16.5 Closing Coverage Gaps: Equipment Breakdown, Crime, and Builders' Risk
Key Takeaways
Equipment breakdown coverage fills the mechanical and electrical breakdown exclusion in commercial property forms and can include business income, spoilage, and expediting expenses.
ISO commercial crime forms cover employee theft, forgery or alteration, inside and outside the premises losses, computer and funds transfer fraud, and money orders and counterfeit money.
Crime coverage is written on a discovery form or a loss-sustained form, which changes when a loss must occur and when it must be discovered.
Social engineering (impersonation) fraud is often excluded from computer and funds transfer fraud coverage and may need a separate endorsement or policy.
Builders' risk covers buildings under construction, with the completed value or reporting form approach setting the limit.
Closing Coverage Gaps: Equipment Breakdown, Crime, and Builders' Risk
Quick Answer: Standard commercial property forms exclude or limit several important exposures. Equipment breakdown coverage fills the mechanical and electrical breakdown exclusion. Commercial crime coverage handles employee theft, forgery, robbery, and computer and funds transfer fraud, which property forms exclude or limit. Builders' risk covers buildings under construction. Choosing the right crime form, discovery or loss-sustained, and addressing social engineering fraud are frequent exam and practice issues.
Why These Gaps Exist
Commercial property forms are designed for sudden, external physical damage. They deliberately exclude exposures that need specialized underwriting and inspection, such as boilers, dishonest employees, and construction projects. These exposures are handled by separate coverages with their own conditions.
Equipment Breakdown Coverage
Commercial property forms exclude mechanical breakdown, electrical disturbance to electrical devices, and steam boiler explosion. Equipment breakdown coverage (historically called boiler and machinery) responds to a sudden and accidental breakdown of covered equipment, such as boilers, HVAC systems, electrical panels, production machinery, and computers.
| Typical coverage | What it pays |
|---|---|
| Property damage | Repair or replacement of the equipment and damage it causes to other property |
| Business income and extra expense | Lost income and extra costs while equipment is down |
| Spoilage | Perishable goods spoiled because of the breakdown |
| Utility interruption | Loss from a breakdown of utility equipment serving the premises |
| Expediting expenses | Overtime labor and express shipping to speed repairs |
| Hazardous substances and data restoration | Cleanup and restoring data lost in the breakdown |
Equipment breakdown insurers also provide jurisdictional inspections of boilers and pressure vessels, which many states require.
Commercial Crime Coverage
Commercial property forms exclude or sharply limit money, securities, and dishonest acts. ISO commercial crime forms offer several insuring agreements:
| Insuring agreement | Covers |
|---|---|
| Employee theft | Theft of money, securities, or other property by employees |
| Forgery or alteration | Forged or altered checks and similar instruments drawn on the insured's accounts |
| Inside the premises: theft of money and securities | Theft, disappearance, or destruction of money and securities on premises |
| Inside the premises: robbery or safe burglary of other property | Robbery of a custodian or safe burglary involving other property |
| Outside the premises | Money, securities, and other property in the care of a messenger or armored car company |
| Computer and funds transfer fraud | Fraudulent computer entries and fraudulent instructions to a financial institution to transfer funds |
| Money orders and counterfeit money | Accepting invalid money orders or counterfeit currency in good faith |
Discovery vs. Loss-Sustained Forms
| Form | Trigger |
|---|---|
| Discovery form | Covers loss discovered during the policy period (or an extended period after it), regardless of when the loss occurred, subject to any retroactive date |
| Loss-sustained form | Covers loss sustained during the policy period and discovered during the policy period or within a set period after it ends |
Because employee theft often goes on for years before discovery, the choice of form matters most when changing insurers. Without prior-loss provisions, a switch can leave gaps.
Key Crime Conditions
- Termination as to an employee: Coverage for a specific employee ends as soon as the insured learns of that employee's dishonest act, even one committed before hire.
- Ownership and custody: Coverage applies to property the insured owns, holds, or is legally liable for.
- Social engineering fraud: An employee who is tricked into voluntarily wiring funds, for example by a fake vendor email, may not be covered under computer and funds transfer fraud. That agreement generally addresses unauthorized transfers. Businesses often add social engineering (impersonation) fraud coverage by endorsement or through a cyber policy.
Builders' Risk
Buildings under construction face fire, theft of materials, windstorm, and vandalism. Ordinary building coverage does not fit well because values rise throughout construction.
- Completed value approach: The limit equals the building's full completed value. Premium reflects the average value at risk during construction.
- Reporting approach: The insured reports values periodically as construction progresses.
- Who buys it: The owner or the contractor, as the construction contract requires, often naming other parties with interests.
- Coverage typically ends when the building is occupied or put to its intended use, when it is accepted, or when the owner's interest ends.
- Common gaps: Soft costs (interest, permits, fees) and delayed-completion income, which are available by endorsement or in manuscript forms.
Worked Scenario: A Wholesale Distributor
A distributor has a $2 million inventory, two large chillers, and a bookkeeper with sole control of payments. Recommendations:
- Equipment breakdown with spoilage and expediting expenses for the chillers
- Commercial crime with employee theft (a limit sized to cash flows and inventory), forgery or alteration, and computer and funds transfer fraud
- Social engineering endorsement, because the bookkeeper wires vendor payments and vendor-impersonation fraud is common
- Internal controls as risk control: dual approval for wires, callback verification of changed bank details, and mandatory vacations
Common Traps
- Assuming property forms cover machinery breakdown: They exclude it; equipment breakdown coverage is needed.
- Choosing the wrong crime form when switching insurers: Discovery and loss-sustained forms treat prior losses differently.
- Expecting social engineering coverage automatically: It usually requires a specific endorsement or policy.
- Forgetting soft costs in construction: Builders' risk forms often need endorsements for soft costs and delayed completion.
A restaurant's walk-in cooler compressor suddenly burns out, spoiling $30,000 of food. The building and personal property form has a special causes of loss form. Which coverage is designed for this loss?
Commercial crime, inside the premises coverage
Equipment breakdown coverage with spoilage
Builders' risk coverage
The businessowners liability section
An insurer's crime policy covers losses discovered during the policy period regardless of when they occurred. Which form is this?
Loss-sustained form
Claims-made liability form
Reporting form
Discovery form
An accounts payable clerk receives a convincing email from a fake vendor asking to change bank details and wires $85,000 to the fraudster. Why might standard computer and funds transfer fraud coverage not respond?
Because money is never covered under crime forms
Because the loss is below the minimum deductible for crime coverage
Because the clerk voluntarily made an authorized transfer after being deceived, which is generally treated as social engineering fraud needing separate coverage
Because employee theft always applies instead
Sections you finish are checked off in the contents.