ENGINEERING INSURANCE

K.S. BURLI, Asst. Manager,United India Insurance Co. Ltd.,

Regional Office, Madras.

'",

Insurance of Engineering risks is becoming more and more relevant' in the present day

- context. With the advent of computerisation and space technology it becomes all the morenecessary to brush up our concept of application on underwriting and processing of these

policies. The following specialities of all the Engin~ring Insurance policies need attention:

1. Sum Insured in all the policies as the replacement value. This is the value of thenew item of the same type and capacity at the time of accident or replacement,

including the erection, transportation and reasonable overheads,

2. Rate and excess together will complete the underwriting of the Engineering policywith the exception of the boiler and pressure vessel policy. where there is no

excess applicable.

3. - Reinstatement of sum insured after the claim by way of additional prorata premiumcollection for the remainder of the policy period. is the condition of all Engineering

policies.

4. There are two ways of claim settlement:

i) Partial loss basisii) Total loss basis

There will not .be any depreciation applicable to the parts damaged in case of a partialloss assessment except for the parts with limited life. The depreciation depending on thecondition of the machine (depending on its usage) is applicable in case of a total loss

settlement. If the repair charges in partial loss assessment exceed the market value (Depreciatedvalue) of the machine then the settle~ent will be made on the total loss basis:

5. Average clause is applicable in all the cases of claim settlement.

. 6. The Indemnity provided is calculated on the following basis:

Estimated loss(as per survey report)

Less the salvage(as per survey report)

The above calculation will give the loss s-gffered by the insured.

Average is applied on the loss suffered to arrive

at the proportionate loss liability of the insurance company. Then -th"e excess, if

any is ded'.lcted as per the policy conditions.;

7. In cas~ of a claim the following details in general are requIred in addition to thedetails which are of special nature to the claim under question:

a) Nature and cause of damage.

b) Photographs showing the damages visibly noticed during survey.

c) Policy datails of the cover with additional endorsement made, if any.

d) Date of accident.

e) Log book details, if any preceding the accident.

t) Replacement value of the damaged equipment." .

g) Depreciation aspects of the machine in case of total loss and of theparts with limited life for the partial loss damages.

Salvage and comments on disposal of the same.

Excess as per policy,

Estimation of Insurer's liability as per survey.

h)

Q

j)

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Machinery Break-down Policy

This class of business has some specialities which should be understood before

underwriting.

1. The rates here are with the "excess. "Excess" is the amount the Insured has to

bear in each and every claim and the rate is linked with the excess amount. If

the excess amount is chosen in mulitiples of the specified excess there i~ a scale

of discount we can ofter as follows in" the rate as per tariff provision.

Eg. Excess Rate2Times excess 0.9 RateHowever the underwriting can not be withoutthe Tariff excess.

Eg. Suppose underwriting a machine is with a Rate of 1% with an excessof 1% or &.10.00/- (Whichever is high) This is the same as 0.9% with

an excess of 2% or &.2000/- (Whichever is high) -NOTE:

There is no tariff excess in the case of Boiler and pr-essure vessel policy.

2.

Eg.

3.

Eg.

4.

Eg.

5.

Eg.

6.

The sum. Insured in aU the Engineering policies should be the Replacementvalue which is the value of the new equipment+ Freight+erection charges

calculated at the time of claim (ie accident/replacement) If there is anyunder insurance the average is applicable.

1) Replacement value of m/c at the time of Insurance =B.s. 1 Lac.

2) Sum Insured is say B.s. 1 lac.

3) Replacement value of the same m/c at the time of claim = 1.2 lacs.

Then if. the 1055 a55e55ed is say &.5000/- Salvage is say &.500/- Excessis say 1% of S.I(or &.1000/- whichever is high) ie 1000/- The liability

of the company.

1= - (5000-500)-10001.2

= (4500)/1.2 - 1000 = 2750

NOTE :

The average is applicable in all the case8, whether the 1088 is part or it is total.

Depreciation is. not applicable in case of partial losses except for partswith limited life.

Even though there is a damage to pistons and liner:-s in a Diesel

Engine/compressors etc. which is amounting io partial loss an apprropriate

depreciation is deducted for their usage since these are the parts with,limited life and wear and tear is much.

Whereas for the. ot~er ~ there is no depreciation effected.The special exclusions' are those which cannot be covered even by

additional premiums. .

Damages to belts, cutters, rolls, glass objects Porceline/Ceramics ect.

Transfprmer oil should be mentioned specifically in the case of Transformersum Insured, otherwise it is an exclussion.

The replacement value of Transformer is &.1 lac.=which includes.-1;}1Atransformer oil. - -

There is no escalation provision in MB policy.

Eg. The possible escalation during the policy period is not possible todetermine. Hence there is a provision in the fire policy to choose the

escalation % upto 15% of S.l. and this is supposed to gradually increaseover a year i.e. for 20 days it is

;6°5x Escl % limit chosen.

This will enable the client to choose the appropriate provision to coveradequately.

7.

Since such provision is not in MB, clients may be advised to have acushion for this in his S.Lie he may declare S.l. little more than

Replacement. No refund of premium is allowed for over insurance if any.

Following extensions are avaliable for M.B. against additional premiumat the rates specified in tarllf.

a) Over time, Night work on public Hoilday, Express freight:

b) Ari Freight only.

c) Cover for Boiler.

d) External impact or accidental damage

e) Ow~ers surrounding property.

o Third party liability.

to Glass Equipments/Apparatus.

Machinery (Breakdown)InsuranceIn the last decade of the nineteenth century a machinery break-down insurance

with a rather wider scope was conceived and introduced in Germany at the initiativeof the Munich Reinsurance Company. It was intended to grant cover for machinery of

any kind against damage occurring during normal operation. After overcoming some

initial difficulties the insurance developed very satisfactorily in the form it had beengiven, and later on,. it was, successfully introduced in all industrialized countries on the

continent. This kind of insurance is today underwritten in mj>st of the countries.

After this intr~duction you should be familiar with the nature of Machinery Breakdowniru;uranc@,...its scope-'-and procedure adopted in -determining the sum insured and theindemnity.

In the second part of these notes the routine work a Machinery Break-down insurer

has to perform in convassing and servicing the business is dealt with. MachineryBr7akdown insurance is a branch which is rather exacting on the Insurer, and can betra:nsacted successfully only if all concerned, including the client, are aware of its basic

features and the peculiarities of the cover provided. -This is why the fore going remarksare of special importance.

1. Nature of Machinery Breakd9WD Insurance

1.1 Property and PeriJs Insured

Machinery Breakdown insurance grants protection for the property insured against

any uproreseeh and sudden physical loss or. damage, but is of course subject to theexclusions customary in property Damage insurance, such as war, riot, wilful act.s and

gross negligence on tile part of the Insured: -It further excludes loss O! damage that canbe covered under a Fire insurance and loss or damage which occurs as a- direct consequenceof the contingental influence of operation, and which is therefore foreseeable, Le. "normalwear and tear". Machinery Break-down Insurance fulfils more or loss the same functionfor machinery as a combination of Personal Accident and Health insurance does for

human beings.

Under Machinery Breakdown insurance it is possible to insure practically all 6tationery

and mobile machinery, machanical equipment and apparatus used in industry and trade,inclucling electric motors, pumps, hoists, airconditioning plant, turning lathes, looms,

printing machmes, cranes, transformers, Diesel engines, steam engines, boilers and eventhe largest steam turbo-sets.-

In order.to explain to you in greater detail the term "unforeseen and sudden physicalloss or damage" some typical causes of loss are enumerated here below:

Cerelessness and Lack of Skill in the Operation and Maintenance ofMachinery

The majority of the indemnities -payable by Machinery Breakdown Insurers is dueto losses attributable~ to these causes, that is, to human failure. A most regretable

symptom of advancing industrialization, higher living standards and~ decreasing

unemployment observed in nearly all countries-is that work is performed much less

conscientiously and reliably, At the same time, machines become more complicated andthe functions by human labour simpler and more monotonous.

Few examples are : Overloading of machines due to an "inadvertent" selection of a

higher operating speed., tools left lying around which may easily get into a machine,failure to obs~rve warning instructions, inadequate maintenance of controlling devices.

. -Industry is following up this development with great concern and is glad about the

cover provided by insurers.

Malicous Damage and sabotage

By consistently guarding factories against outsiders, constantly supervising thepersonnel and endeavouring to maintain a good working atmosphere the danger of

malicious damage and sabotage can pe reduced but in spite of such measures it isalways possible that a discontented worker who feels that he has been treated unfairlytakes revenge against the management by damaging machinery or even rendering itcompletely useless (the famous case of throwing a spanner into the works).

FaultY.pe~ign,..~Faulty Casing and Faulty MaterialThe increasingly rapid progress of techincal development results in. machines and

apparatus becoming obsolete much more quickly than formerly, In order to guarantee amaximum productive capacity, it is therefore often necessary to replace such machinesby up-to-date units. Very frequently such novel designs have not yet fully matured andtheir teething troubles have not been overcome during manufacturer's development testing

but are only revealed when the units are operated in the purchaser's plant. Faultydesign is often not even discovered when machines are fIrst put into operation and are

"', still under the manufacturer's guarantee, but only after many months of running. For.instance, a motor that is insufficiently protected against humidity may only be damaged

'. when the motor is actually getting wet. .

Short-Circuiting; Excess Voltage and Electric Arcing

You all know that these are the main sources of damage to electrical equipment.

In most cases the insulation is the weekest point of such machines, especially if, as iscustomary today, the material is stressed to the utmost even during normal operation.

The construc:tic;m of the winding of an electric motor, a generator or a transformer, forinstance, may gi.~ rise to substantial costs and in canvassing talks' with prospective

clients this is an important argument in -favour~f _tile protectiQ~ against such losses

-provided by-machinery Breakdown insurance. .

''Normal'' Atmospheric influence

This term covers natural phenomena, such as storm, frost and drifting ice, which

do not normally give rise to catastrophes but nevertheless caU5e damage to mac:hinicalequipment rather frequently. In this conne'ction many cases where tower Cl1ines weredamaged'during a storm or where watercooled engines l5ustained frost damage, arecommon.

Catastrophe losses arising out of Acts of. God, such as earthquake, inundation,landslide, etc., do not come under Machinery Breakdown insurance ~hich is d~igded tocover the risks resulting from the normal operation of machinery. Catastrophe cover ismore suitable for inclusion under Fire insurance and has indeed for many years been

granted in that line as "Extended Coverage".

...

Centrifugal Force

The damage caused by centrifugal force was particularly seriouS at: the time when. .

piston-type steam engines with large flywheels 'were still predominant in the field of

prime movers. When these flywheels reached an exce5S speed and 4~integrated one

talked about a flywheel explosion. Today large flywheels f!re not ,as. ~mmo1i as theyused. to be, but, if one of the present-day steam or water turbines ove~peed, say, dueto failure of a control, it is still possible for very heavy damage to be ca~ed by centrifugalforce.

This brief list of possible causes of damage will give you some idea' of the coverage

prpvided by Machinery Breakdown insurance, but you can no doub,t 'imagine that there

are many other causes of unforeseen and sudden loss. The cover is actualll very wiae,since in accordance with the policy conditions, the Insurer is liable' for all losses except

thosd specifically excluded. The wording of the policy, lists the exclusions rather clearly,

. but to give ,you the full picture, they are enumerated again.

. Machinery Breakdown insurance does not" in fact cover loss or damage caused byperils that can be covered under any other type of insurance, such as fll'e, lightning,chemical explosion, burglary and theft;

o Wear and tear as consequence of ordinary use or operation, cavitation, erosion,

corr08ion, rust or boiler scale. This exclusion, however, relates only to the partsof the machinery immediately affected by wear and tear, etc." Whereas damage

indirectly' caused to other parts of the machinery. is included.

War or warlike operation, civil commotion, act, on the part of rebels or locked-outpersons.

Inundation,.flood, earthquake, subsidence, landslide or volcanic eruption.

o

oo Wilful orgros~ly negligent acts on the part of the policyholder or of those

responsible for the management of the works.

o Faults or defects which existed at the time of the conclusion of the insurance

and which ought to have been known to the policyholder or his executiye staff.. .

o. Fault:.. or -defects for which the supplier is responsible py contract or by law{losses covered by warranty)

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12 Fixing of Sum Insured and Indemnities

Perhaps you will for once allow to put the cart before the..-horse and to comment-}pn the indemnity payable in the event. of loss, before dealing with the sum insured.

If an insured machine is damaged and such damage is payable under the terms

of t~e policy, the cl~ent should, of course, be paid the indemnity to which he is entitled.as -quickly as possible. But, before fIXing this amount, it is necessary to. determine

,~hether the damaged machine can be repaired or is a total 1055.A Machine is considereda total 1055 within the meaning of the policy conditions if the estimeted or billed repair

costs. .are higher than the. actual cash value of the machine at the time when the accidentoccurS. A distinction should be made between this actual cash value in a technical sense

and the actual cash value assessed for fiscal or accounting purposes. In the event of a

total 1055 therefore, the Insured is paid the replacement value of the machine less

adeauate depreciation. Even in the case of a very old machine which was still operative~ to the time of the accident, such depreciation should not be higher than 60 or 70%.

Jf., on the other hand, a machine c:an be ~paired -~his is. possible in the case. !Jfmost machinery breakdowns - the costs incurred in repairing the damage are ~id in-full

without.'deducling depreciation.

In either case, however, the indemnity is subject to the deduction of the excess

provided for in the policy.

The term "Replacement value" is mentioned without however, explaining .it. The

replacement value is the price to be paid for a ~ machine of the same type and withthe same capacity of perfonnance. The replacement ~alue of an old machine can thereforebe either higher or lower then the value of such a new machine. The gradual depreciation

of currency taking place in many countries results in a general rise in prices, but on

the other hand it has been possible to lower the prices of many machines by improvingdesigns and retionalizing production processes. The exact replacement value of a machinecan therefore only be obtained trom the manufacturer. Perhaps some of you will regard

the replacement value which is subject to price fluctuation as a rather questionable

criterion for fIXing the indemnity. On the other hand, you will no doubt agree that in

the event of.a total loss ~he only amount that is of interest is that which must 'be paidfor a---ieplacement:. It is also evident that, depending on the age of machine lost, sometlepriciation'.jS justified. The reasons why in the case of repairs no deduction is made

for depreciation are as follows :- First it is often very difficult to say just how much

the value of the machine has increased on account of the repairs, and the second reasonis that most clients would be rather annoyed about such a deduction even in caseswhere the tech,nical postion is quite clear since the increase in value is not all thatobvious. A repaired machine is still an "old" machine to the client, wheras in the case

of a total loss the replacement takes the form of a new machine which has of course

higher value, leaving 'aside a few exceptions. The deduction of depreciation in the caseof repairs is dispensed with in an endeavour to satisfy clients and, on the other hand,1;0facilitate canvassing for you. Thus the sum insured should always equal the replacement

value. You will no doubt wonder what happens if, in the event of loss or damage, the

sum insured turns out. to be too l~w,that is, if it proves to be lower than the actualreplaceJJlent value. The policy condition stipula~ that in the case of such under-insurance

the indemnity is reduced in the same proportion which the sum insured bears to theactual replacement value. However, in Machinery Breakdown insurance it is. not always

'so easy to fIX the sum insured, that is, the rep~cement value of the property to be. insured, fairly often the insurer's specialist staff is called upon 'to assist to you make

an assessment. The Insurer is of course entitled to draw the insured's attention to the

fact that his property is' under insured, even if no loss occurs. In the event of theinsured refusing to agree to increase in the sum insured underinsurance is fully applicablein caSe of loss.

Other conditions and provisions of the machinery Breakdown policy, for a fundemental /

understanding of. ~he peculiarities of this branch are of secondary importance.

The only other point that calls for comment is the rating of MachiIiery Breakdown risks.

Rating13

Machinery Breakdown policies are as rule taken out for a period of one year and

the premium rates are therefore also on an annual basis. For electrical machineries,you may be aware that there is a tariff and for non-electrical equipments there is aguide tariff in your Engineering manual.