Treating Machinery Breakdown (MB) Insurance like a budget for ongoing maintenance obligations leads to claims disputes, and frustrations for clients in the heavy machinery industry. What is often ignored is that insurance does not cover deferred maintenance.
By Jimmy Swira
Industrial operations (clients) enter into binding machinery breakdown (MB) insurance policies with insurers without reading the relevant conditions and understanding its implications. Unavoidably, this leads to claims disputes between the insurer (or underwriter) and the industrial client.
Fundamental cause of misinterpretation
This is what George Parrott, commercial partner at King Price Insurance, has observed from past and recent claim disputes, which he largely attributes to non adherence of underwriting conditions of MB insurance cover. “A fundamental cause of non adherence is that industrial clients often view MB insurance as a quasi-maintenance agreement rather than protection against fortuitous loss,” Parrott points out to Machinery Maintenance Matters.
Quasi-maintenance agreement
Industrial clients expect insurance, viewed as a quasi-maintenance agreement, to guarantee asset reliability – yet these two concepts (insurance and reliability) belong to entirely different spheres, clarifies Parrott. “Insurance is reactive (addressing an event after a loss occurs), while reliability is proactive (preventing the event entirely).”
In their misinterpretation, clients overlook two common business interruption realities:
Firstly, specialised parts for heavy industry can have long lead times to source, import and replace and this can lead to interruption of production and business activities. It is possible to buy insurance cover for these eventualities but is costly and cover can run out in extreme cases.
Secondly, underinsurance combined with inflation remains a major issue. Approximately 77% of industrial equipment is underinsured, often declared at less than 50% of the true replacement cost. This shortfall is worsened by high inflation in the engineering sector, leaving coverage inadequate in the event of a total loss. In cycles where the Rand weakens against hard currencies, this increases the gap of insured value against replacement value of imported machinery and equipment.
Yet, oblivious to these business interruption realities, clients maintain surprisingly unrealistic expectations of the scope of insurance cover. This occurs mainly in the following areas:
i. Fallback for Deferred Maintenance
There is an assumption that insurance can serve as a fallback for deferred maintenance. However, using insurance as a subsidy for poor upkeep violates the principle of fortuity.
ii. The Betterment Trap
Clients often want to replace broken parts with newer, more advanced versions. However, they overlook that insurance is based on “like-for-like” replacement, notes Parrott. “Insurers apply deductions for ‘betterment,’ obliging the client to pay the difference in value for any upgrade.”
iii. Secondary Damages
Companies frequently expect coverage for catastrophic failures that result downstream from ignoring minor faults. Yet if an expensive engine fails because a known inexpensive bearing issue was deliberately ignored to maintain production, insurance will not cover the resulting loss.
All in all, It is important to read and thoroughly understand the terms and conditions of any MB insurance policy before entering into it, Parrott advises. “It is essential to recognise that insurance covers the effects of unforeseen circumstances beyond the insured’s control that do not result from lapses in maintenance. Failure to do so invalidates the cover.”
Common Points of Contention
Misinterpretation leads to several recurring points of contention in the policy conditions, mainly in these areas:
1. Internal vs. External Perils
Standard commercial property insurance protects against external risks such as fire or theft, whereas MBI provides “all risks” cover specifically for internal factors such as short circuits or mechanical seizure. Disputes frequently arise when a failure results from a combination of both, for example, a lightning strike causing motor burnout.
2. The Temporal Nature of “Sudden”
The 2009 African Products v AIG South Africa case set an important precedent. Underwriters now interpret “sudden” using an objective temporal standard, meaning “abrupt” or “occurring quickly”. Clients, however, often interpret “sudden” subjectively as merely “unexpected”. “Unfortunately,” Parrott states, “clients fail to realise that a sudden manifestation of failure (the machine stopping) does not qualify if the underlying damage process (e.g. corrosion) was gradual.”
3. Probationary Periods
Many policies exclude breakdowns occurring within the first 30 days of installation or commissioning. These are typically regarded as installation errors or manufacturing defects and should be covered by warranties rather than insurance.
4. Time Sensitivity
Insurance claims are subject to strict reporting windows – losses must normally be reported as soon as possible and within 30 days of the loss. Delays frequently result in rejected claims because they hinder timely forensic investigation of the root cause. Unfortunately, some clients submit claims well beyond this window and feel short-changed when the claim is rejected.
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