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Electronic Equipment

Insurance

Münchener Rück
Munich 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.

© 1997
Münchener Rückversicherungs-Gesellschaft
Address for letters:
D-80791 München
Germany

http://www.munichre.com

Order number 0025-E-e/156.2

The paper used for this brochure was


produced without chlorine bleaching.
Introduction Munich Re aims to assist its ceding
companies in all questions relating to this
Electronic equipment insurance in important class of business. With a large
Germany dates back to the 1920s. Low- staff of qualified engineers specialized in
voltage insurance, as it was known all technical fields, Munich Re can offer a
originally, covered almost exclusively comprehensive service as regards ac-
telecommunications equipment, such as quisition, claims assessment and settle-
telephones and teleprinters. ment, as well as loss prevention. In
addition, Munich Re can draw on the
In the 1950s, electronic engineering in services of materials testing and loss
general underwent a rapid expansion, research institutes with decades of
especially in the fields of industrial experience in this field when advising its
The measuring coil of a magnetic resonance
tomograph was destroyed as a result of electronics, medical technology and ceding companies on matters of loss
carelessness by a fitter. A screwdriver which the communications, due to the increased prevention and minimization, as well as
fitter was carrying loosely was attracted by the use of semiconductors, which are both claims assessment and settlement.
magnetic force and hurled against the measuring coil
with great impact when he came too close to the versatile and economical. Developments
magnet. in electronic data processing systems
are particularly worth mentioning, for the
originally simple valve devices grew into
“third-generation giants” with integrated
semiconductor circuits which presented
completely new problems for engineering
insurance.

The equipment to be insured in this class


of business has been determined by the
rapid pace of development in electronic
systems since 1980 and it was renamed
“electronic equipment insurance” at the
beginning of 1985 to take account of this
development in Germany.

New insurance terms and conditions


were drawn up to make allowance for the
new risk factors (high concentration of
values within a very small area; sus-
ceptibility to such environmental factors
as temperature, humidity and dust;
interruptions in the power supply, etc).

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1 What can be insured? – a control unit to interpret and monitor
the programs,
1.1 Material damage cover under
electronic equipment insurance may be – a working memory for programs and
taken out for all electronic systems, such the data to be processed.
as:
The peripheral devices include input and
a Electronic data processing systems output units, as well as storage devices.
used in research and development, They are connected to the central proc-
commercial computer centres, ad- essing unit. Where storage devices are
ministration and industry (including concerned, a distinction is normally
computers for monitoring and control made between disk, chip and magnetic
of manufacturing plants) tape storage devices.

Data processing systems are made up of In a broader sense, electronic data proc-
a central processing unit and peripheral essing equipment also includes such
units. external data media as magnetic tapes.
These are treated separately for insur-
The central processing unit comprises: ance purposes.

– an arithmetic unit to process


arithmetical operations,

Inside view of a modern computer service centre b Medical equipment for diagnostic and
with a very high concentration of values within a very therapeutic purposes
small area.

All electrical and nuclear equipment in


hospitals, medical and dental practices
and medical laboratories, including, for
example, X-ray units, computer tomo-
graphs, ultrasound and endoscopic units,
magnetic resonance tomographs, lasers
and radiotherapy equipment

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Transmitter and receiver for mobile
telecommunications (cellular net).

c Telecommunications systems equipment, machines for producing the cost of recovering the programs and
printed matter, burglar alarm and fire data stored on these media.
Telephone systems, text, data, image alarm systems, electronic point-of-sale
and video transmission systems, includ- terminals and scales, cash dispensing 1.3 Additional expenses incurred
ing switching systems, eg telephone machines, traffic control systems, attend- because the insured’s equipment breaks
exchanges and sets, facsimile and ance and access recording systems, etc. down and external equipment has to be
videophone units, directional and mobile hired can be insured under “Increased
radio equipment, ground-based equip- 1.2 All external data media for com- cost of working insurance”. Data media
ment for air navigation and satellite radio, puter systems can be insured under insurance and increased cost of working
commercial radio and television “Data media insurance”. These media insurance are normally only granted in
transmitters, CATV systems include detachable optical, magnetic and conjunction with material damage cover
electronic storage media, such as floppy under electronic equipment insurance.
d Other equipment disks, magnetic tapes and magnetic
disks. The insurance covers damage to
Equipment in film, radio and television or destruction of the data media and
studios, measurement and test

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2 Who can obtain insurance? Electron microscope, eg for materials testing in the
laboratory.

The insured party can be anyone who


owns 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 the


manufacturer is not responsible under a
warranty;

– as the lessor of the insured equipment


Multi-functional point-of-sale (POS) terminal with
against material damage for which the integrated barcode reader and various credit card
readers.
lessee is exempt from liability and cannot
be held responsible;

– as the company servicing the insured


equipment

against material damage caused by


service personnel when working on the
insured equipment;

b the lessee

against material damage for which he is


responsible either by law or under the
rental agreement.

Hired equipment can be insured in three


different ways: either the lessee insures
the hired equipment independently of the
rental agreement or he concludes a com-
bined rental and insurance agreement
which is arranged by the lessor together
with the insurer. The third possibility is to
conclude a floating policy between lessor
and insurer which covers all the leased
equipment.

The methods used in medical technology for


diagnosis and therapy are becoming increasingly
complex. It is not uncommon for a single system,
such as a high-performance computer tomograph, to
be worth more than DM 2 million.

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3 Scope of cover necessitate either repair or replacement.
The vast majority of electronic equipment
3.1 Normal extent of cover insurance claims are based on losses
due to the following causes:
Electronic equipment insurance is
essentially an accident insurance on
an all-risks basis and therefore covers
losses which arise suddenly and
unforeseeably. The loss must have a
material effect on the insured item and

The trend towards increasingly large-scale


integration in conjunction with ever lower operating
voltages is continuing and has led to a growing
number and magnitude of losses involving delicate
electronic systems which are struck by lightning and
overvoltages.

100 %

21,6 %
30,7 %
80 %
5,4 %

7%

60 % 7,5 %
33,4 %

40 %
11,2 %
Miscellaneous 54,8 %
6,4 %
Theft 20 %
Overvoltage 22 %
Fire
0%
Water Breakdown of loss settlements according to causes
Medical tech- Data technology in medical and data technology
Negligence nology (1982–1991).

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In many cases, it is more economical to restore the
damaged equipment or parts than to replace it, if
that is not in fact impossible. This circuit board has
been successfully restored.

Fire, lightning, explosion, crashing Defective air-conditioning Operating errors, clumsiness,


aircraft negligence
Defective air-conditioning can cause
Together with the damage due to smoke, serious damage. Compliance with These causes account for the
soot and extinguishing agents, most precise temperature limits, humidity overwhelming majority of losses.
accidents due to these causes result in conditions and purity of the air is Roughly half the total indemnity paid
a total loss. If these risks are already essential for many applications. under electronic equipment insurance is
covererd by a fire insurance policy, gaps for losses due to one of these causes.
in the insurance cover can be avoided by Short-circuits and other electrical
taking out electronic equipment insur- causes Malicious acts, burglary and theft,
ance as well. wilful intent of third parties
Electrical and electronic equipment can
Smoke, soot, corrosive gases suffer very serious damage as a result of Intentional damage by third parties
short-circuiting, overvoltage, defective cannot be prevented, not even by
Even if these agents intrude from insulation, travelling surges caused by extensive precautions, and can cause
outside, ie are not due to a fire within the indirect lightning, magnetism, induction, considerable losses.
plant, they can still cause extensive implosion, etc.
damage since they usually affect the Hail, frost, storm
entire plant. Design, analysis, manufacturing, as-
sembly and erection faults, defects in The significance of these risks is fre-
Water and moisture casting and materials, workshop er- quently underestimated, although
rors and bad workmanship spectacular losses do occur from time
This includes every type of moisture as to time. Outdoor installations with large
long as it is not due to normal atmos- These shortcomings are frequently only surfaces which are vulnerable to strong
pheric conditions or an inherent part discovered during operation, when the winds are particularly at risk.
of normal operation. Electrical and manufacturer’s liability has long since
particularly electronic equipment is expired and there is no possibility of Subsidence, landslide, rockslide,
highly susceptible to every kind of recourse. Moreover, they cannot always avalanche
moisture. be avoided, not even with the best test
methods. Losses attributable to these risks
The possibilities range from falling generally only occur in particular regions.
drops of condensation to a flooding The inclusion of these perils emphasizes
catastrophe. the “all risks” nature of electronic equip-
ment insurance.

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This computer system was destroyed by arson
(sabotage).

3.2 Excluded hazards Expenses incurred for maintenance work 3.3 Additional cover
are not indemnifiable.
The individual exclusions from cover are The standard insurance cover can be
listed in the policy and essentially com- The following are also excluded from extended by special endorsements to
prise loss or damage due to indemnification: include further hazards and certain
related costs, namely:
– wear and tear as a result of ordinary – aesthetic defects, eg scratches on a
use or operation as well as corrosion polished, painted or varnished surface; Earthquake, volcanic eruption,
(eg rust) and continuous operational typhoon, hurricane and cyclone
influences. However, this exclusion – consequential losses and
normally only refers to the parts im- consequential liability of every kind A limit of liability should be specified
mediately affected; consequential (except for the increased cost of working separately per accident on account of
damage to other parts of the machine insurance for computer systems the high risk of accumulation here.
is covered; mentioned in section 1.3).
Strike and riot
– war or warlike operations and civil
commotion of any kind; Here too, it is advisable to specify a limit
of liability for the same reason.
– wilful intent or gross negligence on the
part of the insured or of his plant Transportation risk
management;
This covers mobile equipment during
– faults or defects for which a third party temporary relocations or occasional
(manufacturer, supplier) is liable either by moves which become necessary for use
law or under contract (losses covered by of the equipment.
warranty);

– losses due to failure or interruption of


gas, water or electricity services (certain
exceptions can be agreed in special
cases).

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Air-conditioning risk 4 Sum insured The indemnity payable per year is limited
to the sum insured and decreases ac-
This extension of cover applies to The sum insured must always be the cordingly following a loss. To avoid
electronic equipment requiring a con- new replacement value of the insured underinsurance in another accident in
trolled environment (precise temperature electronic equipment (value of the new the same year, the sum insured will be
limits, certain humidity levels and purity item plus customs duties, transportation reinstated automatically on payment of
of the air) when a loss is caused by and installation charges), the reasons an additional premium.
indemnifiable damage to the air-condi- being as follows: If repairs are carried
tioner. The air-conditioner must be out – and nearly all claims are for repairs
included in the electronic equipment – old parts are replaced by new ones.
insurance so that the conditions for in- This often leads to a substantial increase
demnification are the same as for the in the value of equipment, especially
electronic equipment itself. when old. Due to the “new replacement
value” principle, however, this is not
Theft taken into account when fixing the
indemnity. In other words, the insured is
25 % of the loss due to theft or a fixed indemnified in respect of the total cost of
minimum amount must be borne by the repairs without allowance being made for
insured as a deductible in the case of depreciation.
losses due to theft.
If the values are subject to change, for
Additional expenses instance due to price rises, the insured
must notify the insurer of such changes
Extra charges for airfreight, express so that the sums insured can be adjusted
freight, overtime and work on Sundays accordingly, thus avoiding underinsur-
and public holidays can be included in ance. Additional items must also be
the insurance for an additional premium. included in the insurance as soon as
possible after being purchased.
This additional cover is strongly recom-
mended for businesses which rely heavily In view of present economic trends, it is
on computers or other electronic sys- imperative for insurers to adjust the in-
tems (eg telecommunications systems). surance premiums in line with wage and
price increases in order to prevent the
A deductible of 10 % and a limit com- real value of the premium income
mensurate with each individual case decreasing with inflation. It is normally
should be agreed with the insured for not sufficient to adapt the sums insured
the cost of airfreight. to the higher replacement values, as this
would only make allowance for changes
in manufacturers’ prices without taking
into account the increases in repair
charges which constitute a major part of
the claims. Experience has shown that
the labour-intensive repair charges in The short-circuit on this circuit board studded with
particular increase at a faster rate than semiconductors was caused by overvoltage.
the manufacturers’ prices which fre-
quently depend on the market. As in
machinery insurance, this is something
which could be taken into account
through an index clause. It should also
be possible to adjust fixed deductibles by
endorsement as required following
changes in wages and prices.

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5 Premium rates 6 Basis of indemnification

The premium rates are fixed on the basis Under electronic equipment insurance,
of directives which apply for normal risks the insured is usually indemnified by
without special hazards. Customized payment of the expenses incurred for
versions and new types of equipment repair of the damage; in rare cases, the
introduced on the market will be rated damaged equipment can be repaired or
individually according to their attendant replaced directly by the insurer. A dis-
hazards. tinction must be made here between
losses to be repaired and total losses.
For hired equipment, the premium is
fixed according to the extent of liability – If the damage can be repaired, the
specified in the rental agreement. It is insurer will indemnify the insured in
advisable for the insurer to obtain a copy respect of the costs incurred to restore
of the rental agreement, as the extent of the equipment to its working condition
liability can vary considerably from one prior to the damage. These include the
case to the next, and can range from cost of repair work including all required
comprehensive liability for all risks to replacement parts, the cost of disassem-
absolute exemption from liability. bly and reassembly, ordinary freight costs,
specialists’ fees, customs duties and
Air-conditioning and power supply other charges included in the sum insured.
equipment which is used exclusively for
the insured electronic systems can be Extra charges for overtime, express
insured with the latter at the same freight and airfreight are indemnified if
premium rate. explicitly included in the insurance,
except for the agreed deductible.

No allowance is made for depreciation.


In other words, the indemnity is not
reduced by any increase in the value of
the equipment due to the repairs which
benefits the insured.

– If the equipment is destroyed totally,


the indemnity is normally based on the
actual value of the insured item on the
day on which the loss occurred. A total
loss is also assumed if the estimated
repair costs are equal to or higher than The ground-floor transmission unit of a broadcasting
the actual cash value of the equipment. station was flooded and rendered unserviceable by
the entrained sludge.

The value of any scrap or useful parts is


deducted from the amount of indemnity.

The cost of overhauling the insured Expenses for provisional repairs are
equipment is not indemnifiable. The indemnified if they do not lead to an
same also applies for any modifications increase in the total repair costs. If the
undertaken on the equipment in the sum insured is found to be lower than the
course of repair. insured value following an indemnifiable
loss, the indemnity payable is reduced in
proportion to the percentage of under-
insurance.

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7 Minimum deductible 8 Special types of supplementary Damaged data media are indemnified on
insurance the basis of records of the expenses
Due to the large number of minor losses incurred, as in the material damage
suffered by electronic systems, the 8.1 External data media insurance insurance, but only up to the agreed limit
insured must accept a minimum de- of indemnity. Underinsurance is excluded
ductible on every loss in order to keep Unlike internal data media, such as hard by the conditions.
premium rates at an economically disks, the number of external data media
acceptable level. A reduction in the increases constantly during the service A minimum deductible to be borne by the
premium payable can be obtained by life of a computer system. This has insured is agreed as for the material
agreeing to a higher deductible. consequently made it necessary to damage insurance.
insure not only the data media them-
selves, but also their data. Except in the case of rented equipment,
data media insurance can only be con-
Data media insurance covers both the cluded in conjunction with electronic
material value of the data media and the equipment insurance. This does not
cost of reprocessing and restoring their apply for rented equipment if the lessor
data. Payment of the indemnity is has granted exemption from liability or if
contingent on a loss or damage to the insurance has already been concluded
insured’s data media, whether inside or by the lessor on his own or the lessee’s
outside the computer equipment, behalf.
provided that it is caused by an accident
indemnifiable under the terms of the
material damage insurance. Damage to
data media due to incorrect program-
ming, insertion or labelling and
accidental deletion or disposal is not
covered, nor is the loss of data due to
the effects of magnetic fields or
manipulation of the program or data
(computer viruses).

The sum insured should correspond to


the material value of the insured data
media and the expected cost of restoring
the data. This is fixed on a first loss
basis.

Calculation of the premium rate for data


media insurance requires a detailed This magnetic tape containing over 20 million
“bits” of information was destroyed by the heat from
knowledge of the particulars of each risk, a fire. Data media insurance covers the material
as with the material damage electronic cost of the data medium, as well as the cost of res-
equipment insurance cover. toring the data it contained.

Special consideration must be given to


the following precautions by the insured
to prevent or reduce losses:

– Backup of all data media, or at least


those containing important information
(eg individual programs).

– Originals and duplicates should be


stored separately and in fire-proof steel
cabinets so that they are not both
destroyed in the event of an accident.

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8.2 Increased cost of working holidays, etc, in other words, the
insurance increased costs of working which have
given this insurance its name.
If electronic systems break down for
more than just a brief stoppage, this can Unlike the replacement costs for data
lead to serious disruption and con- media, the extra costs incurred while the
siderable loss of turnover. Extended equipment is unavailable can be cal-
stoppages can threaten the very exist- culated fairly accurately in advance if
ence of a company, particularly if the corresponding agreements have been
computer system is the basic source of concluded with external service com-
income. Banks, insurance companies, panies. The total increased cost of
building societies, mail order companies, working payable in one year constitutes
travel agencies and tourist services, the annual sum insured for increased
hotel chains and factories with a cost of working insurance and forms the
pronounced mass production (eg basis underlying the premium rates. The
carmakers) all depend on their data magnitude of the premium rates depends
processing systems today. In countries on the agreed time excess borne by the
in which electronic data processing is insured and the maximum indemnity
sufficiently widespread, the required period. The time excess is expressed in
computer capacity can generally be ob- days and normally lies between two and
tained by hiring equipment in the event twenty days for increased cost of working
of a breakdown, although this incurs insurance.
additional expenses in the form of rental
fees, costs for transporting data media, Shorter indemnity periods of nine, six,
travel expenses for personnel and three or less months, for example, and a
possibly the cost of outside accom- longer time excess carry correspondingly
modation, night work and work on public lower premium rates which, however,
continue to be expressed in terms of the
annual sum insured although this is no
longer identical with the limit of indem-
nity. Upon expiry of the time excess, the
increased costs will be indemnified for
every day affected up to the amount of
Business interruption?
the agreed daily indemnity and until the
end of the indemnity period.

These costs, ie the additional costs


incurred over time, are consequently
Normal operation Normal operation
covered by increased cost of working
insurance. However, the insurance can
Occurrence of the accident Damage repaired also be extended on request to cover
costs which do not depend on the period
Many companies can choose alternatives to avoid of unavailability, ie additional costs for
an imminent stoppage following an accident. The
costs incurred for such emergency actions are program modifications regardless of
covered by the increased cost of working insurance. time.

Except in the case of hired equipment,


increased cost of working insurance can
only be concluded in conjunction with
electronic equipment insurance.

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9 Loss prevention – organizational precautions,
eg access control, maintenance,
The saying that “prevention is better than thorough training for the operating
a cure” unquestionably and unreservedly personnel, plan of action following an
also applies to electronic equipment accident;
insurance. The manufacturer of the
equipment, the insured, the insurer and – technical precautions,
the reinsurer are all equally responsible eg overvoltage protection, uninterruptible
for preventing losses. power supply, automatic cutouts.

Very few losses are due to causes inside The risks prevailing on site and during
the equipment itself; most of the hazards operation of electrical and electronic
have their origin outside the equipment equipment should be verified by expert
and include, for example, incorrect inspection for the purpose of risk assess-
operation, malicious damage, lightning ment. Such a “risk analysis” can reveal
strokes and overvoltage, fire and water the weak points and circumstances
damage, defective air-conditioning, etc. capable of increasing the danger so that
the insured can take action to reduce the
The most important precautionary probability of an accident and the insurer
measures to be taken are therefore: can assess the risk appropriately.

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

This machine for producing semiconductors was


exposed to soot and corrosive acid vapours after a
fire. A total loss due to corrosion will be unavoidable
if the acid vapours are not removed immediately.

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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).