You're going along swimmingly in your business, until one day, a power surge or equipment failure wipes out your computer system. Fortunately (or so you think), you have property/casualty insurance, so you call your insurance broker and explain what happened. The broker calls you an hour later and says "Sorry, you're not covered."
After expressing your shock and dismay, you say "How can that be?" The broker explains that your property/casualty policy only covers damage to your equipment from "external" causes, such as a fire, a flood or a tree falling on your roof. The policy does not cover damage from "internal" causes such as mechanical failure, electrical short circuit or "arcing" (faulty wiring or motor burnout).
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What you should have bought, in addition to your property/casualty policy, was "equipment breakdown" insurance. Once mostly limited to large manufacturers, equipment breakdown insurance (sometimes sold under its quaint old-fashioned name of "boiler and machinery insurance") is an increasingly important part of any sound small-business insurance package. Why?
- New technology, such as fragile electronic and computerized equipment, is subject to breakdowns that can be more frequent and costly than traditional mechanical equipment.
- New business practices, such as Internet marketing and "just in time" inventory, make all businesses more dependent than ever on computer systems.
- Critical business information often exists only on the Internet, or in online databases, that cannot be access during periods of equipment breakdown.
- Employees are now traveling with many types of equipment that were once permanently attached to a fixed location, so breakdowns often occur in places other than the ones insured under traditional property/casualty policies.
"You should think of equipment breakdown coverage as being like accident, health and disability insurance for your equipment," says Mark MacGougan, assistant vice president of The Hartford Steam Boiler Inspection and Insurance Company, a leading provider of equipment breakdown insurance. Yet, amazingly, commercial property insurance policies often exclude losses related to equipment breakdowns, unless you specifically ask for the coverage.
MacGougan stresses that equipment breakdown coverage is "hardware" insurance, not "software" insurance. "There has to be some sort of physical damage," he says, "such as a power surge that destroys your computer hard drive." Computer failures due to software problems, such as "bugs" or viruses, are not covered. MacGougan also points out that equipment breakdown coverage covers the cost of repairing and replacing the damaged equipment, and frequently (but not always) includes "business interruption" and "service interruption" coverage, which will cover you against loss of business or income due to computer-related "downtime." If these additional coverages are not included in your policy, you may have to ask for them.
What if, like most small businesses, your Web site is maintained by an independent ISP that owns the computer server where your Web site is located? First, you should make sure that your ISP has both property/casualty and equipment breakdown coverage. Then, make sure your own equipment breakdown policy includes "service interruption" coverage, which should pay for your loss of business caused by a mechanical or electrical breakdown to the ISP's servers or other equipment.
What if your equipment is already covered by the manufacturer's warranties? MacGougan admits there is some overlap between warranties and equipment breakdown coverage but points out that "warranties usually exclude things like operator error, which are normally covered by an equipment breakdown policy. So, for example, if one of your employees negligently overloads an electric circuit by plugging too many things in to the wall, you should be covered." MacGougan cautions, though, that even an equipment breakdown policy will not cover you against acts of intentional sabotage by your employees.
How much does an equipment breakdown policy cost? While there are many variables that will affect a premium quote, such as the type of business you are in, the type of equipment you are using and where your business is located, the cheapest way to buy equipment breakdown coverage is "if you build it into your property/casualty policy rather than a stand-alone policy," advises MacGougan, who adds that you should look at the bullet-point summary of what is included in your property/casualty policy, and look for the "boiler/machinery" heading.
According to MacGougan, equipment breakdown coverage is growing dramatically, and most insurers are building it into their commercial property packages. If you have an older policy, however, you may have to review it with your broker to make sure it covers the high-tech equipment upon which your business now relies. If it doesn't, maybe it's time for an upgrade.
Cliff Ennico is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at www.sbtv.com. E-mail him at firstname.lastname@example.org.
Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.