5.5 Builder's Risk and Equipment Breakdown (Boiler and Machinery) Coverage

Builder's Risk

Purpose

A building under construction changes value every day and faces risks, such as theft of materials and wind damage to unbraced framing, that a completed-building policy does not fit. Builder's risk insures that changing exposure for the owner, the general contractor, or both.

What the ISO Builders Risk Coverage Form (CP 00 20) covers

Causes of loss come from the attached Basic, Broad, or Special causes of loss form, as with the building and personal property form. With the Special form, theft of building materials and supplies that are not yet attached is limited unless an endorsement adds theft coverage, which is a frequent source of disputes on job sites.

Completed-value insurance

Builder's risk replaces ordinary coinsurance with a "need for adequate insurance" condition: the insurer will not pay a greater share of any loss than the limit of insurance bears to the value of the building on the date of completion.

$$\text{Payment} = \frac{\text{Limit}}{\text{Completed value}} \times \text{Loss} - \text{Deductible}$$

Worked example. A building will be worth $2,000,000 when complete, but the owner buys a $1,500,000 limit, reasoning that only part is built. Wind destroys $300,000 of framing with a $5,000 deductible:

• Ratio: $1,500,000 divided by $2,000,000 = 0.75
• $300,000 times 0.75 = $225,000
• $225,000 minus $5,000 = $220,000

The owner absorbs $75,000 of underinsurance because the measure is completed value, not the value at the time of loss. Many insurers also offer a reporting form version in which the insured reports values periodically as construction progresses.

When coverage ends

Unless the insurer agrees otherwise in writing, CP 00 20 coverage ends at the earliest of:

1. expiration or cancellation of the policy;
2. acceptance of the property by the purchaser;
3. the end of the insured's interest in the property;
4. abandonment of the construction with no intention to complete it;
5. 90 days after construction is complete; or
6. 60 days after any described building is occupied in whole or in part or put to its intended use.

Adjuster tip. On a loss shortly after move-in, determine whether builder's risk ended and whether a permanent property policy had started. A gap is common when the owner occupies part of a building early.

Renovations

Standard builder's risk was designed for new construction. Existing buildings undergoing renovation are often insured under the owner's property policy, with endorsements adding the renovation materials and the increased value. Confirm which policy covers the existing structure and which covers the work.

Equipment Breakdown (Boiler and Machinery)

Why it exists

Commercial property causes of loss forms exclude much of what goes wrong inside equipment:

• mechanical breakdown, including rupture or bursting caused by centrifugal force;
• artificially generated electrical current, including arcing, that damages electrical devices, wiring, or appliances, although a resulting fire is covered; and
• explosion of steam boilers, steam pipes, steam engines, or steam turbines owned, leased, or operated by the insured, although a resulting fire or combustion explosion is covered.

Boiler and machinery insurance, now usually called equipment breakdown, fills that gap. ISO's current form is the Equipment Breakdown Protection Coverage Form, and many carriers use their own forms.

The insuring agreement

Coverage applies to direct damage to covered property caused by an accident to covered equipment. An accident is a sudden and accidental breakdown of covered equipment that requires repair or replacement, such as:

• mechanical breakdown, including rupture or bursting by centrifugal force;
• artificially generated electrical current, including electrical arcing, that damages electrical devices or wiring;
• explosion of steam boilers, steam piping, steam engines, or steam turbines;
• loss or damage to steam boilers, steam pipes, steam engines, or turbines from conditions or events inside them; and
• loss or damage to hot water boilers or other water heating equipment from conditions or events inside them.

Covered equipment typically includes boilers and pressure vessels, HVAC and refrigeration units, electrical switchgear and transformers, motors, pumps, compressors, production machinery, and communication and computer equipment. Depletion, wear and tear, corrosion, erosion, and defects found during maintenance or testing are not accidents in themselves.

Typical coverages

Inspections and the suspension condition

Equipment breakdown insurers employ inspectors, and many states require periodic jurisdictional inspections of boilers and pressure vessels. The policy gives the insurer the right to inspect, and under the classic suspension condition, if covered equipment is found in a dangerous condition, a representative may immediately suspend coverage on that equipment by delivering or mailing written notice. Coverage can be reinstated only by endorsement. A public adjuster should ask for any suspension notice on an equipment claim.

Joint or disputed loss agreements

When a boiler explosion or electrical failure causes damage, the property insurer and the equipment breakdown insurer may each say the other's policy applies. A joint or disputed loss agreement, an endorsement on both policies, provides that when both insurers agree there is coverage under at least one policy but disagree about which, each insurer pays half of the undisputed amount promptly and then resolves the allocation between themselves, using arbitration if needed. The insured is paid without waiting for the insurers to settle their dispute. Both policies must carry the agreement for it to work.

Example. A restaurant's water heater explodes, and fire follows. The property insurer says the loss is an excluded steam or hot-water vessel explosion; the equipment breakdown insurer says the fire damage is a property loss. With joint loss agreements on both policies and $160,000 of agreed damage, each insurer pays $80,000 now, and the insurers settle the allocation later.