Machinery Insurance on a Reinstatement Value Basis !

Machinery Breakdown (MBD) insurance covers unforeseen and sudden physical damage to machinery, including mechanical and electrical breakdowns, due to various causes like short circuits, faulty materials, and operator negligence. However, it typically excludes damage from events like fire, natural disasters, war, wear and tear, and pre-existing defects. 

Modern machinery is an essential asset in many industries — but it's also a significant investment. A common question from business owners and asset managers is:

"When is the right time to insure machinery for breakdown risk — and for how long — especially if it's under warranty?"

This post dives into that question using insights from engineering reliability (specifically the bathtub curve), warranty timelines, and insurance strategies — all aimed at helping you make informed, cost-effective decisions.

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🔍 Understanding the Machinery Lifecycle: The Bathtub Curve

The bathtub curve is a well-known model used to describe the failure rate of machines over their lifetime:

1. Infant Mortality Phase (0–3 years): Higher failure rates due to early-use issues, manufacturing defects, or installation errors.
2. Useful Life Phase (3–10 years): Lower, stable failure rates — the most reliable period.
3. Wear-Out Phase (10–15 years): Increasing failure rates as components age and wear down.

Understanding this curve is key to aligning your insurance coverage with the machine’s actual risk exposure.

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🔧 The Role of Manufacturer’s Warranty

Most modern machines come with a 1–3 year warranty covering defects, breakdowns, and performance issues. During this period, insurance may overlap with warranty coverage and therefore add unnecessary cost.

That’s why many risk managers choose to delay insurance coverage until after the warranty expires.

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📅 When to Start Machinery Breakdown (MBD) Insurance?

Here’s the practical breakdown:

✅ Start MBD Insurance from Year 3 or on expiry of Warranty period

• This is typically when the warranty ends.
• Failures still occur — and can be costly to repair or replace.
• Machines still hold significant value and are not obsolete.
• Reinstatement value insurance (i.e., new-for-old replacement) is viable and cost-effective.

✅ Insure from Year 3 to Year 10 – The Prime Window

This is the most cost-efficient and operationally relevant window for insurance:

• Breakdown risk is present, even if infrequent.
• Premiums are generally reasonable.
• You can recover full replacement value under reinstatement terms.

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⚠️ What About Year 10–15?

In this phase:

• Machines may be approaching obsolescence.
• Insurers may tighten coverage (e.g., condition surveys, exclusions).
• Premiums increase, but payout terms might change.

Recommendation:
 Continue coverage if the machine is mission-critical or difficult to replace. Consider:

• Switching to indemnity-based cover (market value).
• Building a self-insurance reserve for predictable wear-and-tear failures.

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📊 Summary Table – Insurance Timing Strategy

Machine Age (Years)	Recommended Action	Why?
0–3	❌ No insurance	Covered under warranty; avoid double coverage.
3–10	✅ Insure (Reinstatement Basis)	Prime period for cost-effective protection.
10–13	⚠️ Optional – Case by case	Depends on criticality, condition, and premium cost.
13–15	❌ Consider ending cover or switch to market value	Reinstatement basis often no longer viable.

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🧭 Final Thoughts

Machinery Breakdown Insurance on a Reinstatement Value basis makes the most sense from Year 3 to Year 10 — when breakdowns can still be financially disruptive, and the machines are worth replacing like-for-like.

After Year 10, decisions should be based on operational importance, replacement planning, and insurer terms. Aligning insurance with your asset’s lifecycle ensures you’re not overspending on unnecessary cover — or leaving your operations exposed.

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