fans and blowers
● Reciprocation compressors, pumps
and internal combustion engines
● Gears and gear sets
● Miscellaneous electrical apparatus.
All of the above-mentioned causes of
loss are excluded under most property
insurance policies. For example, a turbine
destroyed by a building fire or collapse
would be covered by most property policies, but not for burnout resulting from
loss of lubrication. While explosion may be
covered on a property policy, for instance,
it would be excluded should the cause be a
failed valve on a low-pressure boiler.
Equipment breakdown insurance
covers the repair or replacement of damaged equipment. Most policies, for an
additional premium, also provide business interruption and extra expense coverage. These coverages can be combined
in a single limit or separated, depending
on the policy. With this coverage, a company would be reimbursed for extra
costs incurred to keep operating as normally as possible – for renting equipment, for example, or getting heat from
another source. District energy systems
selling steam, heating or cooling services
that experience a covered shutdown
would also be reimbursed for loss of
income while they are unable to operate.
Here are some examples of actual
losses sustained by energy systems in
recent years and the resulting reimbursements made on their claims:
● A large steam turbine-driven centrifugal compressor failed due to
lubrication problems, resulting in
loss. Damage to equipment: $42,500.
Business interruption: $132,000.
● Severe overheating of a watertube
boiler due to a low-water condition,
resulting in a loss of about 40 percent of the tubes. Damage to equipment: $31,300. Business interruption:
● A steam turbine driving a machine
went into overspeed, resulting in the
destruction of the turbine and the
line shaft. Damage to equipment:
$42,300. Business interruption:
● A 200-ton chiller froze due to control
failure. Since it was summer, a rental
unit had to be brought in until the
main unit was returned to service.
Damage to equipment: $31,000. Extra
● A lightning strike to an electrical
transformer caused a power surge,
which caused the wiring in an electrical panel to fuse together. The property policy denied the loss because
there was no fire (just overheating).
The equipment policy paid instead.
Damage to equipment: $13,700. Extra
Not everything is covered, of course.
All insurance policies contain exclusions
that companies must be aware of. These
will vary from policy to policy, but a few
common exclusions include all the perils
insured by a property policy – flood,
earthquake and equipment that is undergoing testing.
Also, companies should be wary of
the subrogation clause in their equipment
breakdown policies. The subrogation
clause defines the right of the insurance
company to recover part of a claim it
paid from someone who may have contributed to the loss (not the policy holder).
Some policies state that if there is a waiver
of subrogation (i.e., between a company
and its maintenance vendor), coverage
may be negated. District energy systems
that have this clause in their policies
should ask their insurance agents to try
to get it removed. They should also be
sure to check if their policies exclude
loss while testing. Although most policies
do not cover loss while testing, systems
can also request that their agents amend
the coverage to include it. Testing of new
or repaired equipment is an exposure
that should be addressed.
The cost or premiums of the equipment breakdown policy can vary. Factors
include the age and quality of the equipment, the limit needed, the condition of
the equipment and, most importantly,
the type of equipment (turbines cost more
to insure than a boiler). Systems should
look into deductible options and carefully
determine the cost/benefit of retaining
part of the loss internally.
There have been a lot changes and
advancements in insurance coverage in
the past few years. Many property insurance companies now offer to include
equipment breakdown coverage. They do
this by simply not excluding the perils of
loss that forced the need to write a separate policy originally. This option can be
very attractive for a district energy system
because of the ease of claims handling. A
Insuring Company Relationships
Most district energy systems carry property insurance policies that
include business interruption coverage. With this coverage, an insurance
company will pay for a system’s loss of income and continuing expenses,
should it sustain an insurable loss. However, system owners, managers and
operators should also examine their companies’ dependent relationships to
see how they would be affected should those other parties sustain a loss.
For example, if a district energy customer had to close due to an insurable loss, the district energy system would sustain a loss of income. This
type of exposure can be insured – with contingent business interruption
coverage, which is often overlooked when companies are designing a risk
Further, a district energy system can also insure a supplier relationship.
For instance, if a system has a contract with a company to provide coal or
other fuel at very competitive prices, and that company is unable to continue due to an insurable loss, then the system would be forced to go to
another supplier, probably at higher prices. This exposure can also be
insured to help cover any additional expenses incurred. The bottom line:
When designing a risk management program, district energy businesses
should examine all their relationships and interdependencies – and how
they may be affected by them.