Down, But Not Out: Ensure equipment breakdowns don’t break your business
In the industrial world, running a successful operation has everything to do with making sure equipment is operational and efficient. Breakdowns can lead to anything from a lost business opportunity to additional expenditures and even bankruptcy.
It’s important to recognize that while a standard property insurance policy will protect a business against losses related to natural disasters, it does not usually cover the sudden and accidental breakdown of equipment. You may not be protected against losses caused by explosions, bursting or rupture of boilers and pressure vessels and mechanical or electrical equipment breakdown. These can be debilitating — but you have more control than you may think. While it’s almost impossible to predict when or how a potentially devastating loss can strike, there are several things you can do to be proactive in protecting your business.
Choose the right equipment
When your operations rely on functioning equipment in order to turn a profit, having the right machinery is a no-brainer. Nonetheless, in times of economic difficulty it’s tempting to take shortcuts and go for discounts or secondhand equipment. Regardless of whether you’re buying brand name, brand new or secondhand discounted equipment, it’s important to be familiar with the suppliers and manufacturers. This way you know what you will be facing when it comes time to repair or replace the equipment or parts.
Short-term savings could mean astronomical expenditures over the long term if equipment requires constant repair or if the suppliers for replacement parts are either limited in number or located overseas. This does not even account for the loss in profitability as workers wait for a replacement machine or part, or the loss of capital as you sink money into repairs.
Rely on a business network to help identify experts who can recommend quality machinery, parts suppliers with good track records and dependable warranties or guarantees. These people could also help negotiate good prices, payment options or terms and conditions. This is something a good insurance partner or broker will be able to do as well, as they deal with a wide network of engineering firms and other similar businesses on a daily basis.
The best thing you can do is to implement a comprehensive equipment maintenance policy. Preventive maintenance is a schedule of planned maintenance actions aimed at the prevention of breakdowns and failures, with the goal of preventing failures before they occur. This helps extend equipment longevity. Typically, the equipment manufacturer outlines maintenance specifications; this generally includes a regularly scheduled preventive maintenance program, with routine maintenance and inspection logs to be completed. Also, make sure you put a written contingency plan in place ahead of time. Some parts are more prone to wear and tear than others and therefore require more regular inspection. A diligent and ongoing preventive maintenance program will go a long way in terms of avoiding wear-point failure and more catastrophic incidents, such as fires and explosions.
Long-term effects and cost comparisons usually favor preventive maintenance over reactive maintenance actions.
Have the right insurance
A common misconception among property insurance policyholders is that their machinery is protected against any type of loss. This is not the case. Equipment breakdown insurance (EBI) specifically fills these gaps in a property policy: it is a form of property insurance with the purpose of insuring against financial losses like property damage, business interruption and spoilage that can result from an “accident” to an “object.”
An object is defined in an EBI policy as any boiler, any fired or unfired vessel; any refrigerating or air conditioning pressure vessel; any mechanical machine, electrical machine or electrical apparatus; and any electronic equipment, including the data or media contained therein, used primarily to control, monitor or operate one or more objects.
The definition can be expanded to provide coverage for production machinery. Some examples are low and high-pressure boilers, compressed air receivers, steam cookers and hot water tanks. Mechanical equipment includes compressors, pumps and internal combustion engines, gas turbine engines whereas electrical equipment includes transformers, electric motors, generators, cabling and electrical distribution panels.
When it comes to finding the right policy, deal with an insurance broker who understands your business and what you need. They should also have a good knowledge and understanding of what types of insurance policies are available and what your options are not only from a pricing standpoint but a quality-control and reliability perspective. Typically, as a commercial industry player, you should be looking to deal with insurance companies with strong financial ratings (A-rated or higher) by reputable rating agencies.
Keep in mind the advice in this column when looking for an insurance company. Insurers will be looking at what you’re doing to prevent equipment breakdown when they underwrite your business. Your broker should be ‘in the know’ when it comes to how you can maintain a healthy, viable operation.
Louis Vatrt is the vice-president and director of equipment breakdown insurance at RSA Insurance. For more information, visit www.rsagroup.ca.