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.

The measuring coil of a magnetic resonance
tomograph was destroyed as a result of
carelessness by a fitter. A screwdriver which the
fitter was carrying loosely was attracted by the
magnetic force and hurled against the measuring coil
with great impact when he came too close to the
magnet.
Introduction
Electronic equipment insurance in
Germany dates back to the 1920s. Low-
voltage insurance, as it was known
originally, covered almost exclusively
telecommunications equipment, such as
telephones and teleprinters.
In the 1950s, electronic engineering in
general underwent a rapid expansion,
especially in the fields of industrial
electronics, medical technology and
communications, due to the increased
use of semiconductors, which are both
versatile and economical. Developments
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.
Munich Re aims to assist its ceding
companies in all questions relating to this
important class of business. With a large
staff of qualified engineers specialized in
all technical fields, Munich Re can offer a
comprehensive service as regards ac-
quisition, claims assessment and settle-
ment, as well as loss prevention. In
addition, Munich Re can draw on the
services of materials testing and loss
research institutes with decades of
experience in this field when advising its
ceding companies on matters of loss
prevention and minimization, as well as
claims assessment and settlement.

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).

3
 1 What can be insured?
1.1 Material damage cover under
electronic equipment insurance may be
taken out for all electronic systems, such
as:
a Electronic data processing systems
used in research and development,
commercial computer centres, ad-
ministration and industry (including
computers for monitoring and control
of manufacturing plants)
Data processing systems are made up of
a central processing unit and peripheral
units.
The central processing unit comprises:
– an arithmetic unit to process
arithmetical operations,
Inside view of a modern computer service centre
with a very high concentration of values within a very
small area.
4
– a control unit to interpret and monitor
the programs,
– a working memory for programs and
the data to be processed.
The peripheral devices include input and
output units, as well as storage devices.
They are connected to the central proc-
essing unit. Where storage devices are
concerned, a distinction is normally
made between disk, chip and magnetic
tape storage devices.
In a broader sense, electronic data proc-
essing equipment also includes such
external data media as magnetic tapes.
These are treated separately for insur-
ance purposes.
b Medical equipment for diagnostic and
therapeutic purposes
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

c Telecommunications systems
Telephone systems, text, data, image
and video transmission systems, includ-
ing switching systems, eg telephone
exchanges and sets, facsimile and
videophone units, directional and mobile
radio equipment, ground-based equip-
ment for air navigation and satellite radio,
commercial radio and television
transmitters, CATV systems
d Other equipment
Equipment in film, radio and television
studios, measurement and test
equipment, machines for producing
printed matter, burglar alarm and fire
alarm systems, electronic point-of-sale
terminals and scales, cash dispensing
machines, 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 media
include detachable optical, magnetic and
electronic storage media, such as floppy
disks, magnetic tapes and magnetic
disks. The insurance covers damage to
or destruction of the data media and
Transmitter and receiver for mobile
telecommunications (cellular net).
the cost of recovering the programs and
data stored on these media.
1.3 Additional expenses incurred
because the insured’s equipment breaks
down and external equipment has to be
hired can be insured under “Increased
cost of working insurance”. Data media
insurance and increased cost of working
insurance are normally only granted in
conjunction with material damage cover
under electronic equipment insurance.
5
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.

6
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).

7
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
aircraft
Together with the damage due to smoke,
soot and extinguishing agents, most
accidents due to these causes result in
a total loss. If these risks are already
covererd by a fire insurance policy, gaps
in the insurance cover can be avoided by
taking out electronic equipment insur-
ance as well.
Smoke, soot, corrosive gases
Even if these agents intrude from
outside, ie are not due to a fire within the
plant, they can still cause extensive
damage since they usually affect the
entire plant.
Water and moisture
This includes every type of moisture as
long as it is not due to normal atmos-
pheric conditions or an inherent part
of normal operation. Electrical and
particularly electronic equipment is
highly susceptible to every kind of
moisture.
The possibilities range from falling
drops of condensation to a flooding
catastrophe.
8
Defective air-conditioning
Defective air-conditioning can cause
serious damage. Compliance with
precise temperature limits, humidity
conditions and purity of the air is
essential for many applications.
Short-circuits and other electrical
causes
Electrical and electronic equipment can
suffer very serious damage as a result of
short-circuiting, overvoltage, defective
insulation, travelling surges caused by
indirect lightning, magnetism, induction,
implosion, etc.
Design, analysis, manufacturing, as-
sembly and erection faults, defects in
casting and materials, workshop er-
rors and bad workmanship
These shortcomings are frequently only
discovered during operation, when the
manufacturer’s liability has long since
expired and there is no possibility of
recourse. Moreover, they cannot always
be avoided, not even with the best test
methods.
Operating errors, clumsiness,
negligence
These causes account for the
overwhelming majority of losses.
Roughly half the total indemnity paid
under electronic equipment insurance is
for losses due to one of these causes.
Malicious acts, burglary and theft,
wilful intent of third parties
Intentional damage by third parties
cannot be prevented, not even by
extensive precautions, and can cause
considerable losses.
Hail, frost, storm
The significance of these risks is fre-
quently underestimated, although
spectacular losses do occur from time
to time. Outdoor installations with large
surfaces which are vulnerable to strong
winds are particularly at risk.
Subsidence, landslide, rockslide,
avalanche
Losses attributable to these risks
generally only occur in particular regions.
The inclusion of these perils emphasizes
the “all risks” nature of electronic equip-
ment insurance.

3.2 Excluded hazards
The individual exclusions from cover are
listed in the policy and essentially com-
prise loss or damage due to
– wear and tear as a result of ordinary
use or operation as well as corrosion
(eg rust) and continuous operational
influences. However, this exclusion
normally only refers to the parts im-
mediately affected; consequential
damage to other parts of the machine
is covered;
– war or warlike operations and civil
commotion of any kind;
– wilful intent or gross negligence on the
part of the insured or of his plant
management;
– faults or defects for which a third party
(manufacturer, supplier) is liable either by
law or under contract (losses covered by
warranty);
– losses due to failure or interruption of
gas, water or electricity services (certain
exceptions can be agreed in special
cases).
Expenses incurred for maintenance work
are not indemnifiable.
The following are also excluded from
indemnification:
– aesthetic defects, eg scratches on a
polished, painted or varnished surface;
– consequential losses and
consequential liability of every kind
(except for the increased cost of working
insurance for computer systems
mentioned in section 1.3).
This computer system was destroyed by arson
(sabotage).
3.3 Additional cover
The standard insurance cover can be
extended by special endorsements to
include further hazards and certain
related costs, namely:
Earthquake, volcanic eruption,
typhoon, hurricane and cyclone
A limit of liability should be specified
separately per accident on account of
the high risk of accumulation here.
Strike and riot
Here too, it is advisable to specify a limit
of liability for the same reason.
Transportation risk
This covers mobile equipment during
temporary relocations or occasional
moves which become necessary for use
of the equipment.
9
Air-conditioning risk
This extension of cover applies to
electronic equipment requiring a con-
trolled environment (precise temperature
limits, certain humidity levels and purity
of the air) when a loss is caused by
indemnifiable damage to the air-condi-
tioner. The air-conditioner must be
included in the electronic equipment
insurance so that the conditions for in-
demnification are the same as for the
electronic equipment itself.
Theft
25 % of the loss due to theft or a fixed
minimum amount must be borne by the
insured as a deductible in the case of
losses due to theft.
Additional expenses
Extra charges for airfreight, express
freight, overtime and work on Sundays
and public holidays can be included in
the insurance for an additional premium.
This additional cover is strongly recom-
mended for businesses which rely heavily
on computers or other electronic sys-
tems (eg telecommunications systems).
A deductible of 10 % and a limit com-
mensurate with each individual case
should be agreed with the insured for
the cost of airfreight.
10
4 Sum insured The indemnity payable per year is limited
to the sum insured and decreases ac-
The sum insured must always be the cordingly following a loss. To avoid
new replacement value of the insured underinsurance in another accident in
electronic equipment (value of the new the same year, the sum insured will be
item plus customs duties, transportation reinstated automatically on payment of
and installation charges), the reasons an additional premium.
being 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 increase
in the value of equipment, especially
when old. Due to the “new replacement
value” principle, however, this is not
taken into account when fixing the
indemnity. In other words, the insured is
indemnified in respect of the total cost of
repairs without allowance being made for
depreciation.
If the values are subject to change, for
instance due to price rises, the insured
must notify the insurer of such changes
so that the sums insured can be adjusted
accordingly, thus avoiding underinsur-
ance. Additional items must also be
included in the insurance as soon as
possible after being purchased.
In view of present economic trends, it is
imperative for insurers to adjust the in-
surance premiums in line with wage and
price increases in order to prevent the
real value of the premium income
decreasing with inflation. It is normally
not sufficient to adapt the sums insured
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.
5 Premium rates 6 Basis of indemnification

The premium rates are fixed on the basis
of directives which apply for normal risks
without special hazards. Customized
versions and new types of equipment
introduced on the market will be rated
individually according to their attendant
hazards.
For hired equipment, the premium is
fixed according to the extent of liability
specified in the rental agreement. It is
advisable for the insurer to obtain a copy
of the rental agreement, as the extent of
liability can vary considerably from one
case to the next, and can range from
comprehensive liability for all risks to
absolute exemption from liability.
Air-conditioning and power supply
equipment which is used exclusively for
the insured electronic systems can be
insured with the latter at the same
premium rate.
Under electronic equipment insurance,
the insured is usually indemnified by
payment of the expenses incurred for
repair of the damage; in rare cases, the
damaged equipment can be repaired or
replaced directly by the insurer. A dis-
tinction must be made here between
losses to be repaired and total losses.
– If the damage can be repaired, the
insurer will indemnify the insured in
respect of the costs incurred to restore
the equipment to its working condition
prior to the damage. These include the
cost of repair work including all required
replacement parts, the cost of disassem-
bly and reassembly, ordinary freight costs,
specialists’ fees, customs duties and
other charges included in the sum insured.
Extra charges for overtime, express
freight and airfreight are indemnified if
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
equipment is not indemnifiable. The
same also applies for any modifications
undertaken on the equipment in the
course of repair.
Expenses for provisional repairs are
indemnified if they do not lead to an
increase in the total repair costs. If the
sum insured is found to be lower than the
insured value following an indemnifiable
loss, the indemnity payable is reduced in
proportion to the percentage of under-
insurance.

11
7 Minimum deductible
Due to the large number of minor losses
suffered by electronic systems, the
insured must accept a minimum de-
ductible on every loss in order to keep
premium rates at an economically
acceptable level. A reduction in the
premium payable can be obtained by
agreeing to a higher deductible.
8 Special types of supplementary
insurance
8.1 External data media insurance
Unlike internal data media, such as hard
disks, the number of external data media
increases constantly during the service
life of a computer system. This has
consequently made it necessary to
insure not only the data media them-
selves, but also their data.
Data media insurance covers both the
material value of the data media and the
cost of reprocessing and restoring their
data. Payment of the indemnity is
contingent on a loss or damage to the
insured’s data media, whether inside or
outside the computer equipment,
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).
Damaged data media are indemnified on
the basis of records of the expenses
incurred, as in the material damage
insurance, but only up to the agreed limit
of indemnity. Underinsurance is excluded
by the conditions.
A minimum deductible to be borne by the
insured is agreed as for the material
damage insurance.
Except in the case of rented equipment,
data media insurance can only be con-
cluded in conjunction with electronic
equipment insurance. This does not
apply for rented equipment if the lessor
has granted exemption from liability or if
insurance has already been concluded
by the lessor on his own or the lessee’s
behalf.

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

12
8.2 Increased cost of working
insurance
If electronic systems break down for
more than just a brief stoppage, this can
lead to serious disruption and con-
siderable loss of turnover. Extended
stoppages can threaten the very exist-
ence of a company, particularly if the
computer system is the basic source of
income. Banks, insurance companies,
building societies, mail order companies,
travel agencies and tourist services,
hotel chains and factories with a
pronounced mass production (eg
carmakers) all depend on their data
processing systems today. In countries
in which electronic data processing is
sufficiently widespread, the required
computer capacity can generally be ob-
tained by hiring equipment in the event
of a breakdown, although this incurs
additional expenses in the form of rental
fees, costs for transporting data media,
travel expenses for personnel and
possibly the cost of outside accom-
modation, night work and work on public
Business interruption?
Normal operation
Occurrence of the accident
Many companies can choose alternatives to avoid
an imminent stoppage following an accident. The
costs incurred for such emergency actions are
covered by the increased cost of working insurance.
holidays, etc, in other words, the
increased costs of working which have
given this insurance its name.
Unlike the replacement costs for data
media, the extra costs incurred while the
equipment is unavailable can be cal-
culated fairly accurately in advance if
corresponding agreements have been
concluded with external service com-
panies. The total increased cost of
working payable in one year constitutes
the annual sum insured for increased
cost of working insurance and forms the
basis underlying the premium rates. The
magnitude of the premium rates depends
on the agreed time excess borne by the
insured and the maximum indemnity
period. The time excess is expressed in
days and normally lies between two and
twenty days for increased cost of working
insurance.
Shorter indemnity periods of nine, six,
three or less months, for example, and a
longer time excess carry correspondingly
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
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
covered by increased cost of working
insurance. However, the insurance can
Damage repaired also be extended on request to cover
costs which do not depend on the period
of unavailability, ie additional costs for
program modifications regardless of
time.
Except in the case of hired equipment,
increased cost of working insurance can
only be concluded in conjunction with
electronic equipment insurance.
13
 9 Loss prevention
The saying that “prevention is better than
a cure” unquestionably and unreservedly
also applies to electronic equipment
insurance. The manufacturer of the
equipment, the insured, the insurer and
the reinsurer are all equally responsible
for preventing losses.
Very few losses are due to causes inside
the equipment itself; most of the hazards
have their origin outside the equipment
and include, for example, incorrect
operation, malicious damage, lightning
strokes and overvoltage, fire and water
damage, defective air-conditioning, etc.
The most important precautionary
measures to be taken are therefore:
– 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.
14
– organizational precautions,
eg access control, maintenance,
thorough training for the operating
personnel, plan of action following an
accident;
– technical precautions,
eg overvoltage protection, uninterruptible
power supply, automatic cutouts.
The risks prevailing on site and during
operation of electrical and electronic
equipment should be verified by expert
inspection for the purpose of risk assess-
ment. Such a “risk analysis” can reveal
the weak points and circumstances
capable of increasing the danger so that
the insured can take action to reduce the
probability of an accident and the insurer
can assess the risk appropriately.
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).