Machinery break-down policy:

The Insurance Policy covers “Unforeseen and sudden physical damage” subject to certain exclusions. The insured has the choice to select specific machinery for insurance. While a deductible of 1% of the Sum Insured is common, this can be increased at the insured’s option with a reduction in premium.

 The Sum Insured “shall be equal to the cost of reinstatement of the insured property by a new property of the same kind and capacity.” If the item- wise Sum Insured “is less than the amount required to be insured as per above provision, the Company will pay only in such proportion as the Sum Insured bears to the amount required to be insured.”

  The provisions for settlement of claims are briefly stated hereafter. If the damage can be repaired, then full cost of repairs to restore the machine to pre-damage condition is payable. No depreciation will be deducted on the value of parts replaced unless such parts are of limited life. 

 However, if the cost of repairs exceeds the actual pre-damage value of the property, i.e., depreciated value, settlement of claim will be limited to actual pre-damage value after taking account of salvage.

 If the insured property is destroyed, the Insurance Company will settle the claim for actual pre-damage value, i.e., depreciated value, after taking into account value of salvage. A cash settlement will be made for the above said machine after deduction of the salvage value from the claim.

 MI INSURANCE TOTAL LOSS PAYOUT

ACV = NRV (1–A/SL)

ACV Actual cash value (on the accident date and therefore the indemnity limit)

NRV:  New replacement value

A: Machine age on the accident date

SL: Designed service life in years under normal operating conditions

 Depending on the inflation rate and useful machine service life, the actual value of an insured item could be greater than the initial purchase value.

Purchase value 100%

NRV after 10 years 163%  of Purchase Value @ 5% annual inflation

Example of a claim with and without an inflation clause

Imagine a machine with a replacement value of ₹50 lakh. After one year, due to inflation, the replacement cost has risen to ₹55 lakh.

Scenario 1: With an inflation clause

• The policy's Sum Insured would have automatically increased with inflation.
• If the machine is destroyed, the insurer pays the full replacement cost, and insured is fully indemnified. 

Scenario 2: Without an inflation clause

•  Sum Insured remains ₹50 lakh.
• The insurance company will apply the "average" or underinsurance clause. They will pay a proportionate amount of the loss, calculated as:
  Claim Amount = (Sum Insured / Actual Current Replacement Value) * Loss
• In this case, Insured would only receive:
  (50 lakh / 55 lakh) * Loss
• Insured is left to pay the remaining cost of replacement from own resources.