Plan for the Worst: Insurance Insights

Imagine this scenario: Two separate power plants experience a bowing problem greater than 18 mils with a steam-turbine rotor. The turbines are from the same manufacturer and several repair options are reviewed. Management at both plants selects an innovative approach involving removal of a substantial amount of material, which is replaced with weld overlay and then machined to correct diameters and centerline of the balance piston area. One plant’s insurance company covers the repair, the other plant’s doesn’t. Why?

The reasons often depend on a number of factors, including the insurance company’s experience and knowledge. For example, Hartford Steam Boiler Inspection & Insurance Co. (HSB) has developed several classifications relating to weld repairs of steam-turbine rotors. For the scenario mentioned above, for example, the weld repair is well understood by HSB, and the firm has developed appropriate classifications and guidelines.

Another key factor is the relationship between the insurer and insured. Numerous conversations with insurers and plant risk managers have a common theme: Forging a good relationship is a key step in any insurance program.

If you approach insurance with the understanding that both you and your insurer have the same goal—to prevent unexpected outages—then you can better appreciate the value an insurer can bring to the relationship.

The relationship you develop with your insurance company should begin even before you decide to purchase your equipment or machinery breakdown insurance, which is separate and distinct from other types of property insurance.

What Insurance Is Really For

Understanding the purpose of insurance in general, and equipment breakdown insurance specifically, is critical. As one insurer put it, the inexperienced plant manager thinks that insurance covers any problems he has at the plant, regardless of operation and maintenance practices. On the surface this may be true, but when it comes time to renew coverage, the plant will either be paying significantly more in premiums or the insurer may choose to deny coverage.

According to HSB, equipment breakdown insurance pays for loss incurred when equipment breaks down suddenly and accidentally. Property insurance covers many standard perils, such as fire. But even “all risk” property coverage isn’t designed to pay for equipment accidents from unique causes of equipment failure, including mechanical breakdown or operator error.

Insurance is designed to make the insured “whole,” or to bring the plant back to where it was before the failure occurred. And the insurer is concerned with the approach taken to make the plant “whole” again. Keep in mind that an insurer shares in any risk associated with a repair.

Eyes and Ears

The insurance market currently is soft, which means that good rates can be negotiated. But an insurance company can be a valuable asset to a power plant manager, so an analysis of potential insurers should go deeper than just the rates.

Top-notch insurance companies maintain a staff of qualified engineering inspectors. These engineers not only have an in-depth knowledge of plant equipment but also have knowledge of how the equipment is performing in the field. If these inspectors see a trend or problem in the field, then they will alert you to any potential impacts. This information can prove invaluable in preventing a catastrophic failure. (For example, see p. 58 for a discussion of fire protection for generators in hydroelectric plants. The author of that article is a risk consultant for various insurance agencies.)

As Chubb Insurance Co. notes in a discussion of utility industry insurance on its website, boiler and machinery insurance is unique. Much of the premium dollar is returned to the policy-holder in the form of inspections and advice about loss control.

During an inspection, the risk consultant will make observations about the operation of the equipment, review and discuss maintenance practices, and witness the operation and testing of safety devices. Once an inspection is completed, the inspector evaluates and compares the plant with good engineering practices, insurance standards, legal requirements, and similar risks.

Management is given the results as well as an assessment of problems and recommendations for their solutions. These are not ultimatums requiring immediate response. Rather, they are specific action items that an insurance company wants to see implemented over time. In some cases, you may agree to disagree over certain recommendations. In general, however, good inspectors are well-regarded in their technical field. Smart plant managers will adjust their outage schedules to accommodate an insurance inspector because they value the expertise. One plant manager noted that his plant’s insurance inspector was viewed as another set of eyes and ears.

Filing a Claim

Should machinery or equipment fail, notify your insurer as quickly as possible. The actual notification and claim forms will probably be filed by your company’s risk manager. Note that most companies are self-insured for a specified amount of any claim, much like a deductible. Also, make yourself aware of any inspection requirements associated with any claim, such as photographs and forensic laboratory tests, before starting repairs. If equipment needs to be sent back to the manufacturer, make sure you get clearance for the insurance company’s inspector to see the equipment there. It is more difficult for the inspector to make an assessment after a repair has been completed.

As a plant manager, you must also educate staff to collect costs the right way, meaning the way that the insurance company requires. You should seriously consider setting up a separate holding account to collect all charges associated with the problem.

In some cases there may be a difference of opinion about the costs associated with getting things back up as quickly as possible. For example, you must be able to differentiate between straight time and overtime salary records and be able to justify paying a premium to get up and running quickly.

Finally, filing a claim that’s easy to understand is also in your best interest. What the insurer will cover depends on the type of coverage you have, so familiarizing yourself with the terms of your policy is a good idea.

Dr. Robert Peltier, PE, is POWER’s editor-in-chief.