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Coverage You Don't Need

When a risk manager thinks about reasons for buying insurance, indemnity for losses is usually the first thing that pops into his or her head. That's a natural enough reaction. Indemnity, after all, is what insurance is all about.

But it's not the only reason for buying insurance. Sometimes it's not even the dominant reason, and every once in a while indemnity is almost irrelevant. Something else the insurance company gives you makes coverage you don't really need worth the price.

One risk manager learned the lesson the hard way (or at least the embarrassing way) when senior executives started asking. for a boiler inspection certificate. This must have been a real babe in the woods because asking a risk manager to get a boiler inspection certificate didn't seem to make any sense at all. That happens when you don't realize that certified boiler and pressure vessel inspections are an important part of the package of services you get with a boiler and machinery policy.

It's been a long time since, sophisticated risk managers woke up to the fact that they can get along very well without coverage for mechanical breakdown losses. In a well-run organization, the losses are almost ideal for retention, small enough to afford, and frequent enough to be reasonably predictable. Wrapping the catastrophe exposure into your property insurance program is easy, especially when your loss financing relies on retention through a high deductible or excess insurance. Why in the world would anyone want to buy boiler and machinery insurance that contributes nothing to your overall loss financing?

The answer lies surprisingly in the origins of boiler and machinery insurance and in legislative developments since then. The boiler and machinery policy didn't start out as an insurance contract. It was originally a contract for inspection and loss-control services. Insurance was an afterthought the engineers threw in to make their services more market able. Indemnity wasn't the driving force behind the development of boiler and machinery insurance, and in many instances it isn't a good reason for buying the coverage.

The most important benefit many organizations derive from their boiler and machinery insurance is the inspection and loss-control service that started the whole thing. Since the early days of the 20th century, every state has adopted a boiler and pressure vessel code that requires periodic inspections by a certified boiler inspector. Several of the larger cities and counties across the country also have their own adopted codes. Despite the diversity of jurisdictions, all the codes are remarkably similar because they all use the American Society of Mechanical Engineers boiler, and pressure vessel code.

What boiler and machinery insurance does is give you access to a certified boiler inspector who has your interest at heart. To get a boiler inspection ticket, you need to satisfy education and experience, requirements, pass an examination administered by ASME, and work for a government agency or an insurance company authorized to write boiler and machinery insurance. That last requirement is the real reason for buying insurance your organization might not need. In some areas, city, state, and county boiler inspectors can be real prima donnas. They decide when to inspect the boiler, and the operator's needs don't influence their decision one little bit. They'll tell you whether or not the equipment meets minimum statutory requirements, but won't even hint at changes that might make the boiler work better or last longer.

Inspectors who work for insurance companies, on the other hand, will at least try to schedule inspections at your convenience, and their primary concern is the safety of the equipment, not just the people who might be injured by a catastrophic event. They'll tell you about the little things that can help make your boiler more efficient and less likely to break down. That's well worth the premium you pay for insurance, even if it does have a deductible higher than the value of the equipment you're insuring.

Joseph F. Mangan is a consultant in Scotch Plains, N.J.
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Copyright 1999 Gale, Cengage Learning. All rights reserved.

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Publication:Risk & Insurance
Article Type:Brief Article
Geographic Code:1USA
Date:Dec 1, 1999
Previous Article:WORKERS' COMP.

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