Machine shops and metal fabrication businesses manufacture parts and assemblies for other companies. When you machine a component, weld a structure, or fabricate an assembly and deliver it to a customer, you're creating products liability exposure. If that part fails and causes injury or property damage downstream, your customer — or their customer — files a products liability claim against you. Standard general liability policies include products-completed operations coverage, but the limits, exclusions, and endorsements matter. You also need property insurance that covers the high value of CNC machinery, equipment breakdown coverage for when that machinery fails, and liability coverage for damage to customer-supplied materials.
If a part you machined fails in a customer's assembly and they file a claim for the cost to replace the entire assembly, that's a products-completed operations claim. If your CNC mill's spindle fails and you're down for two weeks waiting for parts, equipment breakdown coverage pays for the repair and your lost income. And if you damage a customer's raw material or work-in-process during fabrication, you need coverage for customer-supplied property damage.
This guide covers what machine shops and fabrication businesses need to know about insurance: why products liability is the highest-severity exposure, what equipment breakdown covers, how to insure customer-supplied materials, and what machine shop insurance costs.
Products-Completed Operations Liability
Products-completed operations coverage is part of your general liability policy. It covers third-party bodily injury and property damage claims arising from products you manufacture, sell, or install after the work is complete and the product has left your premises or control.
What products-completed ops covers
When you machine a shaft, fabricate a bracket, or weld a structural assembly and deliver it to a customer, you're transferring a product. If that product is defective and causes injury or property damage after it leaves your shop, products-completed operations responds.
- Defective part causes downstream damage: You machine a bearing housing for a customer's assembly. The housing is out of tolerance and causes the bearing to fail. The bearing failure damages the customer's equipment and they file a claim for repair costs and business interruption. That's a products-completed ops claim.
- Fabricated assembly fails and causes injury: You fabricate and install a structural steel platform for a customer. The welds fail and the platform collapses, injuring a worker. The injured party sues you for bodily injury. Your products-completed ops coverage defends and pays the claim.
- Part failure causes recall: You supply machined components to a manufacturer. A defect in your parts causes the manufacturer to recall finished goods. They file a claim against you for the cost of the recall. This is a products liability claim, but many GL policies exclude or limit recall coverage unless you add a products recall endorsement.
Products-completed ops limits and the aggregate cap
Products-completed operations coverage shares the general aggregate limit with your other GL coverages. A standard GL policy is written with a $1 million per occurrence limit and a $2 million general aggregate. That $2 million aggregate is a cap on all claims under the policy in a given policy year, including products-completed ops claims.
If you manufacture parts that go into high-value assemblies or safety-critical applications (automotive, aerospace, medical, energy), a single products liability claim can exhaust your $2 million aggregate. Consider an umbrella policy to add $5 million to $10 million in excess liability above your primary GL.
Products recall coverage
Standard GL policies exclude or severely limit coverage for the cost to recall defective products. If your customer recalls finished goods because of a defect in parts you supplied, the cost of the recall — notification, retrieval, replacement, disposal — is not covered under a standard products-completed ops policy. You need a products recall endorsement or a standalone recall policy to cover this exposure.
Products recall insurance is expensive and is typically only economical for machine shops that supply parts to industries with high recall risk (automotive, consumer products, food equipment). If you supply parts to industries where a defect could trigger a large-scale recall, discuss recall coverage with your broker.
General Liability for On-Premises Exposures
In addition to products-completed ops, your GL policy covers bodily injury and property damage that occurs on your premises or during your operations before the work is complete.
Standard GL limits
Standard limits are $1 million per occurrence and $2 million general aggregate. For most machine shops, these limits are adequate unless you supply parts to high-value assemblies or you have contractual requirements from customers that demand higher limits. Some OEM supply agreements require $2 million per occurrence or higher. If your base GL is written at $1 million, you'll need an umbrella to bridge the gap.
Non-products claim scenarios
- Customer injury on premises: A customer visits your shop to inspect work-in-process. They trip over material on the floor and suffer an injury. This is a premises liability claim under your GL policy.
- Property damage during operations: You're installing a fabricated assembly at a customer's facility and you damage their flooring, electrical panel, or other property during installation. That's an operations liability claim.
- Damage to adjacent property: Grinding sparks from your shop ignite a fire that spreads to a neighboring business. The neighbor files a property damage claim against you. Your GL policy responds.
Property Insurance: Buildings, Equipment, and Inventory
Machine shops carry high-value CNC machinery, manual mills and lathes, welding equipment, grinders, saws, inspection equipment, and raw material and work-in-process inventory. A typical shop's property values range from $500,000 to $5 million or more, depending on the size of the operation.
What property insurance covers
A business owners policy (BOP) or a commercial property policy covers your building (if you own it), your machinery and equipment, your inventory (raw materials, work-in-process, and finished goods), and your tools and supplies. Coverage is typically written on a special causes of loss form, which covers all risks of direct physical loss except those specifically excluded. Fire, theft, wind, hail, water damage, and vandalism are all covered.
Equipment values and agreed value coverage
CNC machinery depreciates on your books, but replacement cost doesn't. If you bought a CNC mill for $200,000 five years ago and it's depreciated to $80,000 on your tax return, but it would cost $250,000 to replace today, you need to insure it for $250,000, not $80,000. Use replacement cost coverage or agreed value equipment schedules to avoid being underinsured.
Business income and extra expense coverage
If a fire, flood, or equipment breakdown shuts down your shop, you lose revenue while you're rebuilding or repairing. Business income coverage pays for your lost net income and continuing expenses (payroll, rent, utilities) during the period of restoration. Extra expense coverage pays for costs you incur to minimize the business interruption — like renting temporary space or outsourcing work to other shops.
The waiting period matters. Many property policies include a 72-hour waiting period before business income coverage kicks in. If you're down for three days waiting for a machine repair, those three days are not covered. Verify the waiting period and consider reducing it to 24 or 48 hours if short outages would be financially damaging.
Equipment Breakdown Coverage
Equipment breakdown (also called boiler and machinery coverage) covers the sudden and accidental breakdown of machinery due to mechanical, electrical, or pressure system failures. This is one of the most valuable coverages for machine shops because CNC equipment failures are common and expensive.
What equipment breakdown covers
- Mechanical failure: Your CNC lathe's spindle fails and the machine is inoperable. Repair costs are $40,000 and the machine is down for three weeks. Equipment breakdown covers the repair cost and the business income loss during the downtime.
- Electrical failure: A power surge damages the controller on your CNC mill. Replacement cost is $25,000 and the machine is down for two weeks waiting for parts. Equipment breakdown responds.
- Computer and software loss: Your CNC equipment is controlled by proprietary software. A hard drive failure corrupts the software and you lose your G-code programs. Equipment breakdown covers the cost to restore or replace the software and the data.
- Spoilage of work-in-process: A refrigeration failure in your heat-treat oven ruins a batch of parts in process. Equipment breakdown covers the cost of the spoiled work.
Equipment breakdown vs. property insurance
Standard property insurance excludes mechanical breakdown, wear and tear, and electrical failures. If your CNC mill's spindle fails from normal use, your property policy denies the claim. Equipment breakdown fills that gap. It's essential coverage for machine shops with expensive CNC equipment.
Customer-Supplied Material and Work-in-Process
Many machine shops work with customer-supplied materials: raw stock, castings, forgings, or partially machined components. If you damage or destroy customer-supplied material during machining or fabrication, the customer files a claim against you for the value of the material and the cost to replace it.
What customer property coverage responds to
- Material scrapped during machining: You're machining a customer-supplied casting and the part is scrapped due to a setup error. The customer files a claim for the cost of the casting and the cost to procure a replacement. Customer property coverage responds.
- Material damaged in storage or handling: Customer-supplied material is stored in your shop and is damaged in a forklift accident or a fire. Customer property coverage pays for the damaged material.
- Work-in-process destroyed: You're partially through a multi-operation job when a machine failure destroys the part. The customer files a claim for the value of the raw material plus the labor and overhead invested in the work-in-process up to the point of loss.
How to structure customer property coverage
Customer-supplied material can be covered under your property policy or under an inland marine policy with a bailees' coverage form. Limits should be set based on the typical value of customer materials you have on premises at any given time. If you routinely have $100,000 to $500,000 in customer-supplied material in your shop, set your limits accordingly.
Workers' Compensation: Caught-In and Struck-By Injuries
Machine shop work is one of the highest-risk occupations for workers' compensation claims. Machinists are exposed to rotating machinery, cutting tools, heavy material handling, slip and fall hazards, and repetitive motion injuries. Caught-in-between injuries from lathes, mills, and grinders are high-severity claims.
Texas workers' comp: optional but required in practice
Texas is the only state where workers' compensation is optional for most private employers. You can operate as a non-subscriber, meaning you don't carry workers' comp and your employees sue you directly if they're injured. For machine shops, this is not a realistic option if you work with commercial customers. OEMs and contractors require workers' comp as a condition of the supply agreement. Without it, you're limited to small, cash-paying customers.
Common machine shop workers' comp claims
- Caught-in-between injuries: Machinists working on lathes, mills, and grinders are exposed to rotating machinery. Fingers, hands, and arms caught in chucks, spindles, or cutting tools produce catastrophic injuries and high-severity workers' comp claims.
- Struck-by injuries: Parts ejected from machines, tools dropped from height, and material handling accidents produce struck-by injuries.
- Slip, trip, and fall injuries: Machine shops have slippery floors from cutting fluids and oils. Trips over material, hoses, and air lines are common.
- Repetitive motion injuries: Machinists performing repetitive setups, loading and unloading parts, and operating manual equipment suffer shoulder, back, and wrist injuries over time.
- Eye injuries: Metal chips, grinding sparks, and cutting fluid splashes cause eye injuries even when workers wear safety glasses.
Commercial Auto
Machine shops operate delivery vehicles, pickups, and trucks for material pickup and job delivery. Your commercial auto policy covers liability and physical damage for your business vehicles. Standard limits are $1 million combined single limit. Make sure your policy includes hired and non-owned auto coverage if employees use personal vehicles for company errands or if you rent vehicles.
Who Requires Your Certificate of Insurance
Machine shops provide certificates of insurance to customers who purchase machined parts or fabricated assemblies. OEM supply agreements almost always require proof of insurance before you're added to the approved supplier list.
Certificate requirements from OEM customers
- General liability with products-completed ops: Typically $1 million to $2 million per occurrence. The customer is added as an additional insured for products-completed operations.
- Umbrella (if required by contract): Some OEM agreements require $5 million or $10 million in total liability limits. If your base GL is $1 million, you need an umbrella to meet the requirement.
- Workers' compensation: Statutory limits, with an employer's liability section at $1 million per accident. Waiver of subrogation in favor of the customer.
- Property insurance with customer property coverage: Some contracts require proof that you carry insurance for customer-supplied materials.
Additional insured endorsements
OEM customers require that they be added as an additional insured on your GL policy for products-completed operations. The endorsement form matters. Most customers require CG 20 10 (ongoing operations) and CG 20 37 (completed operations) or a blanket additional insured endorsement. The restrictive CG 20 33 form is often not acceptable.
Waiver of subrogation
This endorsement prevents your carrier from suing the customer to recover claim payments, even if the customer was partially at fault. It's a standard requirement on OEM supply agreements and is added to your GL, auto, and workers' comp policies by endorsement.
Certificate turnaround time
You win a new OEM contract. The customer needs a certificate with specific additional insured language, products-completed ops confirmation, and waiver of subrogation endorsements before they issue the first purchase order. Can your broker deliver it today? At Tenet, we issue certificates of insurance on a published 15-minute SLA, around the clock. When a delayed certificate costs you the contract or delays your first shipment, speed matters.
What Machine Shop Insurance Costs
Premiums depend on your revenue, number of employees, property and equipment values, the types of parts you manufacture (complexity, tolerances, end-use applications), and your claims history. Here are realistic ranges for a machine shop with $1 million to $5 million in annual revenue, 5 to 25 employees, and $500,000 to $3 million in property and equipment values.
- General Liability (including products-completed ops): $3,000 - $15,000/year
- Property (building, equipment, inventory): $5,000 - $30,000/year
- Equipment Breakdown: $1,500 - $6,000/year
- Inland Marine / Customer Property: $1,000 - $5,000/year
- Workers' Compensation: $8,000 - $50,000/year
- Commercial Auto (1-5 vehicles): $2,000 - $8,000/year
- Umbrella ($5M): $2,000 - $8,000/year
Total annual cost for a typical machine shop: $22,500 - $122,000. Smaller shops with clean loss histories and lower-risk work (general machining, non-critical parts) will be toward the low end. Larger shops with high property values, employees, and products liability exposure for safety-critical parts will be at the higher end.
What drives your premium
- Payroll: Workers' comp is priced as a percentage of payroll. Higher payroll means higher workers' comp premiums.
- Property and equipment values: The more your building, machinery, and inventory are worth, the higher your property and equipment breakdown premiums.
- End-use of parts you manufacture: Machine shops that supply parts for safety-critical applications (automotive, aerospace, medical devices) pay more for products liability coverage than shops that manufacture general industrial parts.
- Customer contracts: If your customers require high liability limits or specific endorsements, that drives your cost. An umbrella policy to meet a $5 million contract requirement costs $2,000 to $8,000 per year.
- Claims history: Five years of clean loss runs can reduce your total insurance cost by 20% to 35%. Frequent products liability claims, customer property damage claims, or workers' comp claims will push you toward the excess and surplus market at higher premiums.
Common Mistakes
Underinsuring CNC equipment
CNC machinery depreciates on your tax return, but replacement cost doesn't. If your equipment is listed on your books at $500,000 but would cost $2 million to replace, and you've insured it for $500,000, you're underinsured by $1.5 million. Use replacement cost coverage and update your equipment values annually.
Not carrying equipment breakdown coverage
Standard property insurance excludes mechanical and electrical breakdown. If your CNC mill's controller fails and you don't have equipment breakdown coverage, you're self-insuring a $30,000 repair and two weeks of lost income. Equipment breakdown is essential coverage for machine shops. Don't skip it.
Not covering customer-supplied materials
If you damage customer-supplied material during machining or fabrication and you don't have customer property coverage, you're paying for the material out of pocket. A single scrapped casting can cost $10,000 to $50,000. Add customer property coverage to your policy or inland marine program.
Signing OEM contracts without verifying products-completed ops limits
Some OEM supply agreements require $5 million or $10 million in products liability coverage. If your base GL is written at $1 million and you don't have an umbrella, you're not compliant and the customer can cancel the contract. Verify your limits meet contractual requirements before you sign the agreement.
Working with a broker who doesn't understand manufacturing exposures
Machine shop insurance sits at the intersection of products liability, equipment breakdown, customer property, and high-severity workers' comp. A generalist broker may not understand the products-completed ops exposures you create, may fail to recommend equipment breakdown coverage, or may place you with a carrier that doesn't write manufacturing risks. Use a broker who specializes in manufacturing and who understands machine shop operations.