Coverage against the machine

With Christmas not far away, this is often 'crunch' time for manufacturers.

No matter the product, it must comply with exacting safety standards, delivery expectations need to be met and then the wait for repeat orders to roll in.

Any firm operating machinery will undertake regular inspections, and employees will be protected by compulsory employers' liability cover.

But companies must also select the right level of insurance cover on a voluntary basis to ensure they continue to operate in the event of breakdown.

Mechanical breakdown cover - which in its wider terms is also known as sudden and unforeseen damage insurance - is one key area in which most brokers should look to provide guidance. It insures machinery against accidental damage and unforseen damage following breakdown, and clients can purchase the cover in a selective manner - perhaps just insuring their most vital machinery. Any broker with a manufacturing client may want to discuss with them the different options at the start of the year. They should almost certainly be on cover when most companies start producing for the Christmas season - typically early in the summer - to be ready for distribution to retailers in August.

There are numerous examples of manufacturers that will be highly aware of the pressures that the festive season brings. These include toy and chocolate producers and printers producing Christmas cards, all of which could be affected by business-critical breakdowns.

And, while large operations may well have significant budgets to pay for substantial repairs, smaller firms will often only be able to afford the cost of routine maintenance. Yet, it is the smaller firms that may well be more vulnerable, since they may rely more heavily on a particular machine and have little or no standby equipment. For many, there are few alternative ways of keeping production going in the event of breakdown or accidental damage.

While the UK does have a manufacturing capability, it is particularly active in the lighter industries, which look to produce well-made and more expensive goods. But, the equipment used to make such products may not be made in this country.

Plant and machinery

Plant and machinery is increasingly manufactured abroad, the benefits of which include that it may well be cheaper than an equivalent product that is made in the UK. However, the downside is that spare parts and service may not always be readily available, particularly in the case of specialist items. The end-result is increased cost and the possibility of delays in obtaining parts or service from overseas suppliers of production machinery.

Clearly, the benefits of mechanical breakdown cover are in place to step in and meet the often high costs of repair of electrical or mechanical failure and damage as a result of accident or operator error. There are also standard extensions to provide for additional costs to speed up the repair or to make a temporary repair.

The manufacturer knows they do not need to set aside massive budgets to meet the costs of repairs or replacement. They do not need to worry about whether to spend additional unplanned amounts to try to speed up the repair or against possible waste of marketing costs if the product is not available in sufficient numbers at the right time.

And, let's not forget the importance of business interruption cover, which complements mechanical breakdown cover. This again is sold as a separate policy and premiums can be considerable. Some firms may feel the cost is too high, but the losses resulting from being unable to trade can be devastating and the inability to fulfil orders can be enormously damaging to a firm's reputation.

An engineering business interruption policy will insure the loss of profit or, where output has been maintained at increased costs, the additional production costs would be insured up to the amount of profit that has been saved. This may well meet the costs of paying overtime to staff making up time or for outsourcing work or perhaps hiring replacement machinery.

For those that have been in a position to make a claim, a business interruption policy is likely to be regarded as one of the best investments ever. Part of the service to claimants is to assess how quickly they can return to full output again and minimise damage with their customers. A recent claim involving mechanical breakdown meant either sourcing new parts from overseas, which would have taken 10 weeks, or buying a brand-new machine, which would take only a few weeks to arrive and be installed, even though it was at a cost of £900,000. It was quickly decided it would be in the best interests of the client and they were soon up and running again - with the payout made as a result of the business interruption policy.

For insurers, manufacturing can result in costly claims. A technical inspection to ascertain the condition of machinery may be insisted on and brokers can play a valuable role in informing underwriters about what is held and its state of repair. Mechanical breakdown cover will not include the cost of maintenance, and faulty workmanship of parts is also excluded.

Similarly, problems can occur when equipment is being set up and insurers will also not cover problems at this stage - although supplementary insurance may be available. In most cases, however, the cover is incepted when the machinery is functioning.

There are many examples where mechanical breakdown cover has saved the day and most insurers in this sector will pride themselves on the speed with which claims are dealt. For manufacturers, the right cover in place means they can fulfil their promises.