Despite American businesses' dependence on the computer chip, many companies don't recognize the new class of exposures related to the integration of computer technology with their equipment. Business owners need to know that high tech means higher risk. Educating insureds about these significant risks is both an obligation and an opportunity for agents.
Most customers recognize how technology dependent their businesses have become, but few are aware of just how vulnerable modern equipment is to events like power surges that can knock out equipment and cause crippling losses. As a result, many do not make equipment breakdown coverage part of their property coverage.
Basic commercial property packages do not address the new equipment and income exposures of technology-dependent businesses. Computerized equipment, technological devices, and modern electrical systems are subject to unique types of damage that traditional property coverage does not cover. The "boiler and machinery" exclusions in every property form have the effect of eliminating coverage for these very high tech events.
A building's electrical system is a significant source of risk to high tech equipment. Many people believe that equipment such as boilers and air conditioning units have a high potential for failure because they have moving parts - pumps, belts, and fans - that wear down and break. In their minds, though, stationary wires and electrical components do not have the same failure potential. But they do. After boiler and air conditioner failures, electrical system failures happen more often than any other type of equipment breakdown.
Surprisingly, most electrical failures are not caused by a major event like lightning, but by loose connections, moisture, dirt, overloads, and other common causes. Seventy-five percent of all electrical system failures can be traced to human error - from carelessness and improperly trained personnel to inadequate maintenance and delayed service. Even modern buildings designed only 10 or 15 years ago are vulnerable to electrical system failures.
Older buildings are often susceptible because their electrical systems were not designed to meet today's higher demands. As businesses become more dependent on computerized equipment and other machines and technologies, their demand for electricity increases. This equipment also generates more heat, leading to the increased use of air conditioning and putting an additional strain on the electrical system.
Why do business owners fail to recognize electrical-related exposures? It's the "out-of-sight, out-of-mind" syndrome. Electrical wires and components are usually located behind walls, in closets, and in the basement. Building and business owners do not give this invisible infrastructure much thought. But in today's buildings, they've become as important as boilers and HVAC systems - and taking them for granted can be risky business. Here are two recent examples:
- A simple loose connection caused electrical arcing (the spark caused by a poor connection or poor insulation) at the main electrical distribution panel of a large apartment building in New Jersey. The current was transmitted through the building's cabling system and destroyed the mechanisms that distribute electricity to 13 floors, causing $500,000 in equipment damage.
- At a large office building, a loose connection led to extensive damage to the electrical system on two floors. That damage resulted in the loss of power and equipment use throughout the 22-floor building. It took contractors 10 days, working 24 hours a day, to restore power to 100 percent of the building. In total, the paid loss exceeded $3 million.
The increased risk of high technology is not confined to specialized equipment. Consider the telephone, the lifeline of the day-to-day business operations. For most companies a PBX system, or private branch exchange, is required to manage the phone lines that funnel incoming and outgoing calls. These systems also typically include voice mail, automated phone answering, and other features. When the phones go down, it's not just an inconvenience, it's lost business and income. A catalog order business, for instance, could lose hundreds of thousands of dollars per hour because they are not getting customer orders.
PBX systems are complex digital equipment, replete with sensitive circuitry and electronics. And like all computers, they are extremely vulnerable to electrical disturbance. One of the biggest culprits in creating electrical disturbances in PBX systems - and virtually any microprocessor-controlled equipment - is harmonic distortion. This is electrical "noise" created by non-linear power loads. The result is heat that burns out sensitive circuitry.
Responding to a system failure can also represent a tremendous cost for businesses. In a phone-intensive business, the costs can escalate rapidly because of the need for a temporary facility to cover the incoming calls. Most at risk for PBX system failures are small- to medium-sized companies that have not taken the precautions to prevent system failures. These are typically companies with fewer than 100 employees at a single location that is not extremely phone intensive.
PBX system failures can mean significant losses for business:
- HSB paid a loss of more than $150,000 for a high rise office building. Iced condensation from an overhead air conditioning unit melted and shorted out the phone system panels, causing a complete system failure.
- In another case, a telephone answering service saw its PBX system damaged by a power surge that originated within the equipment itself. It cost $128,000 to replace the system.
The risks are high for businesses without equipment breakdown coverage. Insureds must understand that loss events are not simple inconveniences but major exposures that could threaten the survival of their businesses - unless they have equipment breakdown coverage. For businesses such as manufacturing plants and food processors, equipment damage is just part of the problem. When failures cause a manufacturing line shutdown or food spoilage, significant income losses magnify the exposure.
The misconception among insureds that electrical systems, phone systems, and other high tech equipment are trouble free still leads to resistance to buying equipment breakdown coverage. One problem is the term "boiler and machinery" policy. It's an out-of-date term that does not reflect the broad range of exposures covered by some of today's equipment breakdown policies. Insureds need to understand that, as their exposures have changed, products have changed to meet these new coverage needs.
To help your insureds understand the exposures they face, ask them what their total investment in equipment is today. Walk through their business process, identifying all the equipment they depend upon. Then show them examples of losses that have occurred within their industry or to the equipment they rely on. Carriers like Hartford Steam Boiler can provide industry-specific loss examples to help your insureds relate to the risks for their businesses.
By getting customers to measure the degree of their dependence on today's sensitive, computer-based equipment, the higher risks associated with high technology will become more obvious. And, with an increasing number of insurers now offering equipment breakdown policies as part of their property packages, it's easy and cost-effective to offer this increasingly essential coverage to your customers.
John J. Kelley is chief operating officer of the Hartford Steam Boiler Inspection and Insurance Company and a senior vice president of HSB Group, Inc.