Renewable (annual) Covers

Contractors’ plant and machinery (CPM) insurance

This is an insurance of contractors’ plant and machinery on an annual basis. The cover, which is similar to the scope of machinery (M) insurance but excluding internal breakdown, applies at work, at rest or during maintenance operations and is not limited to a specific construction site. The sum insured is the new replacement value.

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Boiler and pressure vessel explosion (BPV) insurance

This is a traditional cover for insurance against all kinds of explosions, implosion or collapse specifically of vessels and boilers working under internal pressure or vacuum. This can normally be granted in addition to perils covered under a fire policy or in isolation, and it is designed to include damage to surrounding property of the insured and also liability of the insured for damage to property of third party and for fatal and non-fatal injuries to any third party person.

If Machinery insurance is agreed, the extent of cover provided by a BPV additionally to what is already insured by a Machinery policy can preferably be attached by way of a standard BPV endorsement to the Machinery policy.

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Machinery (M) insurance

It was developed to grant industry an effective insurance cover for plant, machinery and mechanical equipment at work, at rest or during maintenance operations.

By its very nature, machinery insurance is an all risks “accident” insurance for machinery supplementing the coverage afforded by fire insurance. Thus it covers unforeseen and sudden physical loss of or damage to the insured items, necessitating their repair or replacement. Loss or damage covered under machinery insurance is mainly due to one of the following causes:

  • Faulty design (calculations, plans, drawings and specifications)
  • Faults at workshop or in erection
  • Defects in casting and material
  • Faulty operation, lack of skill, negligence, malicious acts
  • Tearing apart on account of centrifugal force
  • Physical explosion, flue gas explosion in boilers
  • Electrical causes such as short circuit
  • Shortage of water in boilers
  • Storm, frost, drifting ice.

All types of machinery, plant, mechanical equipment and apparatus may be covered under machinery insurance. If possible, all the machines of a plant or workshop or of a separate plant section should be included in the insurance in order to ensure that the risk is adequately balanced.

Only those items having a short service life compared with the entire plant are normally excluded from machinery insurance, these are mainly:

  • All types of interchangeable tools
  • Belts, chains, ropes, sieves, engraved cylinders, stamps, dies
  • Parts made of glass, ceramic or wood, rubber tires
  • Operating media of any kind such as fuel, gas, refrigerants, catalysts, liquids, lubricants (oil in transformers and circuit breakers is, however, included since it is not only a coolant but also serves as an insulation agent).

The few individual exclusions from the cover mainly comprise loss or damage caused by:

  • Fire, lightning stroke, chemical explosion, burglary and theft, i.e. perils covered or coverable under other standard policies
  • Inundation, flood, earthquake, subsidence, landslide, impact of land-borne, waterborne or airborne craft (perils coverable under a fire policy)
  • War or warlike operations, civil commotion of any kind as well as acts on the part of strikers and locked out persons
  • Willful acts or gross negligence on the part of the insured or of his representatives
  • Faults or defects existing at the time of commencement of the insurance which ought to have been or were known to the insured
  • Faults or defects for which the supplier is responsible either by law or under contract (losses covered by warranty)
  • Nuclear reaction, nuclear radiation or radioactive contamination
  • Also excluded is consequential loss or liability of any kind or description and wear and tear as a consequence of ordinary use or operation as well as cavitation, erosion, corrosion (e.g. rust) or boiler scale (this exclusion relates, however, only to the parts immediately affected).

The sum insured should always be equal to the costs of replacement of the insured machinery by new machinery of the same kind at the same place (value of the new item plus customs duties plus transportation and installation charges).

Risk assessment and premium calculation for the items to be insured should consider the following factors:

  • Age, specification
  • Present condition, maintenance standard
  • Operating environment
  • Past loss experience

The premium rates charged are calculated separately for each type of machine on the basis of statistics kept over a period of many years.

In the event of damage which may be repaired, the insurer will indemnify the insured in respect of the expenses incurred for restoring the damaged machinery to its working condition prior to the damage. These expenses mainly include the costs for repair work and the necessary spares, disassembly and reassembly costs, ordinary freight charges, customs duties, expenses for the employment of specialists and other charges contained in the sum insured.

In the event where an insured item is totally destroyed or where the repair cost would exceed the actual value of the insured item, the insurer will indemnify the insured the actual value of the insured item immediately before the loss occurrence less the agreed deductible and the value of any salvage.

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Machinery loss of profits (MLOP) insurance

MLOP insurance indemnifies the actual loss of gross profit sustained as a result of a business interruption caused by an accident covered under machinery insurance.

MLOP insurance compensates for:

  • The continuing business expenses (standing charges) including the salaries and wages paid to employees
  • The net profit
  • The increase in cost of working, i.e. the additional expenditure necessarily and reasonably incurred for avoiding or diminishing a reduction in turnover.

The sum insured is, for normal cases, the gross profit obtained from the turnover of goods produced or handled in the course of the insured’s business for a period of twelve successive calendar months (i.e. normally for the business year).

Increase in costs of working may also be covered under MLOP insurance, for instance the additional expenditure incurred for the use of external power if the insured’s own power supply breaks down (additional cost of consumption of kilowatt hours and maximum demand charges for kilowatts in excess of normal requirements).

The period for which the insurance will indemnify losses is defined as the indemnity period. This period – normally 3 to 12 months – is determined by the insured depending upon the replacement period for the machinery to be insured. Instead of a monetary deductible, this type of insurance is usually subject to a time excess of normally 2 to 14 days. Losses made during the period corresponding to the time excess are not indemnified under this insurance.

MLOP insurance is of special interest for all “bottleneck” equipment on which the business operation depends such as boilers, steam turbines, generators, transformers, and important process machinery such as paper machines, printing machines, presses, rolling mill equipment, refiners, crushers, compressors, pumps, etc., including their drives.

The premium is calculated in consideration of the following data:

  • The amount of the sum insured
  • The time excess and the indemnity period
  • The size, number, type and age of the machinery insured
  • The general and the special technical risk of the machinery to be insured
  • The moral and technical hazards relating to each individual user and his employees
  • The effect that a breakdown of the insured machinery would have on the gross profit (relative importance)
  • The reserve facilities and spare parts available
  • The effect of local conditions
  • The possibilities of loss minimization
  • The prevailing general economic and political conditions.

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Deterioration of stock (DOS) insurance

The insurance of “deterioration of stock in cold storage” is designed to meet the requirements of those who want to insure themselves against deterioration of goods in cold storage due to a breakdown of refrigerating machinery.

There are basically two different methods of preservation: Cold storage under freezing conditions and cold storage under cooling conditions.

In the case of cold storage under cooling conditions, a distinction must be made between two types of cold storage: storage in a normal atmosphere and storage in a controlled atmosphere (CA storage). The storage atmosphere in CA storage rooms is different to that of normal atmospheric air and contains approximately 22% carbon dioxide, 4% oxygen and 74% nitrogen.

The insurance of stock in cold storage is important, for example, for

  • owners of cold-storage houses,
  • users (tenants) of cold-storage houses,
  • firms in which agricultural products are manufactured or processed,
  • meat and fish processing industries,
  • food preservation industry,
  • chemical and pharmaceutical industries (finished and semi-finished products).

All goods suitable for storage in cold-storage houses may be covered, the largest category being food. Deterioration of stock insurance is a complementary cover to machinery insurance and may only be taken out in connection with the latter.

Causes of an indemnifiable claim for deterioration of stock may be

  • a rise or fall in cooling temperature,
  • the unforeseen and sudden escape of refrigerants into the cold-storage rooms,
  • in the case of CA storage, an incorrect composition of the storage atmosphere directly resulting from any material damage to the refrigeration plant which is indemnifiable under machinery insurance.

It is possible to extend the deterioration of stock cover to include deterioration due to the failure of the public power supply, provided the position regarding public and back-up power supplies is found to be satisfactory.

The rating of the risk of deterioration of stock kept in a normal atmosphere is based entirely on the no-claims period which is determined by various factors such as

  • quality of the refrigeration plant insulation,
  • storage temperature,
  • type of goods stored,
  • quality of goods stored.

When calculating the premiums for CA risks, the decisive factor is the classification of the stock stored in terms of quality. The rating takes into account the no-claim (non- deterioration) period of the individual goods stored.

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Electronic equipment (EE) insurance

The term “electronic equipment” comprises, in the context of this insurance, all electrical and electronic systems such as:

  • Electronic data processing (EDP) equipment
  • Electrical equipment for medical use
  • Communication facilities
  • Lighting and navigation facilities
  • Equipment for research and materials testing.

The insurance protects:

  • The owner as the operator, the lessor, or the maintenance contractor
  • The hirer.

Material damage cover

Electronic equipment insurance is an “accident” insurance on an all risks basis covering sudden and unforeseen losses which physically affect the subject matter insured. Losses due to the following causes give rise to the vast majority of all claims:

  • Fire, lightning, explosion, failing aircraft
  • Smoke, soot, corrosive gases
  • Water and humidity
  • Failure of air conditioning
  • Short circuit and other electrical causes
  • Design, manufacturing, assembly and erection faults, defects in casting and material, workshop errors, bad workmanship
  • Faulty operation, lack of skill, gross negligence
  • Malicious acts of workmen, employees, third parties
  • Burglary
  • Hail, frost.

The exclusions comprise mainly:

  • War or warlike operations, civil commotion of any kind as well as acts on the part of strikers and locked-out persons
  • Willful acts or willful negligence on the part of the insured or of his representatives
  • Faults or defects for which a third party (supplier) is responsible either by law or under contract (losses covered by warranty)
  • Wear and tear
  • Failure or interruption of gas, water or electricity services (certain exceptions being possible in special cases)
  • Aesthetic defects, e.g. scratches on painted, polished or varnished surfaces
  • Consequential loss and liability of all kinds (with the exception of additional expenses for computer operation).

The sum insured must always be the replacement value of the insured electronic equipment (value of the new item plus customs duties, transportation and installation charges).

Data media cover

Cover is provided on a first-loss basis both for the material value of the external data media used in computing facilities and for the costs of reprocessing and restoring lost information.

Increased cost of working cover

If, in the event of a breakdown, the required computing capacity is hired, then the increased cost of working insurance applies. It covers such expenses as hire charges, transport charges for data media and personnel, expenses for accommodation away from base, night work or work on public holidays and the like.

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Civil engineering completed risks (CECR) insurance

CECR insurance is designed to grant comprehensive cover for civil engineering structures after their completion if they are exposed to a negligible fire hazard, whereas the elementary hazards, hazards emanating from the local geological conditions or arising out of the technical design of the structure or in connection with the operation and use of the structure predominate.

A corresponding coverage achieved on the basis of a fire policy would require numerous special endorsements and would thus deviate considerably from the basic fire cover.

The CECR policy is a named-perils policy on an annual basis covering:

  • Fire, lightning, explosion, impact of land borne or waterborne vehicles
  • Impact of aircraft and other aerial devices or articles dropped there from
  • Earthquake, volcanism, tsunami
  • Storm (air movements stronger than grade 8 on the Beaufort scale)
  • Flood or inundation, wave action or water
  • Subsidence, landslide, rockslide or any other earth movement
  • Frost, avalanche, ice
  • Vandalism by individuals.

The main exclusions are:

  • Political risks
  • Nuclear reactions, nuclear radiation or radioactive contamination
  • Willful act or willful negligence
  • Wear and tear, inherent defects
  • Lack of maintenance
  • Consequential loss.

Coverage is granted only for material damage to the objects insured. Only repair costs are indemnifiable. Costs for improvements, i.e. alterations of the original condition, will not be indemnified.

Underinsurance is applicable if the sum insured on the date of the loss does not correspond to the replacement value of the objects insured on that date (value of the new item plus customs duties plus transportation and installation charges).

Cost of removal of debris can also be covered on a first loss basis.

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Comprehensive machinery (CM) insurance

Comprehensive machinery insurance offers, in addition to the cover under the above described machinery insurance, wide and comprehensive protection against property damage and loss of profits for an entire plant and machinery in operation including other property like buildings, stock, goods in process, etc.

This new policy is designed to grant cover for entire plants where engineering risks are prevailing, in contrast to industrial all risks covers where the fire exposure and extended perils are of more importance.

Therefore, the following property is regarded as excluded under the cover:

  • land including topsoil, backfill, drainage and culverts, roads, runways, railway lines, dams, reservoirs, water, canals, drilling rigs, wells, pipelines, transmission and distribution lines, tunnels, bridges, docks, piers, wharves, any underground property, offshore property
  • all property on the premises of a nuclear power station, nuclear reactors, reactor buildings with equipment therein on any premises other than nuclear power stations, and property on any premises if used or having been used for generating nuclear energy or production, use or storage of nuclear material
  • property of the insured transferred to or in the possession of customers, or under leasing or rental agreements, hire, purchase, credit or other suspense sale agreements.

CMI is an all risks accident and loss of profits insurance covering any unforeseen and sudden physical loss or damage to the insured plant, necessitating its repair or replacement.

Loss or damage covered under Section I of this insurance includes the classical scope of cover described under the machinery insurance above but is furthermore extended to grant protection for plant and machinery mainly against

  • fire, lightning, chemical explosion
  • earthquake, inundation, flood
  • any other cause not specifically excluded
  • The exclusions are typical of operational covers and include e.g.
  • any loss or damage caused by release, discharge or dispersal of toxic or hazardous substances, contaminants or pollutants
  • any loss or damage for which a manufacturer, supplier, contractor or repairer is responsible either by law or under contract
  • any loss or damage caused by any shortage of incoming supplies and operational media, including but not limited to electricity, fuel, water, gas, steam or refrigerant
  • any costs arising from false or unauthorized programming, punching, labeling or inserting, inadvertent cancelling of information or discarding of data media or from loss of information caused by magnetic fields
  • any loss or damage caused by malfunctioning which occurs in hardware, software or embedded chips or any loss, corruption or distortion of data, without any ensuing physical loss or damage to property covered.

The sum insured should always represent the new replacement value of the property insured.

In case of loss or damage, the indemnification under CMI distinguishes between the property affected, i.e.

  • plant and machinery – new or used
  • goods in process, raw material and supplies, finished goods, stocks, plans, electronic data, etc.
  • other property such as buildings or civil structures.

In the event of loss or damage to mechanical, electrical or electronic equipment not older than 5 years, the insurer indemnifies the insured in respect of the expenses incurred for restoring or replacing the damaged property to its condition when new. Regarding insured equipment older than 5 years or totally destroyed or where the repair cost would exceed the actual value, the insurer indemnifies the insured for the actual value of the equipment immediately before the occurrence of the loss or damage.

In case of loss or damage to goods in process, raw materials and supplies, finished goods and stock, indemnification equals the cost of replacement of such items whereas indemnification for damaged plans, drawings, records, data and programs for electronic and electromechanical data processing equipment equals the cost of reproducing from originals or from duplicates.

For all other damaged property such as buildings, civil structures, etc., indemnification equals the cost of repair or replacement, whichever is lowest, to its condition when new.

Section II of CMI comprises the business interruption (BI) cover which provides protection against loss of gross profit and increased cost of working in case the business is interrupted or interfered with as a consequence of loss or damage indemnifiable under Section I.

The few exclusions under this Section II refer mainly to losses resulting from

  • earthquake, volcanic eruption or tsunami
  • shortage, destruction, deterioration or damage to raw materials, semi-finished or finished products
  • deliberate and/or other erasure loss, distortion or corruption of information in computer systems or other records or programs of software unless resulting from an occurrence insured under Section I

Furthermore the insurer is not liable for the amount of any fines or damages for breach of contract, late or non-completion of orders, or penalties of whatever nature.

As to the BI sum insured, the period of indemnity, deductible, etc., the terms are in line with the MLOP policy, whereas under Section II the policy allows to apply either a time excess or a monetary deductible.

* These summaries are taken from Munich Re’s booklet Technical Insurance References and are based on the examples of Engineering Insurance wordings of Munich Re, but broadly apply in general to the classes of Engineering Insurance referred to herein.

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Updates and News

A copy of a Press Release on last conference in Tokyo published by the Asia Insurance Review Dec 2007 see under Annual Conferences - Press Releases.

Latest IMIA Statistics for 2006, issued at last years Conference at Tokyo see under Library

All new Working Group Papers 50 to 54 (2007) are under Library

Working Group topics 2008 see under Annual Conferences

New Short Papers see under Library-Publications

1st August 2008