If you imagine a sparkling new building or renovation as a crown, the crown jewels would be the equipment installed to heat it, cool it, or perform other functions for the structure itself or the enterprise that occupies it.

It is, then, easy to imagine the chagrin--to put it mildly--that would follow a loss to a project after machinery or equipment explodes or bursts.

At worst, such an event could produce a catastrophic loss to life and property. At best, a project will be delayed as the stricken equipment is removed and replaced and other damage repaired.

And, the property losses might not be insured if equipment breakdown coverage is not in place.

In the absence of equipment breakdown coverage, an equipment loss would have to be absorbed by the contractor or project owner, or subjected to costly, contentious, and time-consuming property and/or liability claims among different parties.

Standardized

Standardized equipment breakdown coverage is now available for construction projects through endorsements provided in the Builders Risk section of the AAIS Inland Marine Guide. Equivalent endorsements are slated to be released in the Guide’s Installation Floaters section.

The Inland Marine Guide is an industry leading resource of forms, rating procedures, underwriting guidelines, and other information for the traditionally nonfiled classes of inland marine insurance. (Guide forms and rating procedures are filed, however, in certain states that do not exempt inland marine insurance from filing requirements.)

Builders risk is the form of insurance that covers buildings under construction or renovation. Coverage applies to the structure or part of a structure being worked on, and materials to be incorporated into the work, and typically ends when the property owner occupies the unit.

Installation floaters cover property that is being installed in a structure, such as an HVAC unit or other types of fixtures. Coverage applies to the property being installed, and typically ends when the installation is complete and the owner takes control of the property.

Collaboration

AAIS’s inland marine equipment breakdown endorsements were developed in consultation with The Hartford Steam Boiler Inspection & Insurance Co. (HSB), a leading provider of equipment breakdown reinsurance.

AAIS and HSB have collaborated in the past on the development of equipment breakdown coverage under AAIS personal, commercial, farm, and output programs.

AAIS equipment breakdown coverages can be used with any equipment breakdown reinsurer, however.

“Equipment breakdown losses during construction projects are not all that different from those in finished structures,” says Lisa Phillips, HSB manager of product design. “But the hazards and exposures are different.”

According to Phillips, equipment breakdown losses in construction are very often related to the new and untested nature of equipment in a new setting.

Besides power surges, she says, the principal causes of accidents within covered equipment on jobsites are improper wiring, installation, and calibration of equipment, incompatibility of the equipment with other components of the structure, and lack of knowledge about the equipment’s operation and maintenance.

“Most equipment breakdown exposures [in construction] are weighted toward the end of a project,” she adds, “since this is when most systems are first started and tested.”

Given that, equipment breakdown losses in construction often result in a delay in completion of a project; there is less time to make up for a delay. As a result, additional construction and “soft” costs typically result.

Endorsement

The equipment breakdown coverage endorsement introduced in the AAIS Builders’ Risk forms in 2008 provides standard equipment breakdown coverage for losses arising from “accidents” within covered equipment, defined as equipment that generates, transmits, or utilizes energy, or which operates under vacuum or pressure. To be covered under the endorsement, such equipment must be described as covered property in the base builders’ risk form.

The endorsement covers direct physical damage by an accident to a covered project or structure, including materials to be incorporated in the structure, up to a limit stated on an accompanying equipment breakdown schedule, or up to the base policy limit, if selected by the insurer.

If delay in completion coverage is endorsed onto the base builders’ risk policy, it can be extended to equipment breakdown losses, up to the delay in completion limit or a separate delay limit on the equipment breakdown schedule.

Testing

The AAIS Builders’ Risk equipment form also includes coverage for losses due to “testing,” described in the form as the “start-up, performance, stress, pressure, or overload testing of covered property,” including, but not limited to, covered equipment subject to the equipment breakdown coverage.

Testing coverage has long been built into builders risk and installation floater forms, but the new AAIS forms take a different approach.

“Testing coverage can now be provided as part of the more comprehensive equipment breakdown coverage, or it can be provided in the traditional sense by another new endorsement drafted for that purpose,” says Robert Guevara, AAIS vice president for inland marine and the principal developer of the Inland Marine Guide forms.

Under the equipment breakdown form, testing coverage is provided up to the equipment breakdown limit selected; under the stand-alone testing endorsement, coverage is provided up to a limit identified on the endorsement.

Limitations

The AAIS equipment breakdown endorsements include three provisions designed to help insurers control their exposure to equipment breakdown.

A “suspension” condition allows the insurer to suspend equipment breakdown coverage if it discovers covered equipment to be in or exposed to a dangerous condition.

In addition, there are two exclusions, one for any losses arising from defects, errors, or other conditions involving data or software, and another for losses arising from the “misalignment or miscalibration” of covered equipment.

However, both of those exclusions include exceptions preserving coverage for loss, damage, or expense arising from an accident within covered equipment.

“Buildings are ‘smarter’ today, and computers are more prevalent in the systems that become a permanent part of the buildings,” says Phillips at HSB. “It is not the intent of equipment breakdown coverage to pay for data and software losses, except when an accident results.”

As for the misalignment or miscalibration exclusion, Phillips explains that “many pieces of equipment can stop functioning for the reasons outlined in the exclusion without suffering physical damage.

“We have found insureds submitting these types of claims, and this clarification will help in the claims process.”