Can Fire in Cotton Bales be treated as Spontaneous Combustion:

Cotton bales covered under the Standard Fire and Special Perils (SFSP) policy are stored in covered warehouses without any electrical cabling inside.

"Often, in the event of a fire, representatives of the insured often attempt—out of both ignorance and sincerity—to prove that the cause was spontaneous combustion."

Standard fire and special perils policy does not cover spontaneous combustion, which is an ‘add on’ in fire insurance.

Cotton is assigned to Class 4.1 of the IMDG Code (Flammable solids) and not a spontaneously combustible material.

 Cotton fires often begin as smoldering fires, which can burn internally for extended periods before erupting into flames. This can make it difficult to detect the fire until it's well-established. The considerable compression prevents the fire from spreading as quickly as it would spread through uncompressed bales.

However Specific characteristics and negative external influences may cause cotton bales to behave like a substance from Class 4.2 (Substances liable to spontaneous combustion) of the IMDG Code.

Self-heating / Spontaneous combustion

Cotton bales can spontaneously combust due to various factors, including dampness, oil contamination, and improper storage, leading to smoldering and eventual fire. The tight packing of cotton within bales allows for internal heat buildup, particularly when damp or oily, which can lead to ignition. 

• Dampness:

When cotton is pressed or baled in a damp state, it can generate heat internally, especially if the moisture content is high and the heat cannot dissipate. This heat buildup can eventually reach the ignition temperature, leading to spontaneous combustion. 

• Oil Contamination:

The presence of oils, even in small amounts, can significantly increase the flammability of cotton and lower the temperature at which it can spontaneously ignite. 

• Improper Storage:

Stacking bales too high, inadequate ventilation, or improper spacing can contribute to heat buildup and the risk of spontaneous combustion. 

• Microbial Activity:

Microbes can grow and reproduce in damp cotton, generating heat as a byproduct of their activity, which can further contribute to the risk of spontaneous combustion. 

Spontaneous Combustible Materials

The following materials should preferably be notified to insurer and covered as ‘add on’ in fire insurance policy.

The following materials can be subdivided based on their propensity to spontaneously:

(Reference: sovereigninsurance.ca)

Strong Propensity: Charcoal • Cod liver oil • Fish oil • Fishmeal • Fish waste • Linseed oil • Clothing, silk, fabrics and rags soaked with oil • Tung nut flour (or tung, or Chinese wood) • Peanut seed coat (skin covering the peanut, under the shell) • Pigments in Oil • Cornmeal based pet food

Average Propensity: •Food for animals • Foam rubber • Certain metallic powders • Bituminous coal • Fertilizers • Hay • Coconut bark • Manure Distillery or brewery beans • Whale oil • Cottonseed oil • Corn oil • Menhaden oil • Perilla oil • Pine oil • Soybean oil • Tung oil (or tung oil, or Chinese wood) • Red oil (unrefined palm oil) • Roofing papers and felts • Paint containing drying oils • Pyrite • Rubber residue • Wool residue • Paper waste

Low Propensity: •Cotton seeds • Mustard oil • Palm oil • Peanut oil • Turpentine

The above interpretation is absolutely personal in nature and is not binding on any individual or organization in particular.

 

EFFECTIVE LIFE & REMAINING USEFUL LIFE OF PLANT & MACHINERY

To determine the effective life and remaining useful life of plant and machinery, one needs to consider the asset's physical condition, operational performance, and the applicable depreciation methods. The effective life is the period during which the asset is expected to be used productively, while the remaining useful life is the estimated period from the current date until the asset is no longer expected to be used. 

1. Understanding Effective Life:

Effective life refers to the period an asset is expected to be used productively, considering factors like physical condition, technological advancements, and operational performance. It's a more practical estimate than the legal or statutory useful life, which may be specified in accounting standards or tax regulations.

2. Factors Affecting Effective Life:

• Physical Condition: Regular maintenance, wear and tear, and potential damage can impact an asset's physical condition and, consequently, its effective life.

• Technological Advancements: New technologies and innovations may render older equipment obsolete, shortening its effective life.

• Operational Performance: How an asset is used, the frequency of use, and the intensity of operations can affect its effective life.

3. Determining Effective Life:

• Historical Data: Analyze past maintenance costs, repair records, and production data to assess the asset's historical performance and predict its future performance.

• Manufacturer's Specifications: Consult the manufacturer's recommendations for maintenance schedules and expected lifespan.

• Expert Opinion: Seek professional advice from engineers, valuers, or other experts familiar with the specific type of plant and machinery.

4. Remaining Useful Life:

The remaining useful life is the estimated period from the current date to when the asset is expected to be retired or no longer used. It's calculated by subtracting the asset's age from its effective life.

5. Importance of Accurate Determination:

• Depreciation: The remaining useful life is crucial for calculating depreciation, which affects a company's financial statements and tax obligations.

• Maintenance and Replacement Planning: Accurate estimates of effective and remaining useful life help in planning maintenance schedules and replacement cycles, optimizing asset utilization and minimizing costs.

• Asset Management: Knowing the remaining useful life of assets enables businesses to make informed decisions about their asset management strategy, such as whether to upgrade, refurbish, or retire an asset.

6.       Documentation:

It's important to document the methods and calculations used to determine effective life and remaining useful life for transparency and also for insurance claim purposes.

7.            Regular Review:

The effective life and remaining useful life should be reviewed regularly to ensure they remain accurate and up-to-date, especially in light of changes in technology, operating conditions, and maintenance practices. 

The above interpretation is absolutely personal in nature and is not binding on any individual or organization in particular. 

 

Depreciation due to Deterioration of Plants & Machines

Depreciation It is the usual wear and tear caused by the normal working of any asset, its use is liable to a certain amount of deterioration despite the care and attention bestowed on its maintenance and preservation.

Physical depreciation is broken down into curable and incurable

Curable Depreciation

The following input for machinery under consideration by technical personnel of clients helps in estimating curable depreciation.

(i) Did the equipment undergo major repair or reconditioning?

(ii) Did the equipment undergo capability test?

(iii) What is the present condition in terms of production rate and accuracy vis-à-vis the original at the time of purchase?

Curable depreciation is fixable by refurbishing, rebuilding of the equipment

Physical Incurable Depreciation

Physical depreciation is caused from age, wear and tear, fatigue, exposure to the elements or lack of maintenance. Overall physical depreciation is caused more by use rather than age.

A visual inspection can help to assess present condition of the machine

General Upkeep:

If an equipment is well-maintained during its service life and is expected to operate longer with lower costs, its value may be higher than expected for a machine of its age.

Dirt, dust, and other contaminants can interfere with lubrication and cause abrasive wear on the surfaces of the rotating equipment. This can also lead to increased friction, leading to increased heat, and damage to seals, bearings, and other components. Contamination can also lead to corrosion and oxidation, which can cause parts to degrade and fail prematurely. Additionally, contaminants can interfere with the flow of fluids, cause bearing failure, cause pressure spikes, block lubricant pathways, and reduce equipment efficiency.

Observed deterioration (also known as the 0 – 100% method)

 Lump sum figure of depreciation can be adopted as given below:

 Condition                                                        Depreciation %

New (N)                                                            0 - 5

Excellent (E)                                                    6 - 10

Very Good (VG)                                              11 - 20

Good (G)                                                         21 - 50

Fair (F)                                                            51 - 70

Poor (P)                                                           71 - 90

Scrap (S)                                                          91 - 100

If upkeep and maintenance are high, then the effective age will be lower than the actual age and conversely if upkeep and maintenance have been low then the effective age will be greater than the actual age.

As one of the important obsolescence factors considered by the cost approach, physical deterioration influences the conclusion of value.

Reference Document: STANDARDS ON VALUATION OF PLANT, MACHINERY AND EQUIPMENT; Publisher: Centre for Valuation Studies, Research & Training Association, India

 The above interpretation is absolutely personal in nature and is not binding on any individual or organization in particular.