Traditional machinery breakdown insurance (MBI) does not cover (underwrite) damage caused by cyberattacks on plant and machinery, a key source of recent claim disputes. It is therefore timely for both insurers and industry to address this growing gap, two specialists from Marsh Africa advise.
By Jimmy Swira
“Change is the only constant,” goes the expression.
This particularly resonates with current developments in the insurance industry, especially in the provision of machinery breakdown insurance (MBI). In this area, cybersecurity has emerged as a growing risk for insurers, necessitating changes.
Traditionally, insurance was designed with the assumption of mechanical failure of machines.
Now the game has changed.
Equipment is increasingly digitised, which may not be fully accommodated in traditional Machinery Breakdown Insurance (MBI) policies. This has created a dilemma for insurers, according to two specialists from Marsh Africa – Ben Willmot–Sitwell, Cyber Growth Leader, and Neil Beaumont, Mining and Heavy Industry Leader.
Significant challenges
The rapid digitisation of industrial equipment has created a significant challenge for traditional insurance frameworks, Willmot–Sitwell notes: “We are seeing a blurring of boundaries. The lines between physical hardware, embedded firmware, and cloud-based control systems are becoming increasingly indistinct.”
In the past, “machinery breakdown” was a relatively straightforward concept involving physical failure. Today, the convergence of Operational Technology (OT) and Information Technology (IT) makes defining “physical damage” far more ambiguous.
The ambiguity creates a complex environment for cause attribution mainly on two fronts: root cause and asset valuation, according to Willmot–Sitwell.
“First, when a machine fails, we must now ask if the root cause was a mechanical flaw, a software bug, or even a deliberate cyberattack. Establishing this ‘proximate cause’ is now a forensic-intensive process that traditional MBI wordings, which often ignore ‘silent cyber’ risks or exclude data corruption, are not always equipped to handle.
“Second, we must rethink asset valuation, as the true value of a modern machine now includes its AI models and control logic. This makes the restoration of a system far more complex than simply replacing a broken gear.”
Software grey areas
Compounding matters for underwriters are the “grey areas” created by cyber-physical systems like SCADA and PLCs, Beaumont notes, highlighting two cases.
There are situations where software glitches or network intrusions can completely halt production without leaving a single mark of visible physical damage. This extends to firmware failures in heavy equipment and turbines, or even AI-driven predictive maintenance systems generating “false positives” that trigger unnecessary and costly shutdowns.
Moreover, underwriters have to consider the growing dependency on external factors, such as IoT connectivity and cloud-based OEM services. Beaumont explains how this situation becomes problematic: “If a third-party vendor’s cloud service fails or a software license expires, it can paralyse an operation just as effectively as a mechanical seizure, yet these failures often fall outside the insured’s direct control and traditional policy coverage.”
Third-party SaaS lapses or cyberattacks
Generally, third-party SaaS lapses or cyberattacks do not fall under MBI cover because the policy is typically not designed to cover “intangible” losses like cloud outages that interrupt monitoring without causing physical breakage. However, there is an exception where the cyber event directly results in physical damage to the machinery.
Instead, these risks are better addressed through dedicated cyber policies or specific Contingent Business Interruption (CBI) endorsements. Ultimately, coverage hinges on specific definitions within the policy, such as what constitutes a “computer system” or “electronic data.”
Relevant changes
Clearly, changes to MBI policies to ensure fairness and keep pace with technology are overdue.
As a starting point, Ben Willmot–Sitwell suggests broadening the definition of “damage” to include loss of functionality and software corruption. “The industry should move toward hybrid covers that integrate MBI, cyber, and business interruption into a single, cohesive product for cyber-physical assets. This includes requiring explicit valuations for software and licenses, improving proximate-cause wording, and adding cover for system reinstatement rather than just physical part replacement.”
Industries, specifically those on the front lines of maintenance and reliability, must change their strategies to cope with the new reality. It is no longer enough to manage mechanical wear and tear alone, and software and firmware failure modes must therefore be included in risk registers.
For this reason, close collaboration between maintenance (OT) and IT/cybersecurity teams is essential to secure control systems and manage patch cycles effectively, Beaumont stresses.
From an insurance perspective, documentation is an operation’s strongest asset, Beaumont observes.
“Maintaining detailed failure traceability, keeping meticulous maintenance records to avoid ‘wear and tear’ disputes, and documenting digital assets – including firmware versions and software dependencies – will be critical for accurate valuation and faster recovery. By building a ‘pre-loss’ evidence base of operational data and system snapshots, you can significantly expedite the claims process and ensure that the response from both OEMs and insurers is aligned with the realities of modern failure scenarios.”
