Will your insurance policy protect you if your equipment breaks down?
| HEAVY DUTY: If your kitchen equipment breaks down and you don't have the proper insurance, you'll lose more than customers. |
| Nobody wants to pay out of pocket for repairs that have forced a shutdown. |
As grease built up on the blades, the kitchen exhaust fan gradually became unbalanced. The fan began to wobble and shake, but nobody in the busy restaurant kitchen took the time to have it serviced. Eventually, the bearings burned out and destroyed the fan. A repair-contractor was involved with bigger jobs and couldn't begin to fix the problem for days. With the kitchen hot and the ventilation poor, the general manager had to shut down the restaurant until the repairs were completed, 15 days later.
What began as a minor problem blossomed into a costly equipment breakdown. Having to replace the old in-line exhaust hood fan with a newer rooftop fan and improved duct work grew into a paid loss totalling $59,557: $21,033 in repair costs and $38,524 in lost food and drink sales as a result of the business interruption. The restaurant's property insurance did not cover the claim, but the owner's insurance agent had included a specialty coverage—equipment breakdown insurance—in the policy. It paid for the damages and lost income.
Commercial property insurance alone will often not pay if their equipment breaks down because of an accident. To cover electrical and mechanical breakdowns, your business owner's policy (BOP) or commercial package policy should include equipment breakdown insurance.
What is Equipment Breakdown Insurance?
Equipment breakdown coverage is specifically designed to help pay for the unique causes of equipment losses, such as short circuits, power surges, electrical arcing and mechanical breakdown that are excluded by most property insurance policies. It also can pay for such related expenses as lost income, rental equipment and food spoilage. In short, equipment breakdown insurance and property insurance work together to fill the gaps and to cover the physical and financial damage that results from equipment loss.
Once purchased primarily by manufacturers and municipalities, equipment breakdown coverage is now increasingly important for mainstream businesses like restaurants, hotels, resorts and caterers. Food service is not a high profit margin operation; thus, owners use modern technologies and more efficient equipment as a way to manage labor, inventory and energy costs. This strategy increases equipment values and adds new equipment risks.
Think of all the equipment it takes to run a restaurant. In addition to stoves, ovens, grills, kettles, steamers and microwaves, you may have hot water heaters and boilers, multiple refrigeration and freezer systems, air conditioning and dishwashing equipment. A walk-in refrigerator or freezer box operates with electrical motors, pumps, compressors and mechanical parts that can break down without warning and can lead to food spoilage and business interruption. A breakdown in your heating or cooling systems can drive customers away in cold weather or summer heat.
There are also computer-based electronic cash registers, point-of-sale (POS) systems and inventory scanners that register sales and help you manage operations. Many restaurants use their POS systems as a time clock for employees so they can match staffing with business volume. Business equipment likely includes other computers, telephone systems and fax machines. This technology, in addition to commercial grade sound systems, security systems and the electrical distribution system, can cost thousands of dollars.
Could You Afford This?
The sensitive circuits and computer components in electronic equipment and electrical systems are extremely vulnerable to power surges and other electrical disturbances. In fact, electrical breakdowns are now the number one cause of equipment losses overall. These actual paid claims are typical of the losses covered by equipment breakdown insurance:
- A restaurant seating 160 and located in a converted factory building was shut down for two days when a utility brownout caused electrical arcing and damaged the main breaker switch. The air conditioning and refrigeration compressors were destroyed and power was lost during repairs. Total paid loss: $31,682, including $25,000 in business interruption costs.
- A seafood restaurant at a shoreline resort had to halt most food and drink sales over the busy Fourth of July weekend when power surges damaged a compressor, air conditioning unit, computer and exhaust fan. Total paid loss: $30,222, including $6,197 in repairs, $13,192 in business interruption, $833 in extra expense and $10,000 in spoiled food and drinks.
- A catering company that provides food to several airlines lost power when arcing damaged an electrical panel and other components. Some food was contaminated; the rest was saved by deploying a rented generator and seven refrigerated trailers. Total paid loss: $179,751, including $38,974 in extra expenses.
What can you do to protect your business? First, find out if your property insurance includes coverage for equipment breakdown. Check your policy or ask your insurance agent, broker or carrier. If it doesn't, add the coverage. Make sure the equipment breakdown insurance covers all your equipment. Look for the broadest coverage and carefully check what a carrier specifically provides. Also, inquire about the claim service reputation of a carrier.
Which Policy Is Best For You?
Equipment breakdown insurance can be purchased separately or added to a property policy, but the best option for many foodservice operators is to choose a carrier who automatically includes equipment breakdown with property, liability and other coverage. That spreads the risk and keep premiums affordable. It also eliminates separate deductibles or premiums and prevents undue delays in settling claims because the property and equipment-breakdown coverages are designed to work together.
Equipment breakdown insurance covers many exposures, but the coverages listed here are particularly important to foodservice operations. Make sure you have protection for the following risks:
- Physical damage covers the cost to repair or replace equipment. Almost any equipment that is used to conduct business can be covered.
- Business interruption pays for the loss of income and continuing business expenses when an equipment breakdown shuts down a restaurant or forces owners to scale back operations. Business income losses often far exceed the cost of repairs.
- Extra expense covers the additional costs to continue doing business after a covered equipment breakdown. Extra expense pays for rented heaters, generators or cooling units used to keep your business open.
- Extended business interruption and extra expense covers shortfalls in income and extra expenses for a period when a reopened restaurant works to get its customers back and to resume its normal level of business. Extended business interruption coverage, also known as extended period of restoration, is crucial because a claim doesn't always end when the repair is completed.
- Perishable goods covers the spoilage of foodstuffs due to equipment breakdown.
- Service interruption extends business income coverage to pay for interruptions resulting from the loss of electricity, water, gas and other basic servicescaused by equipment breakdown.
- Off-premises damage covers portable equipment that is damaged by an accident when it's not at your insured location. That could include an oven, stove or freezer you transported for use at a fair, festival, or other off-site event.
Your building systems, kitchen and operating equipment are critical to satisfying customers supporting your business. Protecting your equipment investment from loss or damage may be the best investment for a profitable future.
Tony Capawana is vice president for The Hartford Steam Boiler Inspection and Insurance Company's Eastern Region. He also manages the Direct and Facultative Equipment Breakdown Products business for the global specialty insurer and reinsurer.