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By PAUL BARRA, chief engineer of equipment breakdown, Liberty Mutual Commercial Markets

For many businesses--especially those in the high-technology and biotech industries--the breakdown of an air conditioning or refrigeration unit is a serious occurrence that can result in loss of irreplaceable product, loss of business income and extra expense costs.

Depending on the specifics of the policy form, equipment breakdown insurance can reimburse a policyholder for the losses resulting from the breakdown of objects under pressure and mechanical or electrical equipment that uses, transmits or generates power.

Business owners can work with their agent or broker to customize coverage to best serve the needs and interests of the company or put in place a broad comprehensive form that minimizes the risk of an uninsured loss.

EB can be written as a stand-alone policy, part of a property insurance package or all-risk form, part of a commercial multiperil policy, or part of a business owner's policy. The coverage brings in about $1.7 billion in annual premium.

While larger businesses generally purchase EB insurance as a stand-alone policy or as part of a package policy, many smaller businesses do not--and with the typical EB loss averaging several thousand dollars for smaller businesses, it can be a costly omission.

Here are some typical breakdown scenarios involving open and hermetically sealed refrigeration units, insight on the financial impact resulting from these types of losses, and how to reduce financial loss by including well-planned EB insurance coverages in commercial property insurance programs.

OPEN UNITS

Open air conditioning and refrigeration systems are made up of a separate motor and compressor connected to each other's shaft, and usually range in size from 50 to 500 tons. A refrigeration ton is the standard unit to measure the heat removing capacity of a system, and one ton of refrigeration is equivalent to removing 12,000 BTUs per hour from the substance being cooled.

With regular maintenance, these units have a life span of about 15 years, but like any machine they are susceptible to mechanical breakdown. The most common type of mechanical breakdown is bearing damage due to loss of oil.

Replacement of the bearings typically costs about $100 per ton and two days to repair. Larger losses on these units usually involve fracture of the crank shaft. The cost to replace a shaft typically costs about $200 per ton from a physical damage standpoint and three to eight days to repair. Finally, catastrophic losses on this type of equipment require replacing the entire unit at a cost of approximately $400 per ton and 30 days of down time.

To keep open units running smoothly during their lifetime, building managers should have in place a maintenance schedule performed by qualified technicians to verify that all controls and safety devices are functioning as intended, that rotating equipment is properly lubricated and that all components are visually inspected for proper operation.

Regular maintenance helps prolong the life of the equipment and uncover conditions that allow for planned repair or replacement, avoiding the impact that unplanned breakdowns can have on business operations.

An example of a catastrophic loss involving one of these units emphasizes the value of an EB policy. In this scenario, a 170-ton compressor lost oil pressure, causing the compressor to seize and effectively shutting down an office building due to lack of air conditioning.

What could have been a significant business-interruption situation was avoided because the building manager had purchased an EB policy, which covered the $25,000 for the rental of a temporary unit as well as the $90,000 to replace the compressor.

Additionally, as a result of recommendations provided by the insurer, the owner had contracted with a vendor to supply a rental chiller and avoided any business interruption during the month it took to replace and install the compressor. Without the EB policy, the building owner would have paid $115,000 out-of-pocket as well as the costs associated with being out of business until a rental chiller was procured.

HERMETICALLY SEALED UNITS

Hermetically sealed air conditioning and refrigeration systems, which are usually smaller than 50 tons, have the motor and compressor enclosed in a welded sealed tank in which both components are in contact with the refrigerant and lubrication oil. However, unlike open units, which can be repaired numerous times, hermetically sealed units must be replaced when damaged. These units also have a standard life span of only eight to 10 years.

Hermetically sealed units are found on refrigerators, coolers and small air conditioners and are most often used by the high-technology, biotech, food and florist industries for clean rooms, storage of medical and diagnostic items, food safety and plant survival. Because these units come in a wide range of sizes, so too do the associated costs and risks. The following are loss examples that underscore the need for EB insurance for these sophisticated and expensive pieces of machinery:

-- The compressor for a florist shop's refrigerated storage and display case unit seized due to worn bearings, requiring replacement. It took three days to replace the unit at a cost of $3,300 and a combination of spoiled flowers and loss of business totaling $5,500--all of which were covered by the shop's EB policy.

-- A biotech lab's compressor broke down on a Saturday when the lab was unoccupied. Monday morning when the lab opened, it was discovered that due to the high temperature in the cooler, the chemicals used for diagnosis and treatment were spoiled and the entire system was contaminated. The $7,500 to replace the refrigeration system and the $27,000 value of the spoiled product were covered by the lab's EB policy.

-- A deli owner lost $66,000 in product from a broken shaft on a compressor unit that went unnoticed over the weekend. While the business had named peril insurance, it did not have an equipment breakdown policy. The owner ended up paying out of pocket to replace the meat in addition to $6,000 to replace the refrigeration equipment and the loss of business while the unit was replaced. The deli owner now has an EB policy in place.

While businesses will face many losses that can be overcome, there are others that--without the proper insurance policy in place--can close down their operations. By securing an EB policy and following an ongoing maintenance program, maintaining backup equipment, and implementing disaster and contingency planning, building owners can greatly reduce the incidence of equipment breakdown in their facility and protect their income and their customers.

December 1, 2010

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