1. 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 more
necessary 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 the
new 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 policy
with 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 premium
collection 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 basis
ii) Total loss basis
There will not .be any depreciation applicable to the parts damaged in case of a partial
loss assessment except for the parts with limited life. The depreciation depending on the
condition 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 (Depreciated
value) 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.;

2. 7. In cas~ of a claim the following details in general are requIred in addition to the
details 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 the
parts 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)
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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 Rate
2Times excess 0.9 Rate
However the underwriting can not be without
the Tariff excess.
Eg. Suppose underwriting a machine is with a Rate of 1% with an excess
of 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.

3. 2.
Eg.
3.
Eg.
4.
Eg.
5.
Eg.
6.
The sum. Insured in aU the Engineering policies should be the Replacement
value which is the value of the new equipment+ Freight+erection charges
calculated at the time of claim (ie accident/replacement) If there is any
under 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/- Excess
is 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 parts
with 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 Transformer
sum Insured, otherwise it is an exclussion.
The replacement value of Transformer is &.1 lac.=which includes.-1;}1A
transformer oil. - -
There is no escalation provision in MB policy.

4. Eg. The possible escalation during the policy period is not possible to
determine. Hence there is a provision in the fire policy to choose the
escalation % upto 15% of S.l. and this is supposed to gradually increase
over 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 cover
adequately.
7.
Since such provision is not in MB, clients may be advised to have a
cushion 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 premium
at 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)Insurance
In 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 initiative
of 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 been
given, 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 Breakdown
iru;uranc@,...its scope-'-and procedure adopted in -determining the sum insured and the
indemnity.
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. Machinery
Br7akdown insurance is a branch which is rather exacting on the Insurer, and can be
tra:nsacted successfully only if all concerned, including the client, are aware of its basic

5. features and the peculiarities of the cover provided. -This is why the fore going remarks
are 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 the
exclusions 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 can
be covered under a Fire insurance and loss or damage which occurs as a-direct consequence
of the contingental influence of operation, and which is therefore foreseeable, Le. "normal
wear and tear". Machinery Break-down Insurance fulfils more or loss the same function
for 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 even
the largest steam turbo-sets.
-
In order.to explain to you in greater detail the term "unforeseen and sudden physical
loss or damage" some typical causes of loss are enumerated here below:
Cerelessness and Lack of Skill in the Operation and Maintenance of
Machinery
The majority of the indemnities -payable by Machinery Breakdown Insurers is due
to 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 and
the 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.

6. Malicous Damage and sabotage
By consistently guarding factories against outsiders, constantly supervising the
personnel 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 is
always possible that a discontented worker who feels that he has been treated unfairly
takes revenge against the management by damaging machinery or even rendering it
completely useless (the famous case of throwing a spanner into the works).
FaultY.pe~ign,..~Faulty Casing and Faulty Material
The increasingly rapid progress of techincal development results in. machines and
apparatus becoming obsolete much more quickly than formerly, In order to guarantee a
maximum productive capacity, it is therefore often necessary to replace such machines
by up-to-date units. Very frequently such novel designs have not yet fully matured and
their 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. Faulty
design 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 is
customary 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, for
instance, 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:hinical
equipment rather frequently. In this conne'ction many cases where tower Cl1ines were
damaged'during a storm or where watercooled engines l5ustained frost damage, are
common.
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 to
cover the risks resulting from the normal operation of machinery. Catastrophe cover is
more suitable for inclusion under Fire insurance and has indeed for many years been
granted in that line as "Extended Coverage".
...

7. 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 they
used. to be, but, if one of the present-day steam or water turbines ove~peed, say, due
to failure of a control, it is still possible for very heavy damage to be ca~ed by centrifugal
force.
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 by
perils 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 parts
of 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-out
persons.
Inundation,.flood, earthquake, subsidence, landslide or volcanic eruption.
o
o
o 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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8. 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 considered
a 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 accident
occurS. 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. !Jf
most 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 with
the same capacity of perfonnance. The replacement ~alue of an old machine can therefore
be 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 improving
designs and retionalizing production processes. The exact replacement value of a machine
can 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 paid
for a---ieplacement:. It is also evident that, depending on the age of machine lost, some
tlepriciation'.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 reason
is that most clients would be rather annoyed about such a deduction even in cases
where the tech,nical postion is quite clear since the increase in value is not all that
obvious. A repaired machine is still an "old" machine to the client, wheras in the case

9. 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 case
of 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 actual
replaceJJlent 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 the
actual 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 the
insured refusing to agree to increase in the sum insured underinsurance is fully applicable
in 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 a
guide tariff in your Engineering manual.