A mechanical breakdown insurance policy is designed to insure electro-mechanical equipment in case of unexpected accidental damage, and is also used as a basis for a loss of profits policy as a result of a mechanical breakdown event. On the one hand, they insure typical systems such as pumps, compressors, air-conditioning systems and refrigeration systems, generators and transformers, and elevators and escalators; and on the other hand, industrial systems such as printing presses, production lines in factories, processing machines (CNC), turbines and water desalination facilities, etc.

Why is it important to have a mechanical breakdown policy? As long as the machines are within the manufacturer’s warranty period, in the first years of the equipment’s life, no malfunctions are expected that will shut down the activity and cause loss to the Insured, likewise when preventative maintenance is performed and there are organized maintenance procedures for the production machines. But, every machine has the human factor, and every material gets tired in the end, so it is important to purchase a policy and insure the equipment at the appropriate value (in an established value that reflects the value of the equipment as new) in order to prepare for the day of the damage.


What are the sources of damages that would activate the insurance?


  • Poor planning – The source of the damage can be a poor calculation of the production process, human/software errors in drawings and calculations, etc. For example, if the engineering department of a CNC factory gave the processing machine operator wrong information, and as a result the lathe head broke—the event is covered.


  • Improper operation by employees – Any damage caused by the machine operator, whether due to negligence or lack of experience and skill in operating the equipment. For example, the new employee fails to stop the operation of the lifting device in time at the steel bending plant, during the lifting of a steel beam to the rolling machine, and the raw material caused damage to the body of the machine—the incident is covered.


  • Physical explosion – Damage caused as a result of pressure changes in systems that use compressed air, steam, various liquids, or combustible gases. For example, in the case of a malfunction in the supply of water to a steam boiler, which caused the gas pressure in the tank to rise, resulting in an explosion or damage to the system—the incident is covered.


  • Short circuit – In the event of a sudden voltage increase, damage can be caused to electrical and electronic components, and in addition, as a result, damage will be caused to the machine’s mechanical mechanisms. For example, a high current peak that will lead to the burning of the windings in a pump’s electric motor, or disables a control system in a rubber injection machine, causing it to stop abruptly in the middle of the production process—the event is covered.


  • Defective work and operation of equipment – There is coverage for damages caused due to incorrect assembly and installation of the equipment by the manufacturer, as well as for damages resulting from strenuous operation of the machine that may lead to fatigue of the material, imbalance, and misalignment of the insured equipment, provided it is an overload resulting from proper use in the machine, and for the purpose for which it was intended. For example, if in a plastic pipe production machine that operates at high output, a tooth in the gear wheel of the drive system was broken, and the machine was shut down in the middle of the production process—the event is covered, including damages caused by the cooling of the raw material inside the machine.


In the survey for mechanical breakdown insurance, the insurance company asks for an Engineer’s opinion, and this is where we come into the picture. First, a list of all relevant equipment is compiled, including data such as the year of manufacture and the characterization of the equipment (manufacturer data, suppliers, production outputs, etc.), and then an initial filter is performed based on the age of the equipment.


We will emphasize that not every machine qualifies for mechanical breakdown insurance, and as an initial evaluation we will check two main data: the value of the machine and the year of manufacture of the equipment. When the value of the equipment is relatively low, or when the financial estimate in the event of a system malfunction is close to or lower than the deductible amount, in the event of damage the Insured will not file a claim.


Regarding the age of the equipment, as a rule of thumb we disclaim mechanical breakdown insurance for equipment that is over ten years old and has not been upgraded or renovated, or ten years have passed since the upgrade/renovation, and electrical systems that are over 20 years old. In this case, we recommend not to insure it, or alternatively to increase the deductible for damage to such equipment and/or to increase the wear and tear deduction rate in the calculation of the damage accordingly. After the damage event, the insurance company will require from the Insured an Approval from a service company for the renovation or upgrading of the equipment in the ten years preceding the damage.


What is not covered by the policy?


Of course, the policy does not cover everything. First of all, it is important to understand the relationship between the extent of the damage (including the expenses of experts, engineers, etc.) and the deductible amount (the amount that the insurance company deducts in the event of damage), and to consider the underwriting conditions that may change, and only then make a decision on whether to open a claim against the insurance company. After all, we will not contact the insurance company in the event of damage to the cooling system compressor, when the amount of the deductible is NIS 5,000, before calculating depreciation due to the age of the equipment, and before additions for inspection, running, urgent air delivery expenses, specialist fees, contingencies, and unforeseen expenses, which are purchased as extensions to the policy.


In addition, there are exceptions that are not covered by the mechanical breakdown insurance policy, such as:


  • Natural wear and tear on parts such as conveyors, rollers and belts, cables and chains, tires, batteries, molds and drills, and more.


  • Damages caused by loading the machine beyond the manufacturer’s specifications, using the machine not according to its intended purpose, or making adjustments and modifications as part of experimental procedures.


  • Damage caused as part of the initial start-up of the insured equipment, or damage to equipment that has not passed a manufacturer/supplier inspection Approval, if such is required before starting the machines or production lines.


  • Natural wear and tear of the machine’s materials, such as rust caused by the cooling units (chiller) of an air-conditioning system, which is installed on the roof of an office building that is close to the sea, as well as wear due to continuous non-use of the machine and failure to perform routine maintenance work, a situation that causes gradual deterioration of the insured equipment.


In the event of damages and failures to the insured equipment, which is still within the manufacturer’s warranty period, a claim must be made against the manufacturer or supplier of the equipment. In the event that the manufacturer disclaims responsibility, the insurance company will bear the payment but may refer the claim to the manufacturer.


A mechanical breakdown insurance policy is supplementary coverage to the fire insurance policy of the insured business (for cases of fire damage, burglary, natural damage, etc.), or it can be purchased independently. It can also be extended to cover loss of profits resulting from a mechanical breakdown event, as mentioned above.

A classic condition in a contract works policy is to place a security guard on the site, is this the only choice? No!

But…there are conditions that must be met in order for the insurance company to agree to deviate from the policy. See a creative example from a site that is divided into several sub-areas, where the permanent guard was actually replaced by three parallel security circles:


In the contract works insurance policy there is an exception for work stoppage, usually for a period exceeding 90 days. It is important to understand that the coverage is not stopped, but its scope may be affected.


The issue of distances is one of the challenges in projects that include demolition and construction works in a dense urban environment, with an emphasis on those that include excavations for the construction of basement floors. This factor determines the insurance company’s approach to the level of risk.