Electronic Equipment Insurance

Münchener RückMunich Re

Electronic Equipment Insurance

A publication of the Munich Reinsurance Company

This publication was conceived, written and realized in terms of both graphic design and typography exclusively by Munich Re staff.

© 1997Münchener Rückversicherungs-GesellschaftAddress for letters:D-80791 MünchenGermany

http://www.munichre.com

Order number 0025-E-e/156.2

The paper used for this brochure was produced without chlorine bleaching.

Introduction

Electronic equipment insurance inGermany dates back to the 1920s. Low-voltage insurance, as it was knownoriginally, covered almost exclusivelytelecommunications equipment, such astelephones and teleprinters.

In the 1950s, electronic engineering ingeneral underwent a rapid expansion,especially in the fields of industrialelectronics, medical technology andcommunications, due to the increaseduse of semiconductors, which are bothversatile and economical. Developmentsin electronic data processing systemsare particularly worth mentioning, for theoriginally simple valve devices grew into“third-generation giants” with integratedsemiconductor circuits which presentedcompletely new problems for engineeringinsurance.

The equipment to be insured in this classof business has been determined by therapid pace of development in electronicsystems since 1980 and it was renamed“electronic equipment insurance” at thebeginning of 1985 to take account of thisdevelopment in Germany.

New insurance terms and conditionswere drawn up to make allowance for thenew risk factors (high concentration ofvalues within a very small area; sus-ceptibility to such environmental factorsas temperature, humidity and dust;interruptions in the power supply, etc).

Munich Re aims to assist its cedingcompanies in all questions relating to thisimportant class of business. With a largestaff of qualified engineers specialized inall technical fields, Munich Re can offer acomprehensive service as regards ac-quisition, claims assessment and settle-ment, as well as loss prevention. Inaddition, Munich Re can draw on theservices of materials testing and lossresearch institutes with decades ofexperience in this field when advising itsceding companies on matters of lossprevention and minimization, as well asclaims assessment and settlement.

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The measuring coil of a magnetic resonancetomograph was destroyed as a result ofcarelessness by a fitter. A screwdriver which thefitter was carrying loosely was attracted by themagnetic force and hurled against the measuring coilwith great impact when he came too close to themagnet.

1 What can be insured?

1.1 Material damage cover underelectronic equipment insurance may betaken out for all electronic systems, suchas:

a Electronic data processing systemsused in research and development,commercial computer centres, ad-ministration and industry (includingcomputers for monitoring and control of manufacturing plants)

Data processing systems are made up ofa central processing unit and peripheralunits.

The central processing unit comprises:

– an arithmetic unit to processarithmetical operations,

– a control unit to interpret and monitorthe programs,

– a working memory for programs andthe data to be processed.

The peripheral devices include input andoutput units, as well as storage devices.They are connected to the central proc-essing unit. Where storage devices areconcerned, a distinction is normallymade between disk, chip and magnetictape storage devices.

In a broader sense, electronic data proc-essing equipment also includes suchexternal data media as magnetic tapes.These are treated separately for insur-ance purposes.

b Medical equipment for diagnostic andtherapeutic purposes

All electrical and nuclear equipment inhospitals, medical and dental practicesand medical laboratories, including, forexample, X-ray units, computer tomo-graphs, ultrasound and endoscopic units,magnetic resonance tomographs, lasersand radiotherapy equipment

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Inside view of a modern computer service centrewith a very high concentration of values within a verysmall area.

c Telecommunications systems

Telephone systems, text, data, imageand video transmission systems, includ-ing switching systems, eg telephoneexchanges and sets, facsimile andvideophone units, directional and mobileradio equipment, ground-based equip-ment for air navigation and satellite radio,commercial radio and televisiontransmitters, CATV systems

d Other equipment

Equipment in film, radio and televisionstudios, measurement and test

equipment, machines for producingprinted matter, burglar alarm and firealarm systems, electronic point-of-saleterminals and scales, cash dispensingmachines, traffic control systems, attend-ance and access recording systems, etc.

1.2 All external data media for com-puter systems can be insured under“Data media insurance”. These mediainclude detachable optical, magnetic andelectronic storage media, such as floppydisks, magnetic tapes and magneticdisks. The insurance covers damage toor destruction of the data media and

the cost of recovering the programs anddata stored on these media.

1.3 Additional expenses incurredbecause the insured’s equipment breaksdown and external equipment has to behired can be insured under “Increasedcost of working insurance”. Data mediainsurance and increased cost of workinginsurance are normally only granted inconjunction with material damage coverunder electronic equipment insurance.

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Transmitter and receiver for mobiletelecommunications (cellular net).

2 Who can obtain insurance?

The insured party can be anyone whoowns or rents an electronic system.

On the basis of the insurance conditions,the insurance protects

a the owner

– as the operator

against material damage for which themanufacturer is not responsible under awarranty;

– as the lessor of the insured equipment

against material damage for which thelessee is exempt from liability and cannotbe held responsible;

– as the company servicing the insuredequipment

against material damage caused byservice personnel when working on theinsured equipment;

b the lessee

against material damage for which he isresponsible either by law or under therental agreement.

Hired equipment can be insured in threedifferent ways: either the lessee insuresthe hired equipment independently of therental agreement or he concludes a com-bined rental and insurance agreementwhich is arranged by the lessor togetherwith the insurer. The third possibility is toconclude a floating policy between lessorand insurer which covers all the leasedequipment.

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The methods used in medical technology fordiagnosis and therapy are becoming increasinglycomplex. It is not uncommon for a single system,such as a high-performance computer tomograph, tobe worth more than DM 2 million.

Multi-functional point-of-sale (POS) terminal withintegrated barcode reader and various credit cardreaders.

Electron microscope, eg for materials testing in thelaboratory.

3 Scope of cover

3.1 Normal extent of cover

Electronic equipment insurance isessentially an accident insurance on an all-risks basis and therefore coverslosses which arise suddenly andunforeseeably. The loss must have amaterial effect on the insured item and

necessitate either repair or replacement.The vast majority of electronic equipmentinsurance claims are based on lossesdue to the following causes:

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The trend towards increasingly large-scaleintegration in conjunction with ever lower operatingvoltages is continuing and has led to a growingnumber and magnitude of losses involving delicateelectronic systems which are struck by lightning andovervoltages.

Breakdown of loss settlements according to causesin medical and data technology (1982–1991).

Miscellaneous

Theft

Overvoltage

Fire

Water

Negligence

100 %

80 %

60 %

40 %

20 %

0 %

Medical tech- Data technologynology

30,7 %

7,5 %

7 %

54,8 %

21,6 %

5,4 %

33,4 %

11,2 %

6,4 %

22 %

Fire, lightning, explosion, crashingaircraft

Together with the damage due to smoke,soot and extinguishing agents, mostaccidents due to these causes result in a total loss. If these risks are alreadycovererd by a fire insurance policy, gapsin the insurance cover can be avoided bytaking out electronic equipment insur-ance as well.

Smoke, soot, corrosive gases

Even if these agents intrude fromoutside, ie are not due to a fire within theplant, they can still cause extensivedamage since they usually affect theentire plant.

Water and moisture

This includes every type of moisture aslong as it is not due to normal atmos-pheric conditions or an inherent part of normal operation. Electrical andparticularly electronic equipment ishighly susceptible to every kind ofmoisture.

The possibilities range from falling drops of condensation to a floodingcatastrophe.

Defective air-conditioning

Defective air-conditioning can causeserious damage. Compliance withprecise temperature limits, humidityconditions and purity of the air isessential for many applications.

Short-circuits and other electricalcauses

Electrical and electronic equipment cansuffer very serious damage as a result ofshort-circuiting, overvoltage, defectiveinsulation, travelling surges caused byindirect lightning, magnetism, induction,implosion, etc.

Design, analysis, manufacturing, as-sembly and erection faults, defects incasting and materials, workshop er-rors and bad workmanship

These shortcomings are frequently onlydiscovered during operation, when themanufacturer’s liability has long sinceexpired and there is no possibility ofrecourse. Moreover, they cannot alwaysbe avoided, not even with the best testmethods.

Operating errors, clumsiness, negligence

These causes account for theoverwhelming majority of losses.Roughly half the total indemnity paidunder electronic equipment insurance isfor losses due to one of these causes.

Malicious acts, burglary and theft, wilful intent of third parties

Intentional damage by third partiescannot be prevented, not even byextensive precautions, and can causeconsiderable losses.

Hail, frost, storm

The significance of these risks is fre-quently underestimated, althoughspectacular losses do occur from time to time. Outdoor installations with largesurfaces which are vulnerable to strongwinds are particularly at risk.

Subsidence, landslide, rockslide,avalanche

Losses attributable to these risksgenerally only occur in particular regions.The inclusion of these perils emphasizesthe “all risks” nature of electronic equip-ment insurance.

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In many cases, it is more economical to restore thedamaged equipment or parts than to replace it, ifthat is not in fact impossible. This circuit board hasbeen successfully restored.

3.2 Excluded hazards

The individual exclusions from cover arelisted in the policy and essentially com-prise loss or damage due to

– wear and tear as a result of ordinaryuse or operation as well as corrosion (eg rust) and continuous operationalinfluences. However, this exclusionnormally only refers to the parts im-mediately affected; consequentialdamage to other parts of the machine is covered;

– war or warlike operations and civilcommotion of any kind;

– wilful intent or gross negligence on thepart of the insured or of his plantmanagement;

– faults or defects for which a third party(manufacturer, supplier) is liable either bylaw or under contract (losses covered bywarranty);

– losses due to failure or interruption ofgas, water or electricity services (certainexceptions can be agreed in specialcases).

Expenses incurred for maintenance workare not indemnifiable.

The following are also excluded fromindemnification:

– aesthetic defects, eg scratches on apolished, painted or varnished surface;

– consequential losses andconsequential liability of every kind(except for the increased cost of workinginsurance for computer systemsmentioned in section 1.3).

3.3 Additional cover

The standard insurance cover can beextended by special endorsements toinclude further hazards and certainrelated costs, namely:

Earthquake, volcanic eruption, typhoon, hurricane and cyclone

A limit of liability should be specifiedseparately per accident on account ofthe high risk of accumulation here.

Strike and riot

Here too, it is advisable to specify a limitof liability for the same reason.

Transportation risk

This covers mobile equipment duringtemporary relocations or occasionalmoves which become necessary for useof the equipment.

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This computer system was destroyed by arson(sabotage).

Air-conditioning risk

This extension of cover applies toelectronic equipment requiring a con-trolled environment (precise temperaturelimits, certain humidity levels and purityof the air) when a loss is caused byindemnifiable damage to the air-condi-tioner. The air-conditioner must beincluded in the electronic equipmentinsurance so that the conditions for in-demnification are the same as for theelectronic equipment itself.

Theft

25 % of the loss due to theft or a fixedminimum amount must be borne by theinsured as a deductible in the case oflosses due to theft.

Additional expenses

Extra charges for airfreight, expressfreight, overtime and work on Sundaysand public holidays can be included inthe insurance for an additional premium.

This additional cover is strongly recom-mended for businesses which rely heavilyon computers or other electronic sys-tems (eg telecommunications systems).

A deductible of 10 % and a limit com-mensurate with each individual caseshould be agreed with the insured for the cost of airfreight.

4 Sum insured

The sum insured must always be thenew replacement value of the insuredelectronic equipment (value of the newitem plus customs duties, transportationand installation charges), the reasonsbeing as follows: If repairs are carried out – and nearly all claims are for repairs– old parts are replaced by new ones.This often leads to a substantial increasein the value of equipment, especiallywhen old. Due to the “new replacementvalue” principle, however, this is nottaken into account when fixing theindemnity. In other words, the insured isindemnified in respect of the total cost ofrepairs without allowance being made fordepreciation.

If the values are subject to change, forinstance due to price rises, the insuredmust notify the insurer of such changesso that the sums insured can be adjustedaccordingly, thus avoiding underinsur-ance. Additional items must also beincluded in the insurance as soon aspossible after being purchased.

In view of present economic trends, it isimperative for insurers to adjust the in-surance premiums in line with wage andprice increases in order to prevent thereal value of the premium incomedecreasing with inflation. It is normallynot sufficient to adapt the sums insuredto the higher replacement values, as thiswould only make allowance for changesin manufacturers’ prices without takinginto account the increases in repaircharges which constitute a major part ofthe claims. Experience has shown thatthe labour-intensive repair charges inparticular increase at a faster rate thanthe manufacturers’ prices which fre-quently depend on the market. As inmachinery insurance, this is somethingwhich could be taken into accountthrough an index clause. It should alsobe possible to adjust fixed deductibles byendorsement as required followingchanges in wages and prices.

The indemnity payable per year is limitedto the sum insured and decreases ac-cordingly following a loss. To avoidunderinsurance in another accident inthe same year, the sum insured will bereinstated automatically on payment ofan additional premium.

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The short-circuit on this circuit board studded withsemiconductors was caused by overvoltage.

5 Premium rates

The premium rates are fixed on the basisof directives which apply for normal riskswithout special hazards. Customizedversions and new types of equipmentintroduced on the market will be ratedindividually according to their attendanthazards.

For hired equipment, the premium isfixed according to the extent of liabilityspecified in the rental agreement. It isadvisable for the insurer to obtain a copyof the rental agreement, as the extent ofliability can vary considerably from onecase to the next, and can range fromcomprehensive liability for all risks toabsolute exemption from liability.

Air-conditioning and power supplyequipment which is used exclusively forthe insured electronic systems can beinsured with the latter at the samepremium rate.

6 Basis of indemnification

Under electronic equipment insurance,the insured is usually indemnified bypayment of the expenses incurred forrepair of the damage; in rare cases, thedamaged equipment can be repaired orreplaced directly by the insurer. A dis-tinction must be made here betweenlosses to be repaired and total losses.

– If the damage can be repaired, theinsurer will indemnify the insured inrespect of the costs incurred to restorethe equipment to its working conditionprior to the damage. These include thecost of repair work including all requiredreplacement parts, the cost of disassem-bly and reassembly, ordinary freight costs,specialists’ fees, customs duties andother charges included in the sum insured.

Extra charges for overtime, expressfreight and airfreight are indemnified ifexplicitly included in the insurance,except for the agreed deductible.

No allowance is made for depreciation.In other words, the indemnity is notreduced by any increase in the value ofthe equipment due to the repairs whichbenefits the insured.

– If the equipment is destroyed totally,the indemnity is normally based on theactual value of the insured item on theday on which the loss occurred. A totalloss is also assumed if the estimatedrepair costs are equal to or higher thanthe actual cash value of the equipment.

The value of any scrap or useful parts isdeducted from the amount of indemnity.

The cost of overhauling the insuredequipment is not indemnifiable. Thesame also applies for any modificationsundertaken on the equipment in thecourse of repair.

Expenses for provisional repairs areindemnified if they do not lead to anincrease in the total repair costs. If thesum insured is found to be lower than theinsured value following an indemnifiableloss, the indemnity payable is reduced inproportion to the percentage of under-insurance.

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The ground-floor transmission unit of a broadcastingstation was flooded and rendered unserviceable bythe entrained sludge.

7 Minimum deductible

Due to the large number of minor lossessuffered by electronic systems, theinsured must accept a minimum de-ductible on every loss in order to keeppremium rates at an economicallyacceptable level. A reduction in thepremium payable can be obtained byagreeing to a higher deductible.

8 Special types of supplementaryinsurance

8.1 External data media insurance

Unlike internal data media, such as harddisks, the number of external data mediaincreases constantly during the servicelife of a computer system. This hasconsequently made it necessary toinsure not only the data media them-selves, but also their data.

Data media insurance covers both thematerial value of the data media and thecost of reprocessing and restoring theirdata. Payment of the indemnity iscontingent on a loss or damage to theinsured’s data media, whether inside oroutside the computer equipment,provided that it is caused by an accidentindemnifiable under the terms of thematerial damage insurance. Damage todata media due to incorrect program-ming, insertion or labelling andaccidental deletion or disposal is notcovered, nor is the loss of data due tothe effects of magnetic fields ormanipulation of the program or data(computer viruses).

The sum insured should correspond tothe material value of the insured datamedia and the expected cost of restoringthe data. This is fixed on a first lossbasis.

Calculation of the premium rate for datamedia insurance requires a detailedknowledge of the particulars of each risk,as with the material damage electronicequipment insurance cover.

Special consideration must be given tothe following precautions by the insuredto prevent or reduce losses:

– Backup of all data media, or at leastthose containing important information(eg individual programs).

– Originals and duplicates should bestored separately and in fire-proof steelcabinets so that they are not bothdestroyed in the event of an accident.

Damaged data media are indemnified onthe basis of records of the expensesincurred, as in the material damageinsurance, but only up to the agreed limitof indemnity. Underinsurance is excludedby the conditions.

A minimum deductible to be borne by theinsured is agreed as for the materialdamage insurance.

Except in the case of rented equipment,data media insurance can only be con-cluded in conjunction with electronicequipment insurance. This does notapply for rented equipment if the lessorhas granted exemption from liability or ifinsurance has already been concludedby the lessor on his own or the lessee’sbehalf.

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This magnetic tape containing over 20 million “bits” of information was destroyed by the heat froma fire. Data media insurance covers the material cost of the data medium, as well as the cost of res-toring the data it contained.

8.2 Increased cost of workinginsurance

If electronic systems break down formore than just a brief stoppage, this canlead to serious disruption and con-siderable loss of turnover. Extendedstoppages can threaten the very exist-ence of a company, particularly if thecomputer system is the basic source ofincome. Banks, insurance companies,building societies, mail order companies,travel agencies and tourist services,hotel chains and factories with apronounced mass production (egcarmakers) all depend on their dataprocessing systems today. In countries in which electronic data processing issufficiently widespread, the requiredcomputer capacity can generally be ob-tained by hiring equipment in the event of a breakdown, although this incursadditional expenses in the form of rentalfees, costs for transporting data media,travel expenses for personnel andpossibly the cost of outside accom-modation, night work and work on public

holidays, etc, in other words, theincreased costs of working which havegiven this insurance its name.

Unlike the replacement costs for datamedia, the extra costs incurred while theequipment is unavailable can be cal-culated fairly accurately in advance ifcorresponding agreements have beenconcluded with external service com-panies. The total increased cost ofworking payable in one year constitutesthe annual sum insured for increasedcost of working insurance and forms thebasis underlying the premium rates. Themagnitude of the premium rates dependson the agreed time excess borne by theinsured and the maximum indemnityperiod. The time excess is expressed indays and normally lies between two andtwenty days for increased cost of workinginsurance.

Shorter indemnity periods of nine, six,three or less months, for example, and alonger time excess carry correspondinglylower premium rates which, however,continue to be expressed in terms of theannual sum insured although this is nolonger identical with the limit of indem-nity. Upon expiry of the time excess, theincreased costs will be indemnified forevery day affected up to the amount ofthe agreed daily indemnity and until theend of the indemnity period.

These costs, ie the additional costsincurred over time, are consequentlycovered by increased cost of workinginsurance. However, the insurance canalso be extended on request to covercosts which do not depend on the periodof unavailability, ie additional costs forprogram modifications regardless oftime.

Except in the case of hired equipment,increased cost of working insurance canonly be concluded in conjunction withelectronic equipment insurance.

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Many companies can choose alternatives to avoidan imminent stoppage following an accident. Thecosts incurred for such emergency actions arecovered by the increased cost of working insurance.

Business interruption?

Normal operation Normal operation

Occurrence of the accident Damage repaired

9 Loss prevention

The saying that “prevention is better thana cure” unquestionably and unreservedlyalso applies to electronic equipmentinsurance. The manufacturer of theequipment, the insured, the insurer andthe reinsurer are all equally responsiblefor preventing losses.

Very few losses are due to causes insidethe equipment itself; most of the hazardshave their origin outside the equipmentand include, for example, incorrectoperation, malicious damage, lightningstrokes and overvoltage, fire and waterdamage, defective air-conditioning, etc.

The most important precautionarymeasures to be taken are therefore:

– structural precautions,eg fire compartments, lightning pro-tection, drainage systems, separate air-conditioning systems;

– organizational precautions,eg access control, maintenance,thorough training for the operatingpersonnel, plan of action following anaccident;

– technical precautions,eg overvoltage protection, uninterruptiblepower supply, automatic cutouts.

The risks prevailing on site and duringoperation of electrical and electronicequipment should be verified by expertinspection for the purpose of risk assess-ment. Such a “risk analysis” can revealthe weak points and circumstancescapable of increasing the danger so thatthe insured can take action to reduce theprobability of an accident and the insurercan assess the risk appropriately.

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This machine for producing semiconductors wasexposed to soot and corrosive acid vapours after afire. A total loss due to corrosion will be unavoidableif the acid vapours are not removed immediately.

Source of illustrations:

Allianz (8); IBM (4); Jarltech (6); Joksch (5); Kathrein-Werke (5); Munich Re (7, 12, 13); Philips (6);Relectronic-Remech (14); Tela (3, 7, 9, 10); Union Sumitomo (11).