Adam Masef | Butler Weihmuller Katz Craig
Many industrial companies often purchase commercial insurance policies with equipment breakdown coverage to guard against damage to their valuable equipment and protect against the associated loss of business income. However, as one steel producer recently discovered, not every incident amounts to a covered “breakdown.”
In Aspen Specialty Insurance Company v. Nucor Corporation, No. 19CVS019887-590, 2025 WL 3048981 (N.C. Sup. Ct. Oct. 31, 2025), a group of property insurers, including two equipment breakdown insurers, claimed that their policies did not cover losses sustained by a Nucor subsidiary because of an industrial accident at its steel manufacturing facility in Convent, Louisiana.
The Convent facility processes iron ore that is then shipped to another facility for use in steel production . During the production process, raw iron ore pellets are transported on conveyor belts, coated with cement, and then fed into a reactor, where they are heated to produce direct reduced iron. The production process is managed by a computerized distributed control system (DCS) that consists of computers, servers, and software, as well as field devices, including encoders, communication cabling, and hardware. The DCS is monitored by Nucor personnel.
On November 7, 2017, Nucor personnel identified an issue with a conveyor belt, leading them to replace one encoder with another encoder on the line that was not in use. While Nucor personnel were able to bring the system back online, the use of the replacement encoder resulted in the DCS receiving a “bad status” signal, causing the cement coating system to switch to manual mode. Nucor personnel did not realize this until seven hours later.
At the same time, the cement coating system was shut down for regular maintenance, which caused the system’s programming to set the amount of cement coating to zero. When the cement coating system was restarted, the bad status signal caused the system to remain in manual mode at the last setting (which was zero). As a result, iron ore pellets entering the reactor were not coated with cement before being heated, causing approximately 2,400 metric tons of uncoated iron ore pellets to melt and cluster inside the reactor.
In the litigation, the equipment-breakdown insurers argued that the loss was not covered because no equipment “Breakdown,” as defined by the policy, occurred. The Policy covered “direct damage to ‘Covered Property’ resulting from a ‘Breakdown’ to ‘Covered Equipment.’” “Breakdown” was defined as “direct physical loss that causes damage to … ‘Covered Equipment’ and necessitates its repair or replacement.” The Policy specified that “Without ‘Breakdown,’ there is no Equipment Breakdown coverage.”
The court concluded that there was no coverage under the Equipment Breakdown policies. First, it recognized that the Nucor personnel decided to replace the problem encoder with another encoder from the line (not a spare) and to shut down the system for regular maintenance without appreciating the impact of their decisions. Additionally, when the line restarted, and the cement system did not automatically revert to the proper setting, the DCS operator failed to interpret multiple indications on his screen, signaling a problem, for more than seven hours. Thus, even if the original encoder experienced a breakdown or its replacement caused one in the DCS, it was not the direct cause of the claimed damage.
Second, the court found that for coverage to exist in this case, a fortuitous event involving electronic circuitry must have caused the DCS to lose its ability to function, as it had been functioning immediately before the incident. The parties agreed that the removal of the replacement encoder caused the DCS to shift from automatic to manual mode, and that shutting down the cement system for maintenance effectively caused the system to set the amount of cement coating to zero. Both actions were intentional and within the control of Nucor personnel. Moreover, the events did not cause the DCS to lose its ability to function as it had been. Both before and after the events, the DCS operated in accordance with its programming. Accordingly, the court held that the evidence did not support Nucor’s argument that the DCS suffered a covered Breakdown.
The case serves as a reminder to insurers that claims for equipment breakdown are fact-intensive and should be thoroughly investigated as part of a loss investigation.
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