1866 a group organized The Hartford Steam Boiler Inspection and Insurance Company; its purpose was to locate the actual cause of boiler explosions and provide reimbursement in case an explosion occurred. The company is still in business today and is very much a part of the NCACC Liability and Property Pool policy design.

The inspection and loss preventative service aspects are an important reason for buying boiler and machinery coverage. Losses from the rupture and explosion of a steam boiler are devastating and tend to be extremely costly in both property damage as well as the loss of life.

The key element to coverage activation is usually defined as "breakdown." The occurrence must result in direct physical loss to the covered equipment as defined. Breakdown does not mean or normally include such things as damage arising out of a malfunction, defect, wear and tear, obsolescence or the damage to the structure supporting the covered equipment. It is designed to dovetail with the other standard property coverage and helps greatly in filling in some of the gaps generated typically through normal property policy language exclusions.

Coverage also is designed to automatically extend to include other consequential type damages such as spoilage, service interruption, business income/expediting expense or hazardous substance disposal caused by a breakdown. Normally supplementary coverage carries its own sub-limits that are much less than the main, catastrophic limit.

For the NCACC Liability & Property Pool, a large number of these type claims have arisen out of damage to electrical equipment, and more specifically, communications equipment, such as at 911 call centers. Power surges and or electrical arcing from lightning strikes are often the culprit. Damage to electronic components may occur even if the lightning strikes a transformer or a power pole some distance from the physical location of the call center office.

In addition, other electrical devices such as point-to-point radio communication systems and hard-wire computer networks can be greatly impacted from a power surge – regardless of the reason for its origin. Boiler & Machinery/Equipment Breakdown coverage is one of the best solutions. Look for it in the latter part of the property coverage section if you are a member of the NCACC Liability & Property Pool. It is written into our property form and carries is own separate catastrophic limit of $25 million.

This issue begins the third year for "Managing Your Risk," published monthly in CountyLines. If you have a topic you would like to be covered in future columns, please send me an email. Although I cannot comment on any ongoing claims, I am always looking for interesting topics that are pertinent to local government risk management.

NCACC Risk Management Director Michael Kelly writes a regular column on risk management for CountyLines. With more than 33 years of risk management/insurance experience, he holds the Associate in Risk Management for Public Entities, Certified Risk Manager and Certified Insurance Counselor professional designations. He can be reached at michael.kelly@ncacc.org or (919) 719-1124. Archived versions of the column can be found online at www.ncacc.org/managingyourrisk.html.