Equipment Breakdown and Farm Coverage

Equipment breakdown coverages

Equipment breakdown coverage, formerly called boiler and machinery insurance, pays for loss caused by the breakdown of the equipment a business runs on: boilers, pressure vessels, and mechanical and electrical machinery. This coverage part may be added to the CPP, and a businessowners policy offers it as an optional coverage.

Why the coverage is needed

All three commercial property cause of loss forms (basic, broad and special) exclude the losses this equipment is most likely to suffer:

• Mechanical breakdown, including rupture or bursting caused by centrifugal force
• Artificially generated electrical energy, including electrical current and arcing, that damages electrical devices, appliances or wiring
• Explosion of steam boilers, steam pipes, steam engines or steam turbines that the insured owns, leases or operates

The property forms do pay for a fire that follows one of these events, and for an explosion of gases or fuel in a furnace. They do not pay for the breakdown itself: a burned-out motor, a cracked boiler or an arcing switchboard.

What a breakdown is

The trigger is typically called a breakdown to covered equipment. The businessowners form shows how the trigger is worded: it pays for direct loss of or damage to covered property caused by a mechanical breakdown or electrical failure to pressure, mechanical or electrical machinery and equipment. Computers, including those used to operate production machinery, are within the coverage.

In that wording, a mechanical breakdown or electrical failure does not mean:

• A malfunction, including but not limited to adjustment, alignment, calibration, cleaning or modification
• Leakage at a valve, fitting, shaft seal, gland packing, joint or connection
• Damage to a vacuum tube, gas tube or brush
• The functioning of a safety or protective device

Coverages the form provides or offers

An equipment breakdown form typically provides or offers the following coverages. The declarations show which apply and the limit for each.

• Property damage: direct damage to covered property caused by the breakdown
• Expediting expenses: the extra cost of temporary repairs and of speeding up permanent repairs or replacement
• Business income and extra expense: income lost and extra costs incurred while operations are interrupted by the breakdown
• Spoilage damage: perishable goods that spoil when a breakdown cuts off power, heat, steam or refrigeration
• Utility interruption: business income or spoilage loss when the breakdown is to a utility’s equipment supplying the premises
• Newly acquired premises: automatic coverage for a limited time at locations the insured acquires
• Ordinance or law: the added cost of complying with building laws when repairing the damage
• Errors and omissions: loss that would not otherwise be covered because of an unintentional error in describing the property or premises

Inspection and suspension of coverage

Loss prevention is a large part of this insurance. The insurer has the right, but not the obligation, to inspect the insured’s property. Inspections it makes of boilers and pressure vessels can relate to the certification of that equipment that state or municipal law requires.

Equipment breakdown coverage carries a suspension provision. In the businessowners wording, if covered equipment is found to be in, or exposed to, a dangerous condition, any representative of the insurer may suspend coverage for a breakdown of that equipment. The insurer gives written notice, mailed or delivered to the insured’s address or to the location of the equipment, stating the effective date. Coverage may be reinstated once the condition is corrected. If it is not reinstated, the insured receives a pro rata premium refund.

Sidenote

Know this...

Suspension is not cancellation of the policy. It applies only to the equipment found in a dangerous condition, and coverage can be reinstated when the condition is corrected.

Farm coverage

A farm is a home and a business on the same land, so farm coverage combines personal and commercial protection. This coverage part is available to be added to the CPP to cover an insured’s farm exposures. It includes its own declarations page.

Farm property coverage form

Ten coverages, lettered A through J, provide a combination of property and liability protection. Coverages A through G, which insure property, are found in the farm property coverage forms, and Coverages H, I and J are found in the farm liability coverage form. The insured buys only the coverages needed. A dwelling, household personal property and each type of farm structure are covered only when a limit of insurance is shown for them in the declarations; Coverage B follows automatically from Coverage A.

The causes of loss form for farm property specifies the perils insured against at three levels (basic, broad and special), and the declarations show which level applies to each coverage. These follow the same three levels as the cause of loss forms under the Commercial Property Coverage Part, but the farm Basic level also includes theft and causes of loss particular to farm machinery and livestock.

The conditions, definitions, and exclusions of the Farm Property Coverage Part are similar to the corresponding sections of the Commercial Property Coverage Part. Additional forms may be added to the Farm Coverage Part, including the mobile agricultural machinery and equipment form and the livestock form.

Coverage A - Dwellings

This section covers the dwelling and any attached structures. A dwelling is a building used principally for family residential purposes, including a mobile home. It also covers materials on the insured location intended for building, altering or repairing the dwelling. Land and water are not covered.

In the standard form, loss is settled on a replacement cost basis if the dwelling is insured for at least 80% of its full replacement cost at the time of loss. If it is insured for less, the insurer pays the larger of the actual cash value of the damage or the proportion of the repair cost that the limit bears to 80% of the replacement cost.

For example, a farmhouse would cost $400,000 to replace, so it should be insured for at least $320,000. It is insured for $240,000 and has a $40,000 fire loss. The limit is three quarters of the required amount, so the insurer pays three quarters of the repair cost, $30,000, or the actual cash value of the damage if that is more.

Coverage B - Other private structures

This section covers unattached private structures up to specified limits, such as a detached garage. The structure must belong to the dwelling and be separated from it by clear space, or attached only by a fence or utility line. Structures (other than private garages) used principally for farming are not covered here; they belong under Coverage G.

In the standard form the limit is 10% of the Coverage A limit. It is additional insurance, so a Coverage B loss does not reduce the amount available for the dwelling. Loss is settled as it is under Coverage A.

Coverage C - Household personal property

This coverage is the equivalent of personal property coverage under a homeowners policy. It covers household personal property owned or used by the insured and resident family members while on the insured location, and it extends to their household property anywhere in the world as part of the Coverage C limit.

Coverage C does not cover animals, birds or fish, most motor vehicles, aircraft other than model or hobby aircraft, or farm personal property other than office fixtures, furniture and office equipment. Farm personal property belongs under Coverage E or F. It applies special limits to categories such as money, securities, watercraft, and theft of jewelry, silverware and firearms. Loss is settled at actual cash value, not to exceed the cost to repair or replace.

Coverage D - Loss of use

This section covers additional living expenses similar to the homeowners policy. It has three parts:

• Additional living expense: the necessary increase in living expenses when a covered cause of loss makes the insured’s principal living quarters uninhabitable, for the shortest time required to repair the damage or settle elsewhere
• Fair rental value: the rent lost on a part of the dwelling or an appurtenant structure that the insured rents to others, less expenses that do not continue
• Emergency prohibition against occupancy: both of the above for up to 2 weeks, in the standard form, when a civil authority prevents use of the dwelling or an appurtenant structure because a covered cause of loss damaged neighboring premises

No deductible applies to Coverage D, and payment does not stop when the policy expires.

Coverage E - Scheduled farm personal property

This section covers the farmer’s personal property used for farming purposes that is itemized in a schedule. Farm personal property means the equipment, supplies and products of farming or ranching operations, such as feed, seed, fertilizer, livestock, poultry, grain, produce, and agricultural machinery, vehicles and equipment.

Under Coverage E, each item or class of property is listed and described in a schedule with its own limit, for example a combine, a herd of cattle, or grain in storage.

Coverage F - Unscheduled farm personal property

Coverage F covers farm personal property that is not scheduled. It is blanket coverage: one limit applies to the covered farm personal property together, with no item-by-item schedule.

	Coverage E	Coverage F
How property is insured	Listed in a schedule	Blanket, not listed
Limit	A separate limit for each item or class	One limit for the covered property

Several rules in the farm causes of loss form apply to both coverages. Collision or overturn of farm machinery is a covered cause of loss for these two coverages only. Theft does not include a loss discovered on taking inventory, or a disappearance without evidence that the property was stolen. The broad level adds perils for livestock, including electrocution, drowning, accidental shooting and attacks by dogs or wild animals.

Coverage G - Other farm structures

Coverage is provided by this section for structures on the farm not used for dwelling purposes such as fences and grain silos. Covered property includes barns and other farm buildings, portable buildings, corrals, pens, chutes and feed racks, and materials for building or repairing farm structures. A silo must be individually described, and field and pasture fences are not covered. Each type of property is covered only if a limit is shown for it.

Loss is settled at actual cash value unless the replacement cost option is shown in the declarations. With that option, the 80% rule of Coverage A applies.

Coverage H - Bodily injury and property damage liability

Coverage H pays the sums the insured becomes legally obligated to pay as damages because of bodily injury or property damage caused by an occurrence, meaning an accident, including continuous or repeated exposure to the same harmful conditions. The insurer also has the right and duty to defend the insured against a suit seeking those damages. The duty ends when the limit has been used up in paying judgments or settlements under Coverage H or I or medical expenses under Coverage J.

Exclusions include injury the insured expected or intended, liability assumed by contract, pollution, aircraft and motor vehicles, professional services, and business pursuits. Farming is not a “business” for this purpose, so ordinary farm operations are covered.

Custom farming is planting, cultivating or harvesting done for pay on someone else’s farm under that farmer’s direction. Custom farming operations are excluded when receipts exceed the limit shown in the policy. In the standard farm liability form that threshold is receipts of more than $5,000 in the 12 months before the occurrence.

Coverage I - Personal and advertising injury liability

Coverage provided by this section is similar to the personal and advertising injury coverage of a commercial general liability policy. It pays damages the insured is legally obligated to pay because of an offense committed during the policy period, and the insurer defends the suit. Personal injury offenses are false arrest, detention or imprisonment; malicious prosecution; wrongful eviction, wrongful entry or invasion of the right of private occupancy; publication of material that slanders, libels or disparages; and publication of material that violates a person’s right of privacy. Advertising injury offenses are the two publication offenses (slander, libel or disparagement, and violation of a right of privacy), using another’s advertising idea in the insured’s advertisement, and infringing another’s copyright, trade dress or slogan in the insured’s advertisement.

Personal injury is covered only when the offense arises out of personal activities or operations usual or incidental to farming. An act the insured knew would violate another’s rights is excluded.

Coverage J - Medical payments

Coverage J pays reasonable medical expenses of people injured in an accident, regardless of fault. In the standard form, the expenses must be incurred or medically ascertained within 3 years from the date of the accident.

It applies to a person who is on the insured location with an insured’s permission, and to a person injured elsewhere by a condition on the insured location or the ways immediately adjoining it, by the activities of an insured, by a farm employee or residence employee in the course of employment by an insured, or by an animal owned by or in the care of an insured. It does not pay for injury to an insured, to a resident of the household, to a farm employee, or to anyone eligible for workers’ compensation benefits.

Lesson summary

• Equipment breakdown coverage insures what the commercial property cause of loss forms exclude: mechanical breakdown, electrical arcing, and explosion of steam boilers.
• An equipment breakdown form typically provides or offers property damage, expediting expenses, business income and extra expense, spoilage and utility interruption coverages. The insurer may suspend coverage on equipment found in a dangerous condition.
• Farm coverage has ten coverages: A through G, in the farm property coverage forms, insure property at the basic, broad or special level of perils, and H through J are in the farm liability coverage form.
• In the standard form, Coverage A (dwellings) pays replacement cost when the dwelling is insured to at least 80% of replacement cost, and Coverage B (other private structures) is an additional 10% of Coverage A. Coverage C (household personal property) pays actual cash value. Coverage D pays additional living expense and fair rental value.
• Coverage E insures farm personal property item by item in a schedule. Coverage F insures unscheduled farm personal property on a blanket basis under one limit.
• Coverage G insures barns and other farm structures at actual cash value unless replacement cost is selected. Field and pasture fences are not covered.
• Coverage H pays damages the insured is legally obligated to pay and defends suits. Custom farming is excluded once receipts pass the threshold. Coverage I covers offenses such as libel, slander and false arrest.
• Coverage J pays medical expenses of others regardless of fault if incurred or ascertained within 3 years of the accident in the standard form.