Electrical Arcing Versus Fire Damage Claims—What is Covered and Why Equipment Breakdown Coverage Should Be Sold With Every Commercial Policy

Merlin Law Group attorneys Ashley Harris and Iris Kuhn

Insurance companies tend to limit the loss of electrical arcing to the electrical components and hire experts to say that a fire did not occur to limit coverage. Many business policyholders and public adjusters may not be aware of the following clause found in the vast majority of commercial property insurance policies:

g. Electrical Currents — ‘We’ do not pay for loss caused by arcing or by electrical currents other than lightning. But if arcing or electrical currents other than lightning result in fire, ‘we’ cover the loss or damage caused by that fire.

Some forms have the following exclusion:

Loss, destruction or damage to any electrical machine, apparatus, fixture, or fitting arising from or occasioned by overrunning, excessive pressure, short circuiting, arcing, self heating or leakage of electricity from whatever cause (lightning included), provided that this extension shall apply only to the particular electrical machine, apparatus, fixture or fitting so affected and not to other machines, apparatus, fixture or fittings which may be destroyed or damaged by fire so set up.

So, how does an insured obtain coverage for such losses? Equipment Breakdown Insurance. This can be added as its own policy or as an endorsement. Equipment Breakdown Coverage usually is provided with these terms:

‘Accident’ means a fortuitous event that causes direct physical damage to ‘covered equipment.’ The event must be one of the following: (1) mechanical breakdown, including rupture or bursting caused by centrifugal force; (2) artificially generated electrical current, including electrical arcing, that damages electrical devices, appliances or wires; (3) explosion, other than combustion explosion, of steam boilers, steam piping, steam engines or steam turbines; (4) an event inside steam boilers, steam pipes, steam engines, steam turbines that damages such equipment; (5) an event inside hot water boilers or other water heating equipment that damages such equipment or (6) bursting, cracking or splitting.

If under two policies with two insurers, the problem is that one carrier will argue that the loss is not covered or limited while the other says that the fire loss rather than the electrical loss is much greater. An IRMI article, Equipment Breakdown—More Than Just Boiler and Machinery, even noted this claims issue between the two coverages:

Even when policies are carefully crafted to dovetail coverage, loss disagreements may arise as to which policy an insurer believes should cover the loss. An equipment breakdown loss can be complicated with facts initially unclear as to whether the property policy or the equipment breakdown policy should apply. Coverage disagreements may inhibit an insured’s ability to receive funds to timely repair damage and seek coverage for lost income and increased operating expenses. This situation, which is fairly common, is addressed by use of a joint loss agreement that is endorsed into the insured organization’s property policy and equipment breakdown policy.

Arcing versus fire cases usually have the policyholder making claims against the property insurance carrier and the equipment breakdown carrier since one or the other should pay the loss. If the damage is confined to just electrical damage, the property carrier pays nothing, as noted in a previous blog, Blame It on the Squirrel: Court Rules Furry Fatality Not Efficient Proximate Cause of Policyholder’s Power Station Damage.

The bottom line is that equipment breakdown coverage is important for all commercial policyholders. The coverage needs to be added to prevent a significant coverage gap. One of the most common perils, arcing, is generally not covered under the property insurance policy. Equipment breakdown coverage specifically picks up this coverage gap.

Another post written by Iris Kuhn discussing this coverage is Small Business Manufacturers Should Purchase Equipment Breakdown Coverage.  She stated:

Equipment breakdown coverage used to be known as ‘boiler and machinery coverage.’ It is so much broader today and covers property and perils so much greater than boiler and machinery losses. Many people fail to realize this. For small businesses, failing to purchase this coverage can lead to financial ruin.

Thought For The Day 

Electricity is really just organized lightning.

—Nikola Tesla