Machinery Breakdown Insurance

Machinery breakdown insurance, formerly known as Boiler and Machinery insurance, is designed to cover the losses arising out of all types of mechanical, electrical, and accidental breakdowns as a result of internal and external causes. Machinery breakdown insurance was formerly referred to as boiler and machinery insurance as it was intended to cover the risks faced by boilers and other machinery in the industries. Still, later, with the emergence of many types of machines and the redundancy of boilers, the insurance was re-christened Machinery breakdown insurance. In the olden days, most industries used boilers. Therefore, the policy was designed keeping them in mind, but due to the change in the equipment, the coverage of the policy was also modified accordingly. Machinery breakdown insurance covers the machinery during the time it is in operation or at rest or in the process of dismantling, overhaul, or during subsequent re-erection at the same premises. It is important to note that the policy is premises-specific, and the damage to the machinery is covered only when the machinery is present on the insured premises.

This policy covers the cost of the replacement of the parts or the whole machine in case of damage due to an insured peril. The cost of replacement would be on a market value basis after considering the depreciation and would also include other costs such as freight charges, customs duty, etc. The policy is very useful for industries employing any machinery as the damage to the machinery would disturb the entire manufacturing ecosystem and can cause considerable loss to the businesses. The policy also pays for the bodily injury or property damage to the third parties on payment of an additional premium. Business losses such as loss of income due to machinery damage would also be covered under the policy subject to terms and conditions. It is important to note that the machinery breakdown policy is always taken to complement the Standard Fire & Special Perils policy.

Coverage

Machinery breakdown resulting from mechanical and electrical breakdown due to short circuits, excess voltage, faulty material, faulty casting, and faulty electrical design.
Covers unforeseen physical damage to the machinery due to electrical or mechanical breakdown.
Covers losses arising out of abnormal operating conditions of the machinery
Covers losses due to damages arising out of falling, impact, or collision.
Covers losses to the machinery arising out of lack of skill of the machinery operators.
Covers losses arising out of negligence of the operating personnel.
All these covers would be valid while the machine is in operation or at rest or in the process of being dismantled, overhauled or during subsequent re-erection at the same insured premises.
The policy also covers the machinery foundations, masonry, brickwork as well as the oil in transformers from any unforeseen circumstances resulting in sudden loss or damage apart from those excluded under the policy.

Exclusions

The policy doesn't cover the losses or damages caused to the machinery due to:

Fire and allied perils
Theft
Experiments conducted with overload
Wilful acts or gross negligence
Naturally developed flaws due to deterioration or wear and tear.
Pre-existing defects in the machinery before the commencement of the policy
Consequential loss arising out of the usage of machinery in conditions other than prescribed by the manufacturer or it is intended for.
Bells, ropes, chains, rubber tyres, dies, molds, cutters, blades, knives etc. arising on a stand-alone basis.
Subsidence, landslide, impact of landborne, waterborne craft.
Other general exceptions include war, invasion, contractual liability, and explosions in chemical recovery boilers, other than pressure explosions.

Add-ons

Escalation Clause: The sum insured under the policy can be increased on payment of an additional premium. The sum insured would be escalated every day by an amount representing 1/365th of the specific percentage increase per annum. The escalation clause in machinery breakdown insurance allows the insured customer to increase the sum insured in the policy to cover any unexpected costs. These unexpected costs could be due to fluctuations in the market, such as inflation resulting in increasing the price of the part of the machine.
Air freight: Air freight covers the transportation of an item from one place to another palace through air. Air freight reduces the time for replacement of a part in case of machinery breakdown, which would subsequently rescue the business interruption costs of the insured. There could be machinery that was imported, and any damage to them requires parts to be imported from their country of origin. In such cases, the machinery breakdown policy would pay for the air freight expenses incurred for such replacement or repairs. Air freight expenses would be paid on payment of an additional premium as the base policy does not have to include expenses incurred on air freight.
Express freight (excluding air freight), overtime and holiday wages: Express freight is an item that needs to be transported from one location to another in a short period of time. This is similar to the air freight add-on, but the freight could be express speed, which means the item would be transported within the minimum possible time period. Machinery breakdown could lead to halting the operations of the company and, therefore, could result in business loss. In such cases, insured customers could opt for express freight wherein the item would be delivered within a short period of time, and the business losses could also be reduced, which arises out of the non-functional nature of the machinery. This add-on also covers the overtime and holiday wages incurred during the process of express freight.
Insured’s own surrounding property: Machinery breakdown might result in damages to the insured's surrounding property. For instance, the bursting of boilers could result in damage to the insured's surrounding property, and this damage could be covered under the add-on in machinery breakdown insurance. The damage to the surrounding property could be while the machinery is at rest or in use for construction or erection during the policy period. The insurer could pay for the damages to the insured property by repairing or reinstating the property up to the indemnity limit specified under the policy. However, the damage or loss to the underground piping tunneling or cables and other facilities would be restricted to actual repair costs that are provided prior to the policy commencement by the insured customer. It is important to note that the cracks in the structure, which could neither impact the safety nor stability of the structure, would not be covered.
Third party liability: Loss or damage to the third-party property due to machinery insured is covered under this add-on. The add-on also covers the legal liability arising out of fatal or non-fatal injuries to third parties. The third party would be any person other than the insured or his/her own employees or employees of the owner of the work location or employees of other firms or members of the family of the insured. Third-party liability would be strictly applied to the third parties only and not any member of the insured or their representative. The loss or damage done to the insured due to third parties would not be covered under this add-on.

Benefits of MBD insurance:

Covers business interruption losses

Any business would primarily depend on the machinery for its day-to-day activities, and any interruption to the machinery could result in an imbalance of entire operations. Most industries have different processes set up, and manufacturing is one of those processes, and manufacturing involves the usage of machinery. Loss or damage to the machinery could result in business interruption, leading to further losses. Machinery breakdown insurance covers the losses to the machinery due to internal and external causes, and the repair or replacement would be done so that the machinery could function as usual as it was just before the occurrence of the event. Some industries have foreign-made machines that might not be repaired locally, or even the spare parts might not be available in India. In such cases, air freight or express freight add-on should be taken by the insured customer to increase the speed of replacement or repair of the machinery. Overall, the policy would protect the businesses from losses that could arise out of the interruption caused by the machinery breakdown due to any internal or external cause.

Complementary policy to Property insurance

Machinery breakdown insurance is usually considered a complementary policy to property insurance. Property insurance covers the loss or damage to the property due to fire, lightning, landslide, earthquake etc.. In contrast, these perils are excluded from the scope of the machinery breakdown insurance policy. So it is always better to take property insurance in addition to the machinery breakdown insurance, thereby availing complete protection to the property from most frequent perils. Machinery breakdown insurance covers the loss or damage to the machinery due to fire, in the insured electric machines, where such loss is due to the fire originating from within the machinery and resultant fire damage to such machinery. In simple words, the fire arising from the machinery damaging the machinery is covered under MBD policy, whereas such peril is excluded in the fire insurance policy. A fire insurance policy could cover the loss caused to the adjacent property by the fire originating from the machinery. In this way, the MBD policy would act as a complementary policy to the fire insurance policy, and taking both would provide comprehensive cover to the insured.

Covers damages during repair, dissembling or assembly of parts

Machinery breakdown insurance is usually considered a complementary policy to property insurance. Property insurance covers the loss or damage to the property due to fire, lightning, landslide, earthquake, etc. In contrast, these perils are excluded from the scope of the machinery breakdown insurance policy. So it is always better to take property insurance in addition to the machinery breakdown insurance, thereby availing complete protection to the property from most frequent perils. Machinery breakdown insurance covers the loss or damage to the machinery due to fire in the insured electric machines, where such loss is due to the fire originating from within the machinery and resultant fire damage to such machinery. In simple words, the fire arising from the machinery damaging the machinery is covered under MBD policy, whereas such peril is excluded in the fire insurance policy. A fire insurance policy could cover the loss caused to the adjacent property by the fire originating from the machinery. In this way, the MBD policy would act as a complementary policy to the fire insurance policy, and taking both would provide comprehensive cover to the insured.

Third party cover:

The major benefit of MBD policy is third-party coverage available under the policy. There could be instances where a boiler could burst and cause injury to a third party, resulting in legal liability on the part of the insured. In such cases, the MBD policy compensates the third parties for their losses. Third parties could be any external members such as clients, inspection officials, or any other members who are not employed by the insured. Third-party cover is not available in fire insurance as it covers the property only, and MBD brings this cover so that the policy becomes comprehensive.

Covers damages during repair, dissembling or assembly of parts

Machinery breakdown insurance is usually considered a complementary policy to property insurance. Property insurance covers the loss or damage to the property due to fire, lightning, landslide, earthquake, etc. In contrast, these perils are excluded from the scope of the machinery breakdown insurance policy. So it is always better to take property insurance in addition to the machinery breakdown insurance, thereby availing complete protection to the property from most frequent perils. Machinery breakdown insurance covers the loss or damage to the machinery due to fire in the insured electric machines, where such loss is due to the fire originating from within the machinery and resultant fire damage to such machinery. In simple words, the fire arising from the machinery damaging the machinery is covered under MBD policy, whereas such peril is excluded in the fire insurance policy. A fire insurance policy could cover the loss caused to the adjacent property by the fire originating from the machinery. In this way, the MBD policy would act as a complementary policy to the fire insurance policy, and taking both would provide comprehensive cover to the insured.

Factors to Consider Before Taking MBD Insurance:

Premium

The first thing to consider while taking an MBD policy is the premium charged by the insurer. Premium differs from one insurance company to another, and the basis of premium calculation basically depends on the type of machinery. Premium should be a manageable level as it could affect the desired coverage under the policy. Premiums could also be reduced by opting for voluntary deductibles, which increases the liability of the insured in case of a claim. There is no benchmark for the premium limit as it depends on the sum insured and many other factors. The premium would also depend on the add-ons opted under the policy.
Sum insured

The other important factor to consider while taking MBD insurance is the sum insured under the policy. The sum insured is the maximum legal liability of the insurance company under the policy, and the insured customer should decide this. The proposed value of the sum insured in MBD insurance should be equal to the replacement cost of the machinery plus freight, erection cost, and customs duty, if any. In case of total loss requiring replacement, the claim would be settled on a market value basis, i.e., depreciation would be accounted for at the time of claim settlement. In contrast, in case of repair, the entire cost would be paid by the insurer. Escalation of sum insured add-on can also be taken to increase the sum insured by a certain percentage in case the sum insured might change due to external factors such as inflation etc.

Adverse selection or Partial insurance

In MBD insurance, adverse selection or partial insurance is not allowed, which means that the insured cannot insure only a specific part of the machinery or only a few types of machinery. The complete machine has to be insured for the cover to be applicable under the MBD insurance, as partial insurance is not applicable under the policy. Insured can decide to insure only a few machines under the policy, which is permitted, but this could lead to adverse selection as the insured might not be able to predict which machine would be damaged under what circumstances. There could be reasons for not insuring a few machines, such as the age of the machines, which is above the desired limit for insurance; in such cases, the adverse selection would not apply. In short, a machine should be insured as a whole, and the insured is allowed to insure only a particular machine and not every machine in his/her workshop.
Insurance Intermediary

MBD insurance might seem simple from the outside, but one should understand that this does not provide all-around cover to the machinery. As discussed above, MBD would act as a complementary to Fire insurance and should be taken with it. Not only fire insurance. There are other liability insurance policies that the insured customer should consider to avail complete coverage, and an insurance intermediary would better explain this. Insurance brokers such as Ethika Insurance deal with commercial insurance and have a dedicated team of commercial insurance experts to suggest the best insurance plans that you can take for your machinery. Insurance brokers can provide you with multiple quotations and suggest the best insurance provider based on your requirements and also help you with the claim settlement process.

Premium Calculation in MBD Insurance:

Premium in MBD insurance is dependent on the type of machinery to be insured. Machinery that is imported could attract higher premiums as the replacement or repair cost for it would be higher. The availability of a stand-by facility also influences the premium, spares favorable claims experience. Insurers would usually ask for claims experience in the previous 3 years and decide on the premium to be charged. Less or nil claims would result in better discounts from insurers while underwriting the MBD policy.

Premium also depends on the sum insured selected by the insured. A higher sum insured leads to higher premiums. One can reduce the premium by increasing the voluntary deductible. Stand-by equipment means those that could work as an alternative to the machinery in case of damage, and this doesn't include the DG set of the insured. For stand-by equipment, a 50% discount on tariff rates could be applied by the insurer. It is important to note that premium varies from one insurance company to another and is also dependent on their underwriting philosophy. Old machines attract higher premiums as the chance of loss or damage to them is higher.

Machine Breakdown Insurance (MBD) Claim Settlement Process:

Machine Breakdown Insurance Step 1: Insured must notify the insurance company immediately after the event resulting in loss or damage to the machinery. Insured customers should also be able to provide a detailed description of the events resulting in the loss. The description should contain the nature and extent of the damage or loss to the machinery. It is important to note that in case of loss, the insured must take all necessary and reasonable steps to reduce the extent of loss. In simple words, the insured must act as uninsured and try to reduce the loss to any extent possible.
Step 2: In the next step, the insurer would appoint a surveyor to assess the loss at the insured premises. The surveyor would do the loss assessment, and the report would be submitted to the insurer. Policyholders should provide complete information to the surveyor and allow them to carry out their duties at the accident site. Once the accident occurs, the insured must also take reasonable steps to preserve the damaged parts so that they can be shown to the surveyor at the time of inspection.
Step 3: In the last step, the policyholder must submit all the necessary documents, such as FIR, Policy certificate, and bank account details, to process the claim. The insurer would settle the claim based on the extent of loss, i.e., total or partial loss. In any case, the claim amount under the policy would not exceed the sum insured mentioned in the policy.

How is the Replacement Cost of Machinery Arrived At?

Partial Loss : In case of partial loss to the machinery, the claim would include full costs of the parts and any other additional costs such as freight costs, custom duty and charges for dismantling and reassembling the machinery. Partial loss claims would be settled completely without any deductions under MBD insurance.
Total Loss : Total loss claims would be settled on an indemnity basis. That is, the actual value of the item or machinery just before the occurrence of loss would be paid by the insurer. For this, the insurer would take into account the depreciation of the machinery and factor this while arriving at the final claim settlement amount. Total loss claims are settled on an indemnity basis, which means that the insured would not be able to buy another machine with the claim amount in case of total loss to the existing machinery.
Takers of MBD Insurance : Machinery breakdown insurance can be taken by any business that uses machinery—all types of machinery, such as power generation and distribution units. Equipment having computerized controls and operations that are integral to the equipment can be insured either under a Machinery breakdown policy or an Electronic equipment insurance policy. However, it is suggested that if the value of electronics is predominant, it is recommended to take the EEI policy for such equipment/ machines. All the manufacturing companies, hydroelectric power stations, thermal power stations, and small and medium enterprises with considerable machinery can take the MBD policy.

FAQ's

What is the Machinery breakdown policy? ?

Machinery breakdown policy is designed to cover the loss or damage to the machinery from internal as well as external causes. MBD policy, also known as Boiler and machinery insurance, covers the cost of repair or replacement of the machinery or its parts due to an insured peril. The policy can also be extended to cover the third party liability in case of bodily injury, death, or property damage due to an insured peril on payment of additional premium.

Why is it important to take Fire insurance along with MBD policy?

Machinery breakdown policy doesn't cover the loss or damage to the machinery due to acts of god or fire and other allied perils. In contrast, a fire insurance policy covers all these perils. Similarly, fire insurance doesn't cover the fire originating within the machinery, but the machinery breakdown policy covers it. So, the MBD policy is seen as a complement to the Fire or Property insurance policy.

What is the premium amount for MBD policy?

Premium in the Machinery breakdown policy depends on the type of machinery, including its age, components of electrical or electronics, usage conditions, etc. The premium also depends on the excess opted by the insured. A higher excess can reduce the overall premium outgo. The other important factor that decides the premium amount in an MBD policy is the previous claims experience. Stand-by equipment at the premises of the insured also reduces the premium under the MBD policy as this equipment would be useful in preventing business interruption, thereby causing losses.

Does the policy cover loss due to carelessness?

Machinery breakdown policy doesn't cover the losses due to carelessness by the operators. It is also assumed that the operator would be well trained before giving the job and therefore carelessness is NOT covered. Carelessness is nothing but negligence on the part of the insured or their representatives while operating the machine.

Can I insure only a specific part of a machine?

NO. Only a specific part of the machine cannot be insured under the machinery breakdown policy. Insuring only a specific part is not permitted, as machines should be insured as a whole. For example, one should insure the electronic panel of a machine, which is not permitted under the policy. An entire machine should be insured under the MBD policy, and the premium to be paid accordingly.

Is it mandatory to insure all machines under a MBD policy?

NO. It is optional to insure all machines under an MBD policy. Insured customers can decide on what types of machines to insure and which ones to exclude. Insurers might not accept machines that are more than 15 years old in some cases, and therefore, those machines may be excluded. The reason for exclusion could be that those machines have come to the end of their life cycle.

What should be the sum insured in MBD policy?

The sum insured in the MBD policy should be the replacement value of the machinery, including freight costs, customs duty, etc. Sum insured should be selected with utmost care as this plays an important role at the time of claim. In case of a total loss, the replacement value of the machine minus the depreciation value would be settled. In contrast, in case of partial loss, the entire damaged part would be repaired, and will indemnify all the expenses necessary to restore the damaged part to its original condition. The cost of repair would include all the costs, such as dismantling costs, freight, and assembly costs.

Can the value of the machinery be changed during the policy period?

YES. The value of the machinery can be changed during the policy period by giving prior intimation to the insurance company so that the company would carry out underwriting as per the new value and the difference in premium should be settled by either the insured or the insurer.

Can I get a refund if I cancel the policy?

YES. In case of policy cancellation, one can avail of a refund in machinery breakdown policy. The percentage of refund depends on the time of cancellation of a policy. For more details on the premium refund in case of cancellation, please check with Ethika Insurance.

Does MBD policy cover retrospective damages?

NO. Machinery breakdown policy doesn't cover the damages incurred prior to the inception of the policy. If there are any damages to the machinery they should be clearly mentioned in the proposal form and in case of any future damages only the damage incurred during the policy period would become payable. This is due to the insurance principle which states that insured should not benefit from an insurance policy and would place the insured in a same situation just before the occurrence of the loss.

What are the details should I submit for the Machinery breakdown policy?

The necessary details that should be submitted for machinery breakdown policy are the details of machinery such as make and model, year of manufacturing, country of origin, serial number, age of the machine, type of machine, purpose of usage etc. All these details should be clearly mentioned in the proposal form while availing the insurance, as these details will form the basis of premium calculation. It is important to note that there should be no discrepancies in the proposal form regarding the machinery and their valuation, as this may create confusion at the time of claim settlement.

Machinery Breakdown Insurance