When must a faulty machine be replaced?

Often we have had cases where apparently a machine has been left so damaged following a Fire or Machinery Breakdown event that it has to be replaced.  However, before taking that decision, the situation must be thoroughly examined since, although the Insured may be interested in having the damaged machine replaced with a new one, as you are well aware, if the repair is both technically and financially feasible, then the insurance policies will settle the cost of the repair not that of the replacement.

The Insured can easily get a report from the machinery manufacturer explaining that the repair is not feasible and that the damaged machine must be replaced. Obviously, the manufacturer is interested in selling machines and therefore normally has no problem with issuing this type of report, which generally is pretty brief and not very technical.   But if the machine is replaced, then we will be faced with a total loss, and the cost of the damage will be more than the actual value of the machine.  In such a case, most policies prescribe that the actual or real value of the machine ought to be indemnified, that is to say, taking into account depreciation for age, use and obsolescence.

On the other hand, if we are facing a partial loss, or in other words, the cost of the damage is less than the actual value of the machine, then in this case the policy will indemnify the cost of the repair without applying any depreciation whereby the Insured will not have to make any disbursement whatsoever.

Another scenario that might happen in this type of loss affecting machinery is that it can be repaired temporarily, with no guarantee, so that it might withstand a few months whilst awaiting the arrival of the new machine, which often has delivery times of several months.  This is expedient when the shutdown of the damaged machine will give rise to some significant Consequential Losses.

What can also be useful is to ask for a second opinion or a second report regarding the chances that the machine may be repaired when the manufacturer and the Insured propose its replacement. Likewise, companies specialising in the recovery of facilities and machinery should be contracted, as they can minimise the damage and get the machine working again, even if only temporarily until the new machine can be supplied.

This solution is highly valued by Insureds and Insurers alike, since it allows the Consequential Losses to be minimised by reducing the potential losses of sales and clients.

To summarise all the above, with Machinery Breakdown not only is it important to learn the cause of the loss event, in order for which a metallurgical analysis is often required, but also it is essential to ascertain the exact extent of the damage and confirm whether the machine can be repaired or if it needs to be replaced.

At VANTEVO CLAIMS ADVISORS we work with reputable laboratories and reliable workshops, which allows us to resolve these two questions:  the origin and cause of the breakdown and the extent of the damage, clearly and precisely, thus enabling us to reach agreement with all the parties involved in the claim.

Why is Machinery Breakdown cover important for Industrial Risks?

In the insurance sector you often hear it said that if a piece of machinery has a Maintenance Contract, then it no longer needs any Machinery Breakdown Policy because the two cover the same thing.

The above is totally incorrect, since maintenance contracts do not cover any accidents due to employee negligence, nor do they cover any Consequential Losses arising out of a breakdown, both being things that can be insured under the covers for Machinery Breakdown and Consequential Losses arising out of a machinery failure.

It is statistically proven that the majority of industrial claims occur on account of a “human factor”; in other words, caused by employee negligence and in that case, the Maintenance Contract will not be liable for the losses.

Machinery Breakdown cover not only complements the Material Damage All Risks cover, which as we know excludes Machinery Breakdown due to any causes intrinsic to the functioning thereof, but also is complementary to the Maintenance Contracts.

These latter, particularly in the case of sophisticated and high value machinery, are very useful for guaranteeing rapid repairs using original parts in the event of its breakdown.  They also might allow us to reduce the Consequential Losses if we have agreed in the Maintenance Contract that the manufacturer must, within the next 30 -45 days, install a similar second hand machine whilst the repairs are carried out on the damaged one.  This clause should allow us to achieve a cheaper premium for the Consequential Losses cover by limiting the financial consequences of the loss event.

The same as with the MD All Risks Policy, the General Conditions of the Machinery Breakdown cover includes a series of exclusions which in some cases can be revoked by means of additional covers to the basic ones, such as covering the Extra Costs on account of urgent work, air freight, covering the machine foundations, etc.

It is up to the Insured and their Insurance Broker when contracting the additional covers to “adjust” the Policy to the risk that they want to cover, in such a way that the Machinery Breakdown cover is also “made to measure” so that the Policy functions properly in the event of a loss event, which is the moment of truth in the insurance sector.

 

As regards the loss events, it is vital to ascertain their cause.  In order for this very often it is essential to contract a metallurgical laboratory that can determine whether it was the case of a slow and gradual failure, which is not covered by the Policy, or whether it was a sudden, accidental and unforeseeable event, which is covered by the insurance.

At VANTEVO CLAIMS ADVISORS, we have persons who specialise in the adjustment of Machinery Breakdown losses and the Consequential Losses arising from the same.

The study of the cause of Machinery Breakdowns.

We are all well aware that ascertaining the cause of a loss event is essential in order to clarify the cover for the claim, determine liability for the same and to take measures to prevent it from happening again.

In the case of serious fire losses, sometimes given the degree of destruction caused by the fire, it is not easy to pinpoint the origin of the same, despite contracting experts in root cause investigations.

In cases of Machinery Breakdown claims, the study of their cause is less complicated, but nonetheless often requires the intervention of metallurgical or electrical laboratories, depending upon the presumed origin of the loss event.

It is only by means of a metallurgical analysis that you can verify whether the fracture process of a blade or metal part has been a slow and gradual one or sudden and unforeseeable,  besides being accidental.  In the first case, the loss would not be covered whilst in the second, it would be.  Again we would need the assistance of a metallurgical laboratory to ascertain whether any corrosion or erosion was slow and gradual or accidental and fast, and therefore possibly covered in this latter case.

At VANTEVO CLAIMS ADVISORS, we tend to use the laboratories of Engineering Schools, since in the event of any dispute, the courts usually positively weigh the reports signed by professors, since they assume they have the knowledge and independence to issue their opinion.

There are not normally any problems with the conclusions reached in the laboratory reports, since these are usually clear and conclusive, and their conclusions are objective and well documented, and accordingly can be accepted by all the parties involved in the claim.

At VANTEVO CLAIMS ADVISORS, we usually ask that, in addition to ascertaining the “root cause” of the loss event, they suggest measures to avoid similar claims in the future and their recommendations normally are very interesting.