Business Loans

What is Equipment Breakdown Coverage and Do You Need It?

Mar 21, 2023 • 6 min read
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      When financing major equipment for your small business, many lenders may require you to purchase a specific type of insurance that protects the value of your purchase. It’s called equipment breakdown coverage and helps you pay for repairs caused by covered events. Here’s what you need about this type of insurance and why it’s so important. 

      What is equipment breakdown coverage?

      Many businesses rely on equipment to keep operations running smoothly. Whether you run a restaurant with tons of kitchen appliances or a construction business with heavy equipment and machinery, it’s important to keep everything up and running so you can keep your customers happy and your balance sheet healthy.

      Equipment breakdown insurance covers repair costs when certain events occur. If your equipment is financed, your lender may require you to have a policy in place. Even if your equipment is paid in full, this coverage can still be useful. Note that this coverage is separate from your commercial property insurance, which covers only damage due to external factors such as fire or theft.

      When a covered event occurs, you can file a claim to get paid to fix the equipment. There’s usually a limit to how much each piece is covered for, and you may also have to pay a deductible before your coverage kicks in.

      What does equipment breakdown coverage cover?

      Here are common events that are covered in most equipment breakdown insurance policies. 

      Covered incident repairs.

      Your list of covered incidents will likely vary depending on the type of equipment insured. Damage caused by power surges, burnouts, or other mechanical breakdowns are typically covered. And you could also be covered for any related inventory damage because of the breakdown. For instance, if your restaurant’s refrigerator stops working, you could be reimbursed for any food spoilage in addition to the actual repairs.

      Temporary or rush repairs.

      Working equipment is vital to the success of your business. That’s why your policy should also include coverage for rush repairs and temporary fixes. You need to keep operations running, even if it costs more to get a contractor out there the same day. You’ll minimize the financial impact of your equipment breakdown on your broader business. Check policy details to understand any restrictions surrounding rush repairs. 

      Lost business income.

      There are many requirements your claim must meet in order to be eligible for lost business income coverage. But it’s an important component that’s usually included in this type of insurance policy. 

      The idea is to get reimbursed for any revenue you couldn’t collect because of an equipment breakdown. There must be a direct and well-documented correlation between the loss of income and damage to your equipment. There may also be a minimum interruption period you must get through before your policy goes into effect.

      Property damage liability.

      Liability coverage is a must for any business and your equipment coverage insurance should have a property damage clause. This provides reimbursement for anyone else’s property that is damaged related to the equipment breakdown. 

      Mandatory inspections

      Another benefit of equipment breakdown insurance is that your policy may cover mandatory inspections. The goal is to identify issues before they arise, ultimately saving you (and your insurance company) money.

      What equipment breakdown insurance does NOT cover.

      Not all issues are covered by an equipment breakdown insurance policy. Here’s what won’t be covered, so you can plan accordingly.

      • Damage from everyday wear and tear – Breakdown due to age or lack of maintenance is not included in most policies. 
      • Software or data Software-related malfunctions, even if purchased with equipment financing or equipment leasing, are not included in your coverage. You’ll need separate business insurance to cover cyber attacks and any other issues related to software.
      • Repairs beyond coverage limit Your policy will come with a limit to how much you can claim with each covered event. It’s typically based on the value of the equipment (or a percentage of that value).
      • Deductible or coinsurance Your insurance policy may come with a deductible, co-insurance, or both. A deductible is the amount you’re responsible for with each claim before your coverage kicks in. Some policies may also include coinsurance, which is a percentage of the repair costs that you’re responsible for.

      How to use equipment breakdown insurance with equipment financing.

      Most lenders require that you get an equipment breakdown policy whenever you finance your equipment. It’s a smart financial safety net that keeps your important assets covered so you can avoid setbacks to your business when issues arise. As you explore adding more equipment to your business, remember this added cost of insurance as well. Preparation is always the key to success.

      Learn more about how equipment financing can help grow your business with Lendio.

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      About the author
      Lauren Ward

      Lauren Ward is a personal finance and tech writer with a passion to help consumers make smart financial decisions. Her work has appeared in a variety of publications, including Time and MSN. When she's not writing, she loves gardening and playing board games with her family.

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