VideoLast fall, an early-morning fire broke out at 30 Rockefeller Center, in New York City. NBC's "Today" show was forced to do an impromptu remote broadcast from the sidewalk outside the building. Network producers held curbside meetings and writers wrote news copy longhand as firefighters battled the blaze that sent smoke throughout the 70-story building. More than 2,000 employees arriving for work that morning were told to turn around and go home. Telephone service and many computer systems were inoperable. Fortunately, no serious injuries were reported, but the total losses exceeded $20 million.
Those losses, however, were covered by equipment breakdown insurance, which was included in General Electric's (NBC's parent company) global property policy. And according to Andrea Pearson, manager for insurance programs at GE, the coverage kicked in without a hitch. "Everything worked perfectly," she says. "It was a very fair settlement and resolved quickly, even though it involved numerous parties, each with a special interest."
Like GE, more and more businesses are critically dependent on machines--and the electrical power that runs them--for survival, but it often takes an accident like the one at Rockefeller Center to make companies painfully aware of that fact. In Business Perspectives magazine, published by Liberty Mutual, Eugene Eral, regional underwriting manager of ALM Services, an affiliate of Liberty Mutual; and Richard Kinner, senior vice president for the commercial division at Hartford Steam Boiler Inspection and Insurance Co., write:
"Today, the world has more than 10 billion microprocessors. They are the brains behind fax machines, PBX phone systems, elevators, environmental control systems, and production equipment. Businesses depend on this sophisticated equipment, as well as on systems for heating, air conditioning, and electricity.
"While modern equipment is smart and fast, it is also fragile and sensitive to vibration, dirt, moisture, and heat. Breakdown of equipment or systems can shut down a business, yet many companies don't have the insurance coverage they need. To be properly protected today, a business needs equipment breakdown coverage as part of its insurance package."
That kind of insurance has changed enormously from the days when it was christened "boiler and machinery coverage," primarily in response to the proliferation of sophisticated machines of every ilk into all kinds of businesses, Eral said in an interview. Now the coverage can encompass everything from electrical machinery to high-tech equipment, he says.
Yet many companies mistakenly believe that they don't need such coverage, says Eral. "Because of the old terminology of boiler-machinery, a lot of customers don't realize that many property policies have electrical and mechanical breakdown exclusions in them." The result, adds Kinner, is that of the 10 million commercial establishments in the United States, only 600,000 have adequate equipment breakdown coverage.
The Electrical Connection
This type of coverage has traditionally been geared to companies that have exposures critical to their businesses. For example, if a machine breaks down and its workload can be transferred to another machine, coverage isn't as important to that business as it would be to an enterprise in which a breakdown could shut down an assembly line and stop the production of an entire facility.
More and more businesses, however, are facing equipment breakdown exposure. The main culprit is companies' increased dependence on electricity and the simultaneous lack of maintenance of electrical connections. "Buildings created 20 years ago weren't built at a time when there were multifunction phones and computers on every desk," explains Hartford Steam Boiler's Kinner. "The use of electrical power is much more pervasive today." Still, he adds, new buildings are often in no better shape, because tenants and landlords frequently ignore essential electrical maintenance.
A recent study by the insurer, in fact, found that 75 percent of all electrical-system failures result from a lack of maintenance. Part of the problem, says Matthew Glennon, Hartford Steam Boiler's director of electrical loss control, is that people believe there are no moving parts in electrical systems. But that's a misconception, he continues. There are connections in the system subject to thermal expansion and contraction. That expansion and contraction loosens those connections over time. In addition, if electrical equipment isn't cleaned periodically, moisture and dirt can cause electrical failure.
He cites a case in New York City in which an office building was closed for four weeks due to an electrical problem. The snag was traced to the installation of an electrical panel 25 years before. The panel wasn't riveted in place properly, so each time a surge passed through it, the panel wobbled. That led to a fire. "We're seeing a lot of failures in equipment that's only 20 years old, even though the equipment is rated to last 50 or 60 years," Glennon says. "That's because in many cases, electrical cabinets in those buildings haven't been opened since they were installed."
Electrical problems shouldn't be taken lightly, says Kinner, especially since they're the second most prevalent reason for fires in commercial buildings. The NBC fire, for example, started in an electrical closet on the fifth floor. "We're seeing a dramatic increase in the frequency of losses," he observes. "And we think that frequency is commonly caused by the ever-increasing stress loads on every building."
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