Machine Shop Coverage Gaps: Customer Stock, Bad Parts

The gaps worth checking first sit where the shop's real work meets a standard exclusion: a customer's material in your care, a part you cut wrong, a machine that breaks, a coolant spill, a lost program file and machines insured at old or depreciated values. You can spot each on the policies you inherited, and many can be closed with an endorsement or a separate policy, depending on carrier underwriting. This guide is for owners of job shops and precision parts makers. The core policies are in the first guide of this set.

The short answer

General liability generally excludes customers' property in your care, the cost to redo or recall your own bad part, most pollution at your site and lost electronic data. Each needs a different answer.
Machines are often a large share of what the shop insures and a major valuation risk: a limit carried over from the seller may not match replacement cost, and mechanical breakdown is a separate peril.
Fines, penalties, contract compliance failures and the loss of a key machinist or customer are not things to assume are insured.
Spot each gap by reading the endorsements, not only the declarations page, and fix them in order of how badly a loss would hurt debt service.

Which gaps should a new machine shop owner check first?

Each gap below is tied to the way a shop really operates. The last column says what to ask your broker for. Availability and terms depend on carrier underwriting, and the policy wording controls.

Common machine shop coverage gaps
Gap	How it shows up in a shop	How to spot it	Usual fix to ask about
Customers' material, fixtures and tooling	Bar stock, castings and fixtures held for open jobs are lost to fire or theft	General liability excludes it; check whether the property form covers property of others, at what limit, and whether it applies only at your premises or also in transit	Property of others or bailee coverage sized to peak holdings
Your own bad part	A batch is found out of tolerance after it shipped	Products wording excludes redo, replacement and recall costs	Contract limits and quality controls first, then ask what recall or rework options exist
Design or process advice	A shop recommends a material, tolerance or process and the part fails	General liability is not professional liability	Ask whether professional liability coverage, also called errors and omissions, fits, usually claims-made
Machine values	Limits copied from the seller or from the deal price	Compare a replacement cost machine list with the limit, valuation basis and coinsurance	Replacement cost valuation, a schedule of machines, agreed value
Mechanical breakdown	A spindle, drive or controller fails	Property forms generally exclude mechanical or electrical breakdown	Equipment breakdown coverage with income and extra expense
Long shutdown	A specialized machine can be slow to repair or replace	The 72-hour waiting period in the standard Insurance Services Office (ISO) form, a short restoration period or a low income limit	Extended business income or an extended period of indemnity (a longer paid period while production ramps back up), and a realistic income worksheet
Site pollution	Coolant, solvent or hydraulic oil escapes near a sump or drain	Pollution exclusion on general liability, possibly a total pollution endorsement	Separate pollution coverage
Lost data	Ransomware locks drawings, programs and business systems	General liability excludes electronic data and there is no cyber policy	Cyber coverage, claims-made, plus offline backups
Fraud and stock theft	A spoofed invoice is paid, or an employee takes tooling or metal stock	Property and general liability generally do not respond to employee theft or funds transfer fraud	Commercial crime coverage

What if a part the seller made fails after you close?

Your own policy is generally the one in play, but the seller's history still matters.

Which policy responds. On a typical occurrence general liability policy, the policy in force when the injury or damage happens generally responds, even if the claim arrives later, subject to its terms. A bracket the seller machined that fails after you close falls in your policy period.
Your product. The standard form counts products of a business whose assets you acquired as yours, so check that your products-completed operations coverage and limit were written for the shop you bought, and tell the carrier about the seller's product history. Damage known before your policy started may fall outside it.
The seller's old policies. They matter for injury or damage that happened during their terms. In some asset deals, state successor liability law can also bring claims about pre-closing products to a buyer. Whether you can use the seller's old policies depends on the deal and state law, and a claims-made form works differently, so ask deal counsel and your broker. See successor liability when an asset purchase is not clean and stock deal versus asset deal.

Whose material is in your shop, and who insures it?

Many shops cut material the customer supplies, hold fixtures the customer owns or keep a customer's castings between operations. The standard general liability form excludes damage to personal property in the insured's care, custody or control, so a fire or theft loss of that material is not a general liability claim. Property policies differ on property held for others. Many forms cover customers' property in your care only inside the same limit as your own property, or only with a specific endorsement, and the limit may be far below what you hold at peak. Read the form to see whether customers' property is covered, whether it has its own limit and whether it is valued at replacement cost.

Ask the seller's broker and your shop manager how much customer-owned material is on the floor in a busy week and whether the supply agreements make you responsible for it, then compare that figure to the policy limit. Care, custody and control explains the exclusion.

Does insurance pay for a part you cut wrong?

Usually not the part itself. The standard general liability form excludes the cost to redo or replace your own product, damage to property that is not physically injured because your product is defective, and the cost to recall, inspect or remove products withdrawn from use. It can respond to bodily injury or property damage a defective part causes to other people or property after it leaves the shop, subject to its terms and the products-completed operations limit.

A hypothetical example. A shop machines 5,000 brackets and later finds that one hole position was cut slightly out of tolerance. The customer has already installed 1,200 of them. Redoing the batch costs $40,000 and pulling the installed parts costs another $25,000. Nobody is hurt and no other equipment is damaged. General liability is generally not designed to pay either figure, so the cost lands on the shop unless another coverage applies. Whether a stand-alone recall or rework product is available for a parts maker depends on the carrier. The numbers are illustrative.

Contracts and quality controls do the work that insurance cannot here, so read the warranty and indemnity language in each supply agreement before you sign.

Which gaps hide in property, machines and income?

Machines bought in an acquisition were priced on earnings, but a policy needs what they cost to replace. Purchase price, book value and insurable value are different numbers. Under actual cash value, a claim is paid at depreciated value unless replacement cost was chosen. With replacement cost coverage, the standard ISO form pays the replacement cost difference only after the property is actually repaired or replaced, and many others work the same way, so ask how that works when a machine can be slow to source. If coinsurance applies (a clause that cuts a claim when the limit is below a set share of the property's value) and the limit is too low, a claim can be reduced in proportion.

Mechanical breakdown is a separate peril, generally covered by equipment breakdown insurance rather than the property policy, and that coverage can add income and extra expense.

Business income coverage responds to direct physical loss at the premises. It does not pay for losing a customer or a key machinist or programmer, and a fire at a customer's own plant is a different question that some policies address through dependent property coverage, an add-on for damage to a key customer's or supplier's property. See business interruption when the owner was the business and the business income review.

What about pollution, data and defense work?

Pollution, data and defense gaps
Topic	What to know	Where to read more
Pollution	The standard form's pollution exclusion removes most injury and damage from pollutants released at premises you own, rent or occupy. A coolant sump, parts washer or floor drain is where a release starts. If diligence finds stained concrete, ask about separate pollution coverage and cleanup liability for owners and operators. Do not assume fines and penalties are insured.	The pollution review
Data	The standard form excludes damage arising from loss of electronic data, including programs used with electronically controlled equipment. Cyber policies are usually claims-made, which means they respond to claims first made while the policy is active, and many have a retroactive date, the earliest event date they cover. Ask about both, and about the notice deadline.	The cyber review
Aircraft and defense work	For aircraft parts, ask the carrier in writing whether any aircraft or aviation products exclusion applies, and read the customer's terms. For defense customers' controlled drawings, do not assume that a cyber policy responds to contract compliance failures.	Contracts, licenses and bonds for a machine shop

In what order should you close the gaps?

Fix anything the lender requires first, because lapses can lead to force-placed coverage at your cost.
Insure customers' material and your machines to realistic values.
Add equipment breakdown if two or three machines carry most production.
Add cyber, pollution, errors and omissions or crime coverage where the shop's work fits the rows above.
Raise limits to meet customer contracts, then compare the cost of each fix to the loss you could not absorb.

Some gaps are business risks, not insurance gaps: a fine, a missing certification or the loss of a senior machinist. Key employees leaving after an acquisition covers retention, and cost trade-offs are in what drives insurance cost for a machine shop. Morrow can review the inherited policies against the shop you bought and flag gaps; any new terms depend on carrier underwriting.

Keep reading

Frequently asked questions

Does insurance pay if I ship a batch of parts that are out of tolerance?

Usually not. The standard general liability form excludes the cost to redo or replace your own product and to recall or remove it. It can respond to injury or damage a defective part causes to other people or property after it leaves the shop, subject to its terms.

What covers a customer's material that burns in my shop?

General liability generally excludes property in your care, custody or control. Property of others or bailee coverage on a property policy is the usual answer, and the limit should reflect the most customer material you hold at once.

Will my property policy pay if a spindle or controller fails?

Not necessarily. Property policies generally do not pay for mechanical or electrical breakdown of a machine, whether the form lists causes of loss or covers risks of direct physical loss. Equipment breakdown coverage is the usual way to insure it, and it may add business income and extra expense. Check your form.

Does my insurance cover a ransomware attack on the shop's computers?

Not under general liability, generally. The standard general liability form excludes damage arising from the loss of electronic data, but carrier wording varies and the policy wording controls. A separate cyber policy, usually claims-made, is the coverage to look at.

Would insurance pay a workplace safety or environmental fine?

Do not assume it would. Policy wording and state law decide whether a fine or penalty can ever be insured, so ask your broker and your attorney before relying on any coverage for them.

How do I know if my machines are insured for enough?

Build a machine list with the replacement cost of each, then compare the total with your property limit, the valuation basis (replacement cost or actual cash value) and any coinsurance clause. A limit carried over from the seller or from the deal price may not match. Your policy wording controls.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

Request a review Check a contract

Morrow · 25 New Chardon Street, 4th Floor, Boston, MA 02114

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Machine Shop Coverage Gaps: What New Owners Should Check