Fire Insurance vs. Machinery Insurance:  Gap in Coverage 

Introduction

In the world of industrial and commercial operations, insurance plays a vital role in safeguarding expensive assets and ensuring business continuity. Two commonly held policies—Fire Insurance and Machinery Insurance—are often considered complementary. However, many policyholders are left surprised, even aggrieved, when their fire damage claims are rejected because the origin of the fire lies within the machinery.

This article explores the distinction between fire and machinery insurance, clarifies the types of perils each covers, and explains why claims often fall into a grey area—leaving businesses vulnerable despite having insurance.

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Distinction between fire insurance and machinery insurance 

In fire insurance, fire is generally understood as hostile fire. 

Furnace heat damage is not regarded as fire damage. Damage due to glowing embers or heated objects not in flame which scorch or burn holes without igniting a fire is not regarded as fire damage. 

A friendly impellent fire is one which remains within a specific confinement area, eg the combustion chamber of a furnace or a gas turbine. Essentially, fire is required to generate heat by means of combustible media (oil, gas or other fuel). Damage does not occur as long as the combustion process remains under control. However, process irregularities may lead to damage such as local overheating in the combustion chamber. Such damage would be excluded from fire policies and falls within the scope of the machinery insurance.

A short circuit can often result in fire and, conversely, a fire can cause a short circuit. The fire policy excludes loss or damage to machines, equipment, electrical conductors resulting from the direct effect of electrical power itself, eg overvoltage, surge voltages, increasing temperatures due to overloading as well as loss or damage to protective devices (safety gear, fuses, etc) occurring during the normal operation of such devices.

Loss or damage due to lightning, however, is covered within the scope of the fire policy.

Fire policy excludes the machine or equipment if it is considered as the source of fire. 

Any resulting fire, loss or damage to other machines or equipment, however, falls within the scope of the fire policy. Fire policy excludes the source of fire.

Loss or damage caused by explosion is covered by the fire policy. Explosion is understood as an instantaneous manifestation of fire, triggered by expanding gases or vapours. 

With respect to pressure vessels (eg steam boilers, cylinders, or vessels for vapour, gas or liquid, or boiling units, steam pipes), explosion damage is deemed to have occurred only if the walls of the receptacle are damaged to such extent that the pressures inside and outside the receptacle are instantaneously equalized. In fire insurance, however, explosion peril does not include distortion, whether or not accompanied by the rupture of any part of the pressure plant caused by crushing stress through forces related to steam or other fluid pressure (apart from the pressure associated with ignited flue gases). 

Furthermore, it does not encompass the destruction of rotating machines caused by centrifugal forces nor loss or damage caused by implosion (instantaneous deformation of a vacuum receptacle caused by external overpressure). Consequently, this loss or damage is not considered to be an explosion in the sense of fire insurance and thus falls within the scope of the machinery insurance. Machinery insurance also provides cover for loss or damage in the case of sudden and violent bursting of pressure plants by internal steam force or other fluid pressure (except pressure of chemical action or of flue gas ignition) causing structural physical displacement of any part of the pressure plant together with forcible ejection of its contents. 

Damage caused by fire preceding or following such events, however, is excluded from machinery cover. 

Understanding the Distinction Between Fire and Machinery Insurance

While both types of insurance protect valuable equipment, they do so under different premises and conditions:

• In Machinery Breakdown (MBD) Insurance, fire or explosion originating internally within the insured machinery is generally covered, while standard fire insurance policies typically exclude such incidents. 
  However, the standard fire policy would cover the resulting spread of fire from the machinery to surrounding property. 
  In simpler terms:
  • MBD policies cover damage to the machine itself from internal fire or explosions.
  • Standard Fire & Special Perils Policies cover damage to surrounding property if the fire started inside a machine and spread outwards. 

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Real-World Example: A Common Source of Grievance

A production machine overheats due to an electrical fault, leading to an internal fire that destroys part of the equipment. The claim is denied under:

• Fire Insurance, because the fire was a result of internal malfunction, not a hostile external fire.

Result: The policyholder is left with an uncovered loss, despite having fire insurance.

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Conclusion

Fire and machinery insurance serve different but complementary purposes. Unfortunately, gaps in understanding—and in coverage—can leave even the most diligent policyholders exposed to costly claims denials.

Reference Publication:© 2000 Swiss Reinsurance Company Zurich Title: Machinery insurance Author: Max Bommeli RE, Reinsurance & Risk division

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

 

 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.

 Important Role of Insurance Valuation in Assessing Business Health

During assignment for Insurance valuations of fixed assets on re-instatement basis, usually clients ask for report on market valuation basis as well to know the current worth of their business.

In addition, the periodical market value/depreciated replacement cost valuation may be helpful in understanding a company’s overall financial health also for the business owners.

During preparation for ‘Plant and Machinery Valuation certification’, came across the following very important publication, which in my view will be very helpful in understanding the concept presented here:

 STANDARDS ON VALUATION OF PLANT, MACHINERY AND EQUIPMENT, Prepared by CVSRTA Registered Valuers Association & Centre for Valuation Studies, Research & Training Association

In the practical world of business operations—: comprehensive valuations are time-consuming, costly, and require complex inputs that may not be readily available or justifiable outside of key strategic events such as mergers, acquisitions, or financing rounds.

In this context, insurance valuation may offer a more practical and cost-effective alternative that can still serve as a meaningful indicator of business health.

Unlike full enterprise valuation, which attempts to capture the total worth of a business based on future cash flows, market comparables, insurance indemnity valuation focuses on the market (DCR) value of physical and tangible assets. While more limited in scope, this approach may provide insights into the present economic condition of the business, especially when done periodically.

One of the significant advantages of insurance valuation (Depreciated Replacement Cost basis) is that it can be utilized for finding economic obsolescence—a critical element in asset-heavy businesses.

“Economic obsolescence exists, if the economic support for fixed and intangible assets is less than the fractional values of the identified assets, as individually estimated by the depreciated replacement cost or sales comparison methods, as the case may be.

Business enterprise value less net working capital represents the economic support for fixed and intangible assets.

Share Holder’s Equity + Long Term Debt = Net Working Capital (Current Assets - Current Liabilities) + Fixed Assets + Intangible Assets

Followings are readily available from company’s financial reports for the necessary deduction

CA = Current assets

FA = Fixed Assets

IA = Intangible Assets

CL = Current liabilities

 LTD = Long-term debt

SE = Stockholders’ equity

If there is excess economic support for the underlying identified assets, it is concluded that unidentified intangible value exists, which is generally considered to be goodwill or going concern value. 

Once economic obsolescence is suspected, a full business valuation may be initiated with the help of specialist Chartered Accountants and remedial measures undertaken.

In essence, while insurance valuation is not a replacement for full enterprise appraisal, it offers a fair and objective framework for monitoring key indicators of business health. Its periodic execution aligns better with operational realities and can serve as a proactive tool for risk management, strategic planning, and resource optimization.

Important Caveat: It's an Indicator, Not a Substitute

Of course, a DRC-based valuation is not a replacement for a Sales Comparison or full-blown income approach. It doesn’t factor in future cash flows, competitive dynamics, or goodwill. But as a practical, cost-effective tool for interim business checks at the time of insurance policy renewals, it may offer additional utility.

In summary: Think of DRC-based insurance valuations not just as a risk management necessity, but also as a financial wellness tool. When interpreted smartly, they can spotlight trends in obsolescence, underline capital misallocations, and even hint at business’s ability to generate value in today’s economy.

Reference Publication:

STANDARDS ON VALUATION OF PLANT, MACHINERY AND EQUIPMENT, Prepared by CVSRTA Registered Valuers Association & Centre for Valuation Studies, Research & Training Association.

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

 Title: Predicting Equipment Resale Value: A Handy Guide for Indian Contractors

When it comes to heavy construction machinery, knowing when to sell can be just as important as knowing what to buy. For many contractors, this boils down to one key question: “How much will my machine be worth after a few years of use?”

Drawing inspiration from a publication by Dr. Gunnar Lucko at Virginia Tech, here's how Indian contractors can make smarter decisions using data, not guesswork.

🏗️ Case in Point: JCB 3DX Backhoe Loader

A regional road contractor in Maharashtra purchased a JCB 3DX backhoe loader in 2018 for ₹32 lakhs. After 7 years of operation, here's the financial picture:

• Fuel cost: ~₹34 lakhs (based on 1,200 hrs/year @ ₹90/litre)

• Maintenance cost: ~₹6.5 lakhs

• Estimated resale value (2025): ₹18.5 lakhs (58% of purchase price)

• Projected value in 2028: ₹11.2 lakhs (35% of purchase price)

Net cost of ownership (7 years): ₹54 lakhs

🧮 Dr. Lucko used statistical modeling to calculate optimal resale timing by factoring in:

• Age and condition of the machine

• Manufacturer brand perception

• Regional auction trends

• Macroeconomic indicators (like inflation and GDP growth)

🔄 Smart Decision: Sell Now or Wait?

For this contractor, selling now brings a better return, avoids rapid depreciation, and allows investment in an upgraded model like the JCB 3DX Super or CAT 424 4WD, both offering better fuel efficiency and higher resale value down the line.

💡 Final Thoughts

Most site managers don’t have time for spreadsheets and regression curves. But even a simple understanding of how resale values behave can:

• Strengthen your bids

• Reduce total owning cost

• Improve fleet planning

If you're interested in a free Residual Value Estimator sheet tailored to Indian machines, drop a comment below or reach out!

Author’s Reflection > > During my years on construction sites, I often saw valuable machines—graders, backhoe loaders, dumpers—left idle in the yard for weeks, sometimes months. Repairs delayed. Spare parts unavailable. Maintenance teams scrambling, sometimes forced to cannibalize components from older machines just to keep newer ones running. > > These hard-earned observations shaped my perspective on how critical equipment lifecycle planning really is. > > This article was created with the support of Microsoft Copilot—helping translate complex financial models into practical insights for those who keep our infrastructure moving, often against all odds.

The above is my personal interpretation on the subject and has been composed with help of Google Copilot.

 

Title: Repair, Replace or Discard? Understanding the Real Value Behind Your Assets

We all have that one favorite item—a watch gifted years ago, a handbag we carry everywhere, or an old kitchen appliance that has served us loyally. When these items start to wear out or malfunction, we’re faced with a decision: Should we repair it or replace/discard it?

This decision, surprisingly, isn't always made on sound financial logic. More often, it’s driven by emotion and habit. And that’s where we go wrong.

Let me give you two real-life examples from my own experience.

My wife recently spent ₹1,000 to repair a wristwatch whose purchase price was around ₹700. In another instance, she was willing to spend ₹300 on fixing a handbag that originally costed her ₹300—and has already seen years of use. Her reasoning? “I like it.”

I couldn’t help but reflect on how such decisions ignore some basic—but crucial—principles of asset valuation.

Rational repair/ replacement /discard decision is much more crucial in business environments, where the financial stakes are much higher. 

Many Industrialists reluctant to let go their aged old non-functional equipment insure these separately as obsolete assets in their property insurance policies. 

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Emotional Attachments vs Economic Value

We tend to form emotional bonds with our possessions. That’s human. But when it comes to spending money, especially on repairs, emotion can cloud rational judgment.

The economic value of an asset is not the same as its original purchase price. As time passes, most items depreciate—they lose value due to wear and tear, obsolescence, or simply changes in taste and utility.

The Three Pillars of Repair Decisions

When considering whether to repair an asset, we should ideally evaluate:

1. Current Market Value (CMV)
   What is the item worth today, if you tried to sell it?
2. Residual Value (RV)
   What is the item expected to be worth at the end of its useful life?
3. Remaining Useful Life (RUL)
   How much longer can the asset realistically serve its intended purpose after repair?

Now apply this to any repair decision:
If the cost of repair exceeds the CMV, and the RUL is short, the repair is likely not justified—financially speaking.

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A Simple Rule of Thumb

A good benchmark to use:

Repair cost should not exceed 50% of the item’s current market value, unless the item has a long remaining useful life or exceptional utility.

Of course, there are exceptions. Heirlooms, sentimental gifts, or rare collectibles may warrant a different approach. But for everyday items, this logic helps prevent throwing good money after bad.

How to Think Like a Valuer

Before making your next repair decision, pause and ask:

• How old is the item?
• What is its resale value today?
• How long can it continue working effectively?
• Is the cost of repair proportionate to its value and future service potential?

This mindset shift can lead to smarter financial decisions and better resource allocation—not to mention less clutter and fewer regrets.

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Conclusion

Valuation is not just for accountants, insurers, or investors. It’s a life skill. Whether it’s a ₹700 watch or a ₹30 lakh machine, we must learn to separate emotional worth from economic value.

Let’s be rational where it matters—and reserve our sentiment for things that truly deserve it.

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

 

 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.