The Boiler That Wasn't a Boiler
Riverton Hospital's property policy covers 'boiler and machinery' under a broad equipment breakdown endorsement with a $100,000 limit per accident and a $5,000 deductible. In August, a 15-year-old emergency generator failed during a power outage. Investigation showed the failure began with a cracked coolant hose, which caused the engine to overheat and seize; the repair cost is $140,000. The hospital also lost $60,000 of temperature-sensitive pharmaceuticals because the generator failed to start. Separately, a pressure vessel in the laundry developed a hairline crack from corrosion and leaked, causing $30,000 of water damage to adjacent ceilings. The insurer argues the generator failure was 'mechanical breakdown' excluded under the property form and that the pharmaceutical loss is consequential.
1. Analyze whether the generator loss is covered under the equipment breakdown endorsement, addressing the limit, the deductible, and the cause of loss.
Read the worked answer
Equipment breakdown coverage is designed for exactly this loss: accidental breakdown of pressure vessels, mechanical equipment, and electrical equipment from causes such as cracking, overheating, and motor burnout, which the property form excludes as 'mechanical breakdown.' The cracked coolant hose is the initiating cause; the seizure is the resulting damage. Most equipment breakdown forms cover the cost to repair or replace damaged equipment, including damage to the part that failed, subject to the limit and deductible.
The repair cost of $140,000 exceeds the $100,000 per-accident limit, so the maximum payable is $100,000 less the $5,000 deductible = $95,000, leaving $40,000 uninsured. The hospital should consider raising the limit to reflect the replacement cost of its critical equipment. The adjuster should also check whether the endorsement includes expediting expenses and whether the limit is shared across all equipment or scheduled per item.
The insurer's 'mechanical breakdown exclusion' argument is weak because the endorsement is specifically written to buy back that exclusion. The stronger insurer argument would be wear and tear or lack of maintenance: a 15-year-old hose may have been at the end of its service life, and many forms exclude loss caused by corrosion, erosion, or deterioration unless it results in sudden accidental breakdown. The maintenance records will decide the point.
2. Address the $60,000 pharmaceutical loss and the $30,000 laundry water damage, explaining the different treatment of each.
Read the worked answer
The pharmaceutical loss is spoilage consequential to the generator failure. Whether it is covered depends on the endorsement's spoilage extension. Many equipment breakdown endorsements include a spoilage limit for loss of perishable goods caused by breakdown of refrigeration or other specified equipment, but the generator is not refrigeration equipment, and the spoilage extension often applies only to breakdown of the insured's refrigerating, heating, or air-conditioning apparatus. If the policy has a general spoilage extension, the $60,000 may be recoverable subject to its own sublimit; if not, it is excluded as consequential loss. The adjuster should read the spoilage clause carefully rather than assume.
The $30,000 laundry water damage is treated differently. The corrosion crack in the pressure vessel is a breakdown, and the resulting water damage to adjacent ceilings is damage to other property caused by the accident. Equipment breakdown forms typically cover damage to other property caused by the breakdown, subject to the same per-accident limit and deductible. The corrosion itself is not the insured event, but the resulting leak and water damage are. If the $100,000 limit has already been exhausted by the generator claim, the laundry loss may be unrecoverable in the same policy period, which is a strong argument for a higher limit.
The contrast illustrates the core distinction: direct damage to the insured's equipment and other property is covered; pure economic or spoilage loss is covered only if a specific extension says so.