Selective coverage for industrial machinery

THE GREAT Fire of London opened the eyes of people to the need for fire insurance. The Industrial Revolution in the U.K. gave the impetus for the evolution of Machinery Breakdown insurance.

Coverage

The Machinery Breakdown Insurance policy provides indemnity against any unforeseen and sudden physical loss or damage to the insured machines whilst running or at rest as a result of an `accident' due to internal or external causes.Such losses would also be paid during the process of dismantling for overhauling, cleaning or repairs and subsequent re-erection within the same premises.

Main exclusions

The insurer will not pay for loss / damage due to accidents in respect of belts, ropes, chains, rubber tyres, dies or exchangeable tools and non-metallic parts; fire and attendant perils (which can be covered under a fire policy); war or warlike operations, riot and civil commotion, strike, lock-out, confiscation, commandeering, requisition or destruction of or damage to property by order of any government, de jure or de facto, of any public, municipal or local authority. (Riot and civil commotion risks can be covered under the standard fire policy.); any existing faults or defects within the knowledge of the insured or his chief engineer; wearing out of any part or parts due to corrosion, rust or boiler scale; wilful act or wilful negligence of the insured or his chief engineer; and overloading or tests requiring the imposition of abnormal conditions.

The insurer will not also pay for any loss or damage for which the manufacturer or supplier of the machines concerned is responsible.

What and how to insure

Unlike in fire insurance, the insured has the option to select specific items of machinery for insurance. Care must be exercised to select only those machines where breakdowns can occur frequently and where the cost of repairs can be high. Also, in an industrial set-up, where there are many identical machines, it may perhaps be economic to be self-insured.

In respect of each and every loss, a deductible franchise (usually a percentage of the sum insured) has to be borne first by the insured. Therefore, wherever possible the selected machinery must be sub-divided into distinguishable and identifiable items of machinery, for example, a generator set can be divided into alternator, diesel engine and accessories.

Sum insured

In fire insurance, the sum insured can be either the reinstatement value or the market value of the property insured in its condition at the time of taking the cover. But, in machinery breakdown insurance, all selected machines should be insured on current replacement value.

If not, at the time of a claim, the application of the condition of average will reduce the quantum of loss payment.

Claims procedure

Inform insurance company immediately and ask for surveyor to be sent; prepare statement giving causes of damage and nature of repairs to be effected and probable cost; furnish surveyor with information he requires, in particular (a) photographs of damages (b) probable cause of failure and (c) estimate of repairs to be carried out.

Claims documentation: Occurrence report; photographs; claim bill and bills to support repair cost.If the repairs are done through an outside agency, the claim bill will be for the amount paid to the repairer plus cost of dismantling, transport to the repairer and back, re-erection and testing charges.

If repairs are carried out in the factory, the claim bill will be for the cost of spares utilised, the cost of dismantling, re- erection and testing.

Basis of settlement

Where repairs have to be carried out normally no depreciation will be charged. However, care must be taken to see that all machines are insured on present day reinstatement value.

If this is not done the insurance company will apply the principle of average and to the extent of under-insurance the insured will have to bear the loss proportionately. In the case of parts which have a `limited life' depreciation will be charged.

However, if any machine is totally destroyed, the insurance company will only pay the present day market value of a new machine less a suitable percentage of depreciation on the basis of the age of the machine concerned deducting salvage subject to adequacy of sum insured.

N. Ramachandran

The author is an insurance consultant.

He can be contacted at: nramac@md3.vsnl.net.in.

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