A clearer understanding: the underserved market for breakdown coverage is small, nonmanufacturing businesses.

As the Industrial Revolution was transforming America throughout the mid-to-late 19th century, steam was the top energy source. Steam powered the boilers for industrial machinery, locomotives and steamboats. As uses for steam power became widespread, the risk potential became more apparent. Businesses realized that they could experience huge losses if problems arose with steam boilers and machinery associated with them. It was then that steam boiler coverage was introduced under the term boiler and machinery insurance.

Times have changed and industries have evolved throughout the 20th century so that boiler and machinery insurance covers far more than steam boilers. Insurers have continued to look for a name that encompasses the technological boom over the past 25 years. The name that is sticking now is equipment breakdown coverage. But this designation does not clearly define or characterize the product nor call attention to its importance.

As a result, many agents do not understand the terms boiler and machinery insurance/equipment breakdown coverage. Therefore, many customers do not understand the benefits that may be available to them. Due to this confusion, hundreds of ions of dollars in losses are exposed each year throughout the world.

It is critical for agents and clients to understand that this coverage protects against breakdown of equipment, a peril that is most often not covered by a typical property policy. For example, if a business owner suffers a loss because of a fire, flood, wind, quake or theft, the owner generally has coverage under the business' property policy. However, if any equipment were to actually break down, coverage would not be furnished unless he or she specifically had breakdown coverage.

For large manufacturing businesses, the need for this coverage is obvious. They have larger pieces of equipment with breakdown exposure that are vital to their operations and therefore usually invest in the coverage. Larger real-estate organizations usually see a need as well Fortunately for these businesses, jurisdictional boiler inspections are usually conducted on an ongoing basis, making the need for breakdown coverage quite obvious.

Truly, the underserved market for breakdown coverage is the small, nonmanufacturing business. The obstacle, especially for these businesses, is the belief that their policy deductible would be greater than most breakdown losses they expect to incur. The small retail store or doctor's office often does not recognize a need since they lack a boiler and large machinery. They own computers, faxes, a small phone system or other office appliances whose repair costs are less than the deductible. The owners also often believe that warranties will cover a loss anyway.

So why add the extra expense of the boiler and machinery coverage? Many of these small businesses tend to overlook the possibility of a catastrophe for which they are not financially prepared. For example, a random electrical surge could cause a comprehensive breakdown in systems and daily business flow. It is critical to point out to customers that a comprehensive electrical breakdown is a real threat to any business. While it is certainly more common to have one piece of equipment break down, it is not uncommon to have an electrical surge burnout everything plugged into an outlet.

Small businesses need to know that they can be the unfortunate victims of noncovered comprehensive electrical breakdowns. If the businesses are not insured appropriately because of preconceived notions about breakdown coverage, they can be seriously at risk--even to the point of going out of business. The terms are sometimes confusing, but the importance of the coverage should not be.

The savvy agent makes sure that the buyer never has to face this dire and preventable consequence by fully understanding both the risk and the coverage implications. Most breakdown coverage applies to the cost of repair or replacement of equipment that stops working suddenly and accidentally. It may also cover loss of income from property-damage liability defense costs as well as consequential damages such as damage to other real or personal property due to the breakdown. For example, if a restaurant's refrigeration units break down, this policy typically covers repair of the unit and replaces spoiled food. Also, if a customer's air conditioning and heating unit breaks down and covered property is damaged as a result, this coverage generally takes care of the damaged equipment and resulting business income loss.

No matter how you look at it or what term you use, breakdown coverage is a fraction of the cost of a property insurance program and truly one of the best examples of sleep insurance a business owner or corporate risk manager can buy.

Anthony J. Giannone is vice president, Boiler & Machinery, at St. Paul Travelers Cos. Inc. He can be reached at [e-mail].