Machinery Breakdown covers losses when your machine unexpectedly stops working, can also include losses from the subsequent business interruption, but it does not include theft, fire, etc. to your machine. Machines covered in this section are sometimes required to have an active maintenance plan.
As part of the insurance assessment process, an assessor may be brought in to conduct a valuation of the machine. You probably need Machinery insurance if you have any the following items:
Your insurance policy will have its own specific list of insured events and exclusions. It is best to check with your insurer or the policy wording to confirm the details of your Machinery Breakdown insurance policy.
Some commonly covered and not covered items include:
Any unforeseen and sudden physical damage to the machinery that you have specified (from any cause not excluded) while it is:
This is typically the cost that it will take to replace or repair your machine and put you back in the same position that you were in before the machine stopped working. For example, if you have a machine that is imported from Italy, you would include the cost of the machine (R80 000), the shipping and import duties (R20 000) and the installation costs (R20 000).
In this example the machine would be insured for R120 000.
What happens if my machine is no longer available?
If the machine is no longer available, the insurance company will cover the business for the nearest equivalent machine of the same or lower value.
There is usually an option to get covered for your business’s loss of income because a machine broke down. This can be calculated in a few ways, but the most common is loss of profits – difference basis. This is calculated by starting with turnover and subtracting all costs that will not be incurred if there is no turnover. It uses the following formula:
Turnover – Cost of goods sold (opening stock + purchases – closing stock) – Variable sales costs (e.g. packaging material, delivery charges, commissions)
Let’s calculate Mabo’s Manufacturing loss of profits – difference basis as an example.
Here is Mabo’s Manufacturing Forecast Income Statement:
Income: R100 000
Cost of goods sold: (R49 000)
Sales commissions: (R1 000)
Gross profit: R50 000
Electricity: R10 000
Rent: R10 000
Salaries: R10 000
Net profit: R20 000
Remember the formula from before: R100 000 (Turnover) – R49 000 (Cost of goods sold) – R1 000 (Variable sales costs) = R50 000.
Breakdown
Business Interruption
Let’s say that it will cost R120 000 to replace a machine (R80 000 for the machine, R20 000 for import duties and shipping and R20 000 for installation).
Under-insuring my item
If the machine is insured for R100 000, the business will pay lower premiums than it would have if the machine was insured for R120 000. If the machine breaks down and the business puts in a claim, the insurance company will only pay out R100 000. The business will have to pay the additional R20 000 out of its profits.
Over-insuring my item
If the machine is insured for R150 000, the business will pay more premiums than necessary. If the machine breaks down and the business puts in a claim, the insurance company will only pay out the retail value of R120 000.
Changing conditions
Businesses need to update their insurance policies as soon as there is a material change in forecasts or circumstances – otherwise they risk being under- or over-insured. This is especially important for businesses that have selected the business interruption option.
Generally, the higher the level of risk that your business is exposed to, the higher the cost of the premium.
Insurance history gives the new insurers a chance to get to know what sort of client you are. If you have a good insurance history and few claims, you have an increased chance of having cheaper premiums.
It is very important to be honest when disclosing your claims history – if an insurer finds that you were dishonest, you may not be covered when you have a claim.
The obvious factors are your selected sections and amount of cover – more protection means higher premiums. Other major factors include occupation, address and claims history. If other businesses in your occupation or area have had lots of losses in the past, premiums will generally be higher.
If your business has had lots of losses in the past, your premiums will usually be higher. It is very important to be honest when disclosing all of your information – if an insurer finds that you were dishonest, you may not be covered when you have a claim.
It is best to submit the claim form as soon as possible after a loss to ensure that there are no delays or issues, some insurers may request reasons as to why there was a delay in claiming if a form is submitted after 30 days from the date of loss.
