Most firms plan to cope with a major disaster but what if a key item of plant fails, shutting down the business?
Your client is the owner of a hotel. In the height of summer the air conditioning breaks down forcing it to close. Replacement takes a month. What does it do? Welcome to the world of engineering business interruption insurance.
In recent years disaster recovery has become the hot topic on everyone's lips. Ask the managing director of any company how he would cope in the event of a disaster and he would be able to produce tried and tested disaster recovery plans to ensure interruption to the business is kept to a minimum.
Ask the same managing director to discuss the impact of the failure of a key item of plant and the chances are he has not even considered this scenario.
This type of mechanical failure is a much more likely event and one which could stop a company trading for anything from a couple of days to several months.
Very often, companies have misplaced faith in the support expected from service companies, the availability of spare parts and the willingness of employees to work around the clock to meet customer needs.
The reality is somewhat different and it is when this gap between perception and reality is identified that the necessary protection can be provided through an engineering business interruption policy.
Such a policy is designed to provide protection against financial losses following sudden and unforeseen damage to plant or machinery which typically includes loss of profits and increased cost of working following:
The main differences in cover provided by a standard engineering and property business interruption policies can be seen in the comparison table (right).
Traditionally engineering insurance has been associated with the manufacturing industry, trades such as paper manufacturers, printers and textile manufacturers have recognised the risk to their business and acted accordingly.
However, the manufacturing sector has been in decline for a number of years and is continuing to suffer.
As the manufacturing industry declines, so the service sector goes from strength-to-strength bringing with it new business risks. Take for example our previously mentioned hotel; its profits will derive from a number of activities all of which are vulnerable to the breakdown of plant:
Provision of accommodation and conference facilities- dependent on air conditioning, heating, hot water boilers and lifts
Restaurant - dependent on refrigeration equipment and extraction as well as air-conditioning in both in the restaurant itself and the kitchens
Leisure facilities - dependent on swimming pool plant and air conditioning.
Other trades in the service, retail and leisure industries are similarly dependent on plant such as:
Breakdown of critical plant occurs frequently enough to warrant a greater consideration of the risks involved. A small to medium sized enterprise can be put into the red by a relatively small breakdown and yet many are still not taking the basic step of insuring against this.
A well-circulated statistic states that 80% of organisations who are disrupted by a major incident and who do not have a business continuity plan cease trading within two years. Engineering business cover can help a business by identifying risks such as the over reliance on one piece of machinery and the most vulnerable parts in the production process.
Engineering business insurance should form an integral part of any business continuity plan. Not only will it assist in identifying the risks and possible problems before they arise but most importantly, it will ensure that when all else fails, a company does not put their continued success in jeopardy. IT
' Sarah Stoddart is a graduate assistant underwriter at Allianz Cornhill Engineering, and Geoff Godwin is senior underwriter at Allianz Cornhill Engineering
Differences in property and machinery BI policies
Property business interruption policy
1. Cover is usually financial loss following perils such as accidental damage, fire, water perils and theft, but excluding many perils covered under a machinery business interruption policy.
2. Financial loss following operator error. This is an exclusion on most standard property BI policies.
3. Financial loss following joint leakage, cracking, fracturing or overheating of boilers or other steam plant is an exclusion on most standard property BI policies.
4. Financial loss following overheating or electrical burnout of other plant and machinery is also an exclusion on most standard property BI policies.
5. Financial loss following the failure of gas electricity or water can be provided as an extension, but it will often be limited to the perils covered under the policy.
Machinery business interruption policy
1. Provides cover for financial loss following accidental damage, breakdown and collapse.
2. Financial loss following damage due to operator error is covered as standard.
3. Covers financial loss following all of these events.
4. Provides for financial loss following both overheating and electrical burn-out.
5. An engineering BI policy can usually be extended to cover financial loss following the failure of gas electricity or water. This failure can be from any cause and is not limited to the policy perils.
What to ask your clients to raise awareness of this type or cover include the following:
Critical Items of plant
Are any of the items of plant critical to the business? For example, what would the effect be of the failure of the hot water boiler on the provision of accommodation or the failure of air-conditioning in conference facilities or in the kitchen of a busy restaurant?
Does your client know the current lead times for the delivery, installation and commissioning of new plant? Many items are now manufactured abroad which can lead to increased lead times.
Will reliance on standby items be sufficient? Many stand-alone air conditioning units are too large to use effectively in most restaurants and generate a significantly increased level of noise and as such may not be a solution to the failure of the installed plant.