The Office of General Counsel issued the following informal opinion on October 20, 2000, representing the position of the New York State Insurance Department.
Re: Equipment reliability insurance
1a. May an insurance policy insuring against loss of or damage to computer equipment, copy machines, or other equipment that uses electricity be written as boiler and machinery insurance?
1b. May a boiler and machinery insurance policy provide "corrective maintenance coverage," which covers repairs to or replacement of covered equipment as a result of mechanical breakdown?
2. May an insurer licensed to write boiler and machinery insurance issue a policy providing "preventive maintenance coverage," which provides coverage for periodic maintenance?
1a. Yes, a boiler and machinery insurance policy, written pursuant to N.Y. Ins. Law § 1113(a)(9) (McKinney 2000), may insure against loss of or damage to computer equipment, copy machines, or other equipment that uses electricity.
1b. Yes, an insurer licensed to write boiler and machinery insurance may issue a policy providing "corrective maintenance coverage," but only in regard to machinery or other apparatus that is within the scope of N.Y. Ins. Law § 1113(a)(9) (McKinney 2000).
2. Yes, such an insurer may provide "preventive maintenance" coverage, as "necessarily or properly incidental to the kinds of insurance" it is authorized to do, pursuant to N.Y. Ins. Law § 1113(a) (McKinney 2000), but only in regard to machinery or other apparatus that is within the scope of N.Y. Ins. Law § 1113(a)(9) (McKinney 2000).
An insurer is licensed to write boiler and machinery insurance, pursuant to N.Y. Ins. Law § 1113(a)(9) (McKinney 2000). It wishes to offer a policy providing "corrective maintenance" and "preventive maintenance" coverage in regard to certain types of covered equipment, which is specified in the blanket group schedule that is attached to the policy. Examples of the types of equipment included under the blanket group schedule are computer equipment (such as portable computers, digital cameras, modems, mouses, and printers), copy machines, building systems (such as intercoms, sprinkler systems, ventilation or air conditioning equipment, boilers, furnaces, security equipment, telephone systems, etc.), cooking equipment (including broilers, deep fat fryers, ovens and stoves), dishwashers, ice machines, and fax machines. This list is far from a complete listing of what kind of equipment is included on the blanket group schedule, but is representative.
The "corrective maintenance" coverage is defined as "repairs to or replacement of covered equipment because of direct physical loss or damage to the covered equipment, unless otherwise excluded." The policy is intended to cover physical damage caused by animals, negligence, dust, overload conditions, power surges, rapid weather changes, high humidity, etc. The policy does not cover certain specified causes, such as fire, lightning, explosion, flood, war, sprinkler leakage, wear and tear, etc. While the policy covers losses from a myriad of causes, most of them present no insurance issue because they relate to outside causes. However, clearly contemplated under the policy is coverage that could be called "mechanical breakdown" coverage. In other words, there is no requirement of physical damage from an outside cause, such as fire, lightning, flood, and the like to trigger the insurance coverage. Rather, coverage will be provided when the product simply breaks down.
The "preventive maintenance" coverage is defined as "periodic inspection and maintenance to covered equipment in accordance with the manufacturers operating instructions or accepted industry standards, unless otherwise excluded."
N.Y. Ins. Law § 1113(a)(9) (McKinney 2000) defines "boiler and machinery insurance" as follows:
(9) "Boiler and machinery insurance," means insurance against loss of or damage to any property of the insured, resulting from explosion of or injury to:
(A) any boiler, heater or other fired pressure vessel;
(B) any unfired pressure vessel;
(C) pipes or containers connected with any such boilers or vessels;
(D) any engine, turbine, compressor, pump or wheel;
(E) any apparatus generating, transmitting or using electricity;
(F) any other machinery or apparatus connected with or operated by any such boilers, vessels or machines; and including the incidental power to make inspections of, and issue certificates of inspection upon, any such boilers, apparatus, and machinery, whether insured or otherwise.
There are two questions regarding the corrective maintenance coverage. The first is whether the types of property insured are covered under boiler and machinery insurance; and the second is whether the nature of the perils insured against is covered under boiler and machinery insurance.
Preliminarily, the property that sustains the loss or damage may be, but is not required to be, the machinery or apparatus that is the subject of the explosion or injury. In other words, if a boiler blew up, both the boiler and other property that was damaged by the explosion could be covered under a boiler and machinery policy.
Types of property
The first issue is whether the types of property that the insurer proposes to cover comes within the specified types of machinery and apparatus identified in the statute. You state that computers, as well as most of the other equipment that you proposed to cover, are included within the provision "any apparatus generating, transmitting or using electricity."
Traditionally, boiler and machinery coverage has been written only in regard to steam boilers, pipes or containers connected therewith, apparatus for heating or lighting buildings, or other kinds of similar machinery. Computer equipment, cameras, etc. have not been considered to be included under this kind of insurance.
While the 1909 Insurance Law did not label the kinds of insurance, prior to 1939, "boiler and machinery insurance" was commonly known as "steam boiler insurance" and authorized pursuant to NY Insurance Law § 70(7)(a). The first draft of the 1939 Recodification proposed to call the kind of insurance "steam boiler and flywheel insurance", but was quickly renamed to its present name.
The pre-1939 Law did not contain the words "any apparatus generating, transmitting or using electricity". Old Insurance Law § 70(7)(a) specifically provided, in relevant part, for "loss or damage to apparatus for lighting buildings caused by explosion thereof or accidental injury thereto", and the scope of the old law was clearly limited to machinery involved in generating power (except for apparatus for preparing food.) In fact, while coverage for steam boilers also included coverage for pipes or containers connected therewith, there was no similar coverage for systems connected to the lighting apparatus.
None of the early drafts for the Recodification that was ultimately enacted in 1939 contain the words "any apparatus using electricity". The first two drafts in 1935 and 1937 retained the language, albeit more clearly laid out, from Insurance Law § 70(7)(a), as did the version introduced as A-2380 in 1938. (See P.D.I., p. 40, Oct 1935; P.D. 2 Art. 4 § 31, p. 3, March 1936; T.D. 1 Art. IV § 31, p. 5, June 1937; A-2380, March 14, 1938).
However, the section was radically revised in January 1939 into its present form. The Comments to the Final Draft to new section 46(9) noted that "[t]his definition was recommended by the boiler and machinery companies. It is a clarification and improvement over paragraph 9 of the second draft." The second comment reflected an intentional broadening of the types of boilers covered: the language was revised to permit coverage for explosion on low pressure residence boilers, because casualty insurers did not write the coverage extensively and the revised language would permit fire companies to add it to the fire policy by extended coverage endorsement.
While the archaic separation between fire and casualty companies has long been eliminated, we take the above comments and changes to the statutory language as reflecting an intentional broadening of the writing powers under boiler and machinery insurance. While it is not clear that the intent was to extend the writing powers to any kind of equipment that uses electricity, the language of the statute clearly can be read in that manner. Accordingly, it is the opinion of this office that a boiler and machinery insurer may insure any kind of apparatus, including computers, copy machines, etc., that uses electricity.
Nature of peril
The next issue is in regard to the nature of the perils. To the extent that the policy provides coverage for damage to covered equipment resulting from outside physical causes, there is no dispute that a boiler and machinery policy may provide the coverage for such events. The question is whether a boiler and machinery policy may provide coverage for breakdowns of covered equipment that do not occur as the result of some outside event. This has often been referred to as "mechanical breakdown insurance."
In the past, this Department concluded that mechanical breakdown coverage was permissible in regard to motor vehicles and aircraft, pursuant to N.Y. Ins. Law § 1113(a)(19) (McKinney 2000), or as part of an all-risk personal property floater under N.Y. Ins. Law § 1113(a)(7) and (20) (McKinney 2000). The basis for these determinations was the use of the words "loss of or damage resulting from any cause" in regard to motor vehicles and aircraft, and "any kind and all kinds of loss of or damage to, or loss of use of" in regard to the personal property floater.
Similarly, boiler and machinery insurance provides coverage for "loss of or damage to any property of the insured, resulting from explosion of or injury to [specified types of machinery or apparatus]."
While the definition of boiler and machinery insurance doesnt use the words "any cause", the words may reasonably be implied, so long as the loss or damage results from explosion of or injury to the specified types of machinery or apparatus. Because "explosion" would not be the basis for the breakdown covered under the policy, the issue is whether the breakdown of the property results from "injury".
Words in a statute are to be given their ordinary meaning, unless the context compels otherwise. In this case, "injury" may be construed in its ordinary sense, that is, "hurt, damage, or loss sustained." Websters Ninth new Collegiate Dictionary, Merriam Webster, 1991.
Clearly, there is impairment of the usefulness or value of the covered property when the property breaks down. Hence, a literal reading of the statute permits such coverage. It may be further observed that the pre-1939 law required an "accidental injury", which would have precluded mechanical breakdown coverage since there is no "accident" when there is only a breakdown. While the legislative history cited above does not explicitly address this change, the elimination of the adjective may be construed to be a broadening of the statute.
Nor does N.Y. Ins. Law Article 79 (McKinney 2000) preclude an insurer from offering mechanical breakdown coverage, even though the coverage comes within the definition of a service contract within the meaning of Article 79. In allowing motor vehicle insurers, for example, to continue to write mechanical breakdown coverage for motor vehicles, the Department construed the service contract law to be an additional vehicle for providing coverage that did not supersede the pre-existing recognition of such coverage by insurers.
Accordingly, a boiler and machinery insurer may write corrective maintenance insurance coverage in regard to any kind of equipment that is powered by electricity.
The final question is whether the insurer may write the preventive maintenance coverage under the insurance policy. The coverage provides for periodic inspection and maintenance. Essentially, the coverage would be a "maintenance agreement" within the definition contained in N.Y. Ins. Law § 7902(d) (McKinney 2000), that is, "a contract of limited duration that provides for scheduled maintenance of property " Maintenance agreements are not insurance as defined in N.Y. Ins. Law § 1101 (McKinney 2000) in that they do not provide coverage for loss resulting from the happening of a fortuitous event. Maintenance agreements are also expressly excluded from the definition of service contracts under Article 79.
The power to inspect is specifically provided for in the definition of boiler and machinery insurance, as an incidental power of the insurer. Further, in addition to any power specifically conferred under the Insurance Law to engage in any other kind of business than an insurance business, any insurer authorized to do business in this State may engage in other kinds of business to the extent necessarily or properly incidental to the kinds of insurance business it is authorized to do in this State. N.Y. Ins. Law § 1113(a) (McKinney 2000). Because the proper maintenance of covered equipment has a direct bearing on the risk insured against, the preventive maintenance coverage is properly incidental to boiler and machinery insurance. Accordingly, the insurer may provide such coverage, so long as the power to do so is permitted under its corporate charter.
For further information, you may contact Supervising Attorney Paul A. Zuckerman at the New York City Office.