Presented By: Shawn Burnett, BA, CFEI

Presented By: Shawn Burnett, BA, CFEI
All started with the Industrial Revolution in the U.K. and
North America in the 1800’s
 Originally only boilers were insured and only for
explosions. Technology was in it’s infancy and boiler
explosions were unfortunately a common occurrence
 The original Boiler Policy insured property damage
resulting from Accidents to Objects, business interruption,
bodily injury, death and defense costs. It was therefore
actually a casualty type Policy.
 Important part of the Boiler Policy was a provision for
licensed inspectors to examine the boiler on a regular
basis. These inspections were regarded by many Insured’s
as being more valuable to them than the actual Policy.

Boiler Policy expanded to include machinery.
This led to coverage overlaps when Property Policies expanded
their coverage.
 In 1958 the All Canada Insurance Federation introduced Guiding
Principles to govern the way Signatories to the Agreement adjusted
overlapping losses. Modifications were made in 1961 and then in
1973. New Guiding Principles were introduced by the Insurance
Bureau of Canada in 1984. These are the Guiding Principles in force
today.
 In the late 1970’s, coverage for bodily injury, death and defense
costs were removed from B&M carriers as this type of coverage
was available elsewhere
 The B&M Policy then became more of a first party Property type
Policy rather than the original Casualty type Policy.
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Overlapping type losses became more of an inconvenience to an
Insured as both the Property and B&M companies were involved in
loss adjustment rather than just the one adjuster.
 This occasionally led to disputes. The Insurance Bureau of Canada
introduced the Disputed Loss Agreement in 1980 where coverage
disputed between the Property and B&M carriers were resolved
with each carrier paying 50% of the amount in dispute and
proceeding to arbitration.
 Too many overlaps in coverage led to B&M carriers eliminating
some obvious Property type peril coverages from their Policies.
 In the mid 1980’s coverages for lightning, earthquake, windstorm,
tornado, and hurricane type losses were removed from the
majority of B&M Policies as these coverages were available under
an Insured’s Property Policy.
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Most important point is B&M Policies are
ACCIDENT driven as opposed to PERIL driven.
For coverage to apply there has to be an
Accident as defined, to an Object as defined,
subject to the Exclusions and Terms and
Conditions in the Policy.
Property Policies originally only insured the perils
of Fire, Lightning and Explosion of natural or
manufactured gas.
 Later expanded to provide coverage for
additional Named Perils.
 Further expanded to provide coverage on an All
Risk basis, subject to exclusions and terms and
conditions of the Policy.
 With expansions in coverage on both Property
and B&M Policies, overlapping coverages
become more common.
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Pure Combined Policies introduced by Brokers
and written on a Property Policy wording with
Boiler & Machinery exclusions removed –
Problematic.
Better for the Insured to have separate
Policies for Property and B&M risks, or at least
a sectionalized Property/B&M Policy with
separate wording for Property and B&M risks
in one Policy jacket.
There must be an “Accident”, as defined in the
Policy
 To an “Object”, as defined in the policy
 Insurable interest
 Must be in use, or connected ready for use
 At a Location insured under the Policy
 Subject to Special Provisions
 Subject to the Exclusions
 Subject to Terms and Conditions contained
within the Policy.
 Occurring during the Policy period


“Accident” shall mean a sudden and accidental
breakdown of an Object, or a part thereof, which
results in physical damage to the Object and
necessitates repair or replacement of the Object or
part thereof.
 RESTRICTIONS TO ABOVE DEFINITION
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▪
Depletion, deterioration, corrosion or erosion of material
Wear and tear
Cracking of certain parts of gas turbines
Leakage at valves, seals and fittings
Breakdown of certain electronic components
Functioning of a safety device
Combustion explosions

Object shall mean any boiler, any fired or unfired
vessel, normally subject to vacuum or internal
pressure, any refrigerating or air conditioning vessels
and piping, any other piping, any mechanical or
electrical machine or apparatus used for the
generation, transmission, or utilization of mechanical
or electrical power.
 RESTRICTIONS TO ABOVE DEFINITION
▪ Refractory or insulating material
▪ Sewer piping, sprinkler piping, domestic water piping
▪ Elevator, escalator, conveyor, crane or hoist (not excluding electrical
equipment attached to the equipment)
▪ Any vehicle, mobile equipment, trailing cable
▪ Well casings, penstocks, draft tubes
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Testing of equipment
Furnace explosions
Date recognition
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Nuclear
Terrorism
Fire
 (Please note: the only time Fire is insured under B&M
Policy is when ignition occurs inside an electrical
apparatus as a result of an Accident to that electrical
apparatus)
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Combustion explosion
Windstorm, tornado or hurricane
Earthquake, including tidal waves, tsunamis and
landslides

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Lightning and hail
Vandalism, malicious mischief
Pollution, contamination
Water damage
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By-laws (in or out of coverage)
Notice of Accident
Subrogation (no prejudice)
Inspection
Suspension
Limitation period
Professional fees etc.
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Damage to insured property
Insurable interest
Against All Risk
Subject to Exclusions
Subject to Conditions and Limitations
Occurring during term of Policy


Property of every kind or description, as
specified in the Declarations Page
Subject to being specifically excluded, i.e.
motor vehicles, aircraft, watercraft, land etc

Property of the insured, or of others which
the insured may be legally liable, or for which
they shall have agreed to insure

All causes of loss (perils) covered unless
specifically Excluded
Earthquake, landslide, etc
Centrifugal force, mechanical or electrical
breakdown
 Explosion, collapse, rupture, bursting, cracking,
burning out or bulging of pressure vessels,
rotating machinery and gas turbines
 Electrical disturbances, including arcing to
electrical devices or wiring
 Freezing, rust or corrosion, contamination
 Rodents, insects or vermin
 War, civil commotion
 Nuclear
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Wear and tear, gradual deterioration, latent
defect or inherent vice
Faulty or improper material, workmanship or
design
Pollution or contamination

There are a variety of losses that can occur in
relation to Property and Boiler & Machinery
policies and these are generally classified as
follows:
 Sole Loss
 Pure Joint Loss
 Shared Loss
 Disputed Loss


An example of a sole B&M loss would be a
mechanical breakdown of a machine. This loss
would be 100% B&M as most Property
Policies specifically exclude mechanical
breakdown.
An example of a sole Property loss would be
fire in a mechanical machine. The loss would
be 100% Property as all B&M Policies
specifically exclude fire.
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Pure joint loss occurs when both the Property and B&M Policies
cover exactly the same loss.
A good rule of thumb to establish a pure joint loss would be to look
at the loss in absence of either policy.
If for example, there was no Property Policy, would the B&M policy
cover the loss 100%, and vice versa? If the answer is Yes, it is a pure
joint loss.
A good example of this type of loss would be water damage to a
piece of electrical equipment, as a result of pipe breakage.
In the absence of a B&M Policy the Property policy would cover the
loss as the loss was caused by escape of water. On the other hand
the B&M Policy would cover the loss as the equipment arced
therefore, there was an Accident to an Object.

In the case the IBC Agreement of Guiding
Principals would be used to determine the
basis of settlement based on Limits and
applicable deductibles. Generally speaking
the loss would be paid 50/50 subject to the
lowest deductible. The Carrier with the lower
deductible would pay the deductible
difference.
A shared loss is combination of a sole loss and joint loss.
An example of this would be arcing occurring to a large electrical
panel with overheating and fire occurring to the remainder of the
panel and the subsequent fire extending beyond the electrical
panel and damaging the building.
 In this case, the B&M policy would respond to 100% of the initial
arcing as the Property Policy excludes electrical disturbance, i.e.
arcing. The resultant fire in the remainder of the panel could be
considered as joint as the B&M policy covers fire within electrical
equipment caused by an Accident, and the Property Policy also
insured the peril of fire.
 The extension of the fire beyond the electrical panel to the building
would be 100% Property as the B&M Policy does not cover fire
outside an electrical Object.
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Again the IBC Agreement of Guiding Principals
would be utilized to settle the loss, however
this type of loss is more complicated as
Deductibles for both the B&M Policy and
Property Policy have to be prorated to the
amount of sole and joint loss in order for the
Agreement to be effected.
This is a far more complex situation where each Carrier disputes
coverage for a loss however recognizing an insurable loss exists. To
assist the insuring Public, the IBC introduced the Disputed Loss
Agreement (DLA) in 1980, allowing the insured to recover a
disputed loss from both Carriers. The Carriers then proceed to
Arbitration.
 There are a number of conditions that must be met prior to the
DLA becoming involved and these are outlined in the Agreement.

 There has to be an insurable loss with both the B&M and Property
insurers agreeing there is coverage under one of the Policies.
 There has to be an agreement by all parties as to loss quantum prior to
any payment being made and any payment is made on a without
prejudice basis by each carrier.
 Only that part of the loss in dispute falls to the Disputed Loss
Agreement.
Once the agreement has been made and the quantum has
been agreed to then the IBC Agreement of Guiding
Principals is utilized to determine the amount payable by
each Carrier.
 Once payment is made, each Carrier chooses an arbiter
and subsequent umpire to resolve their differences.

 This can be modified by the agreement of both carriers. It is
important to note that the insured is a party to this agreement
and must agree to offer any assistance required by the Carriers
to pursue arbitration.

all of the above, joint loss, shared loss and disputed loss is
only applicable if the carriers are signatories to the
agreement or have agreed in the Policy to be bound by
these agreements.

Facts of Loss:
 A manufacturing plant was temporarily shut down
following an electrical fault in underground
electrical power supply cables connecting exterior
1000kVA dry type transformer to interior 600 amp
switch within the electrical panel.

The investigation revealed arcing within the cable,
led to a resultant fire within the panel. The heat of
the arc at the junction of the incoming cable to the
switch caused a fire to erupt in the panel spreading
to a partition wall situated behind the panel. Fire
spread along this wall damaging a metering cabinet
and 600V transformer. The damages included
destroyed electrical installations ,fire and smoke to
the other electrical panels as well as damages to the
structure.

It was determined that arcing preceded the fire. The
electrical cable that suffered the failure was partially
damaged by the arcing , but completely destroyed
by the Fire. There was adequate evidence that the
ensuing fire caused additional damages.

The insured arranged
the installation of a
portable generator to
maintain power in the
facility. Repairs
proceeded on the best
available basis.
 COVERAGE:
▪ Boiler & Machinery
▪ Standard form including miscellaneous electrical apparatus (MEA)
Extra Expense was covered, but there was no Business
Interruption coverage. $75,000 Physical Damage deductible
▪ Property
▪ Property of Every Description (POED), All Risk; Extra Expense
Business Interruption with a 48 hour waiting period. $50,000
Physical Damage deductible

Both policies are at risk. Arcing is an Accident
to an insured Object, the MEA. Arcing is not
fire within the context of a property policy,
but there was an ensuing fire. The ensuing
fire outside the electrical Object is excluded
under the B&M Policy. All fire damage is
insured 100% under the Property Policy.
a)
b)
c)
The first observation should be that the loss is pure loss and joint
loss. This was a claim to which both Policies shared the loss, but
there were two distinct situations from an underwriting
perspective.
It becomes necessary to determine the physical damage caused by
the Accident, and by the Property perils of fire and smoke,. It was
ultimately determined that the electrical cable and switch was
damaged to the extent of 75% by the “accident”, and 25% by the
“fire”. The costs were joint on that portion which were considered
as loss under both Policies, as this fire was contained within the
insured Object, but pure loss to the B&M Policy for the arcing
damage.
The damages to the other electrical equipment were all caused by
ensuing fire, a situation not insured by the B&M Policy. 100% of
this damage went to the Property Policy.
d)
e)
The physical damages to the building were all
caused by fire and smoke from the fire, and
as such, fell to the Property insurer
completely.
Both Policies provided Extra Expense
coverage, hence these costs were “joint loss”.
Property deductible
B&M deductible
= $ 50,000
= $ 75,000
Adjustment:
Pure Property Loss
Pure B&M Loss
Joint Loss
= $ 50,000
= $ 100,000
= $ 200,000
Total Claim
= $ 350,000

B&M
$100,000 - ($25,000) = $75,000
Property $ 50,000 - ($10,000) = $40,000
$200,000 – ($ 50,000. Highest ded.) = $150,000.
(each insurer pays 50%/$75,000.00 each)
In this case, Property Underwriters insure
difference in deductibles
Therefore:
$50,000 – ($40,000) = $10,000
B&M
Pure
B&M
Joint
Total B&M contribution
$ 75,000
$ 75,000
$150,000
Property Pure
Property Joint
Property Deductible difference
Total Property Contribution
$ 40,000
$ 75,000
$ 10,000
$125,000
Therefore, the insured’s total recovery = $275,000. (net of deductibles)