Indemnity for CPM insurance Claims

In the construction industry, the construction machines are constantly exposed to damage during use. Companies using these machines often decide to purchase an insurance policy.

CPM Insurance can cover:

Construction machinery (including excavators, loaders, forklifts, road rollers, bulldozers, cranes and others), Construction equipment (including tools, scaffolding, safety items, containers).

It protects machinery and equipment primarily during operation, but also for downtime, repair, overhaul, assembly, disassembly, loading and unloading.

·        Theft of machinery and equipment from a construction site or staging area,

·        Damage and destruction done by third parties,

·        Errors in machine operation,

·        Damage caused by weather conditions (fi re, lightning, landslide, hail),

·        Collisions with other machines,

·        Machine rollover,

·        Other damages.

Optional policy extension (Add Ons)

• Add-ons provide extra coverage beyond the standard policy for a premium, including options like Third-Party Liability, Terrorism, Earthquake, Express Freight, and Additional Customs Duty. These additions can be tailored to specific needs, such as covering damages to surrounding property or the costs associated with dismantling and shifting machinery
• In consideration of the payment of an additional premium, Insurers offer a variety of CPM coverage, and they almost always allow comprehensive coverage extensions. It may include incidents occurring while construction machinery is being transported to the site.
• If the machine travels on public roads, you can also additionally insure it. Because regardless of whether you opt for a CPM policy, you still have to purchase third-party liability for the machines you own. If the machine travel on its own wheels on public roads, liability insurance is mandatory otherwise if used strictly inside construction yard, it is optional
• Although the range of services offered by insurers may vary, the policy generally does not cover mechanical breakdowns of vehicles, as well as defects in electrical systems. Nor will the CPM protect the owner of a construction machine from damage caused intentionally or negligently.
• There is no direct annual maintenance contract requirement for a Contractors' Plant and Machinery (CPM) policy, as it is an indemnity-based insurance product. However, insurers mandate that the policyholder perform their own proper maintenance to ensure the machinery is in working order and to prevent claims. 
• It is extremely important to note that CPM insurance is completely optional – it is a good practice and a solution that will help avoid sizable costs in the event of a breakdown, collision or theft of construction machinery, but it is not a substitute for third-party liability. 

Basis of Indemnity 

The basis of indemnity for a Contractors Plant & Machinery (CPM) policy is to restore the damaged machine to its pre-loss condition, either by repairing it or, in case of total loss, by paying its actual value just before the loss occurred. For repairs, the company covers the cost of repair, dismantling, re-erection, and ordinary freight, customs duties, and other specified costs, provided they were included in the sum insured. For a total loss, the payment is the replacement value, minus depreciation, plus applicable costs like dismantling and freight, if they are included in the sum insured

Before taking out a policy, a necessary few steps to make decision easier and avoid common pitfalls.

Step 1: Make a list of construction machinery and equipment to be insured

The list of construction machinery you intend to submit for insurance should include:

·        The identification, registration and/or inventory number of the machine,
·        Brand and model name,
·        Year of production,
·        Specifying the type of machine,
·        Value of the machine.
·        In addition, if the machine is leased, a set of documents certifying the fact of the lease agreement should be           prepared in this connection

 Step two: determine the sum insured•

The sum insured is the limit of the amount the insurance company can pay out under the contract. By setting a low sum insured, you may be able to get a benefit that does not cover all your losses if necessary – but in return you pay a lower insurance premium. A higher amount will allow you to recover a larger amount in case of damage.

To be more precise about your needs, try to prepare separate sums insured for each machine if you want to cover more than one with your policy.

 Step three: Compare insurers’ offers

Contact different companies and looking at each offer separately. Or use the services of an insurance broker/consultant, who will do this work for you – in exchange for a certain amount.

Common mistakes when declaring their insured values:

• Declaring assets’ Book Value.
• Using last year's declared values or simply increasing values by a percentage.
• Declaring assets’ Market Value.
• Relying on valuation from an in-house accountant.

Understanding Insurance Valuation

Valuation is the way an insurance company will value the worth of the damaged or stolen equipment.  The most common methods of valuation are Actual Cash Value (ACV) and Replacement Cost (RC).

Actual Cash Value (ACV) is the cost to replace the equipment with another of like kind and quality less the cost of depreciation. It is important to review equipment ACV periodically as the value will decrease when the item depreciates over time.

Replacement Cost (RC) is the cost to replace the equipment with equipment of like kind and quality at current costs.  RC does not consider depreciation and ignores factors such as age, condition, maintenance, or obsolescence. For example, a machine purchased three years ago for 30,00,000 Rs. may have an ACV of 10,00,000 Rs., but to purchase a comparable unit based on today’s market it would cost 20,00,000 Rs.  

Thus 20,00,000 would be the Replacement Cost and 10,00,000 the Actual Cash Value. For newer equipment ACV verses RC is an important consideration.

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. 

 

Claim Settlement under Fire Insurance

 Fire & Special Perils Insurance policies are generally issued with Reinstatement Value clause. 

Damaged / destroyed / irreparable property to be replaced by new property of “the same kind or type but not superior to or more extensive than the insured property” and the monetary claim to be allowed on value as new basis without deducting depreciation.

 In R.I. policy monetary claim is to be paid only after actual repairs / replacement of parts / reinstatement has been completed and then payment shall be made for claims made by the insurer, as per terms and conditions of relevant policy.

The important aspects to be borne in mind by the insured that the insured has the option to reinstate or not and the said option has to be exercised within 6 months of the damage or any further time limit which may be allowed by the insurer in writing.

The reinstatement may be done at the same site or at any other site.

The reinstatement has to be completed within 12 months of the date of damage. Extension of time, may be allowed by the insurer.

 For damage to repairable property, the full cost of repairs including replacement of parts would be payable without deduction of any depreciation, subject to the repairs / replacement of parts are of the “same kind or type.”

1.     Buildings

The amount payable would be the cost incurred for reinstating or replacing a new building in the place of the building destroyed. The cost incurred would include the cost of materials used in the construction, the labour charges, the architect fees and other technical charges.

Example

Assuming that the replacement cost would come to say Rs.6 lacs. If the market value of the building destroyed is assessed after considering the state of maintenance of the building, its wear and tear and the use to which it was put, it would amount to Rs. 4 Lacs. Thus the amount payable had the policy been on the ordinary indemnity basis would be as follows:

Cost of building as new	RS. 6 lacs
Less: say 33 1/3 % depreciation	Rs. 2 Lacs
Depreciated value (market value)	Rs. 4 Lacs

 

Rs. 4 lacs is payable under normal indemnity basis.

Rs. 6 lacs is payable under Reinstatement value basis.

The “words of the same kind or type but not superior to or more extensive than the insured property when new as on the date of loss” mean that if the new building covers a larger floor area or is of superior construction than the one destroyed, i.e., employing materials of superior quality or durability or higher cost. If any betterments accrue to the insured under the above factors, he / she is required to make his / her contribution to the cost of betterments.

If there is partial damage to the building, the policy would pay the cost of repairs, the depreciation factor being totally ignored.

  2.     Plant and Machinery

The amount payable represents the cost of reinstating or replacing the new machinery of the same kind and type of the machinery destroyed but disregarding depreciation suffered by the machines up to the time of loss. The amount payable would be the delivered cost at site plus incidentals for civil work etc. Delivered cost would constitute, usually, CIF cost of new similar machine plus duty, if any, installation charges and incidentals like octroi, transport etc.

In other words, the amount payable represents the fully re-erected value of the machine at the time of erection.

Loss assessment has to take into account, the specific terms, conditions, etc., covered under “add-on” covers and special policies (e.g., Reinstatement value, Declaration etc.) under the fire policy for computation of claim amount. 

Method for Computation of Loss

The rule of “DESAFER” is followed to ensure a standard rule for computation of loss.

DE	Depreciation
S	Salvage
A	Average or Under Insurance, if any
FE	Franchise / Excess (whatever is applicable)
R	Reinstatement premium

 

While computing net payable amount, deduct depreciation first from the gross assessed loss followed by deducting Salvage, Underinsurance, excess as application and finally the Reinstatement premium. In case this sequence is altered, the net payable loss would also change which may lead to disputes.

(Reference Publication: IC-56 Of Indian Institute of Insurance)

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

A handy reference of insurance coverages under different Engineering Insurance Policies

Please note that CNC machines can be covered under either MB Policy or EEI Policy

 

Comparative Maintenance Cost of Diesel Generators: Why Proactive Strategies Matter

Drawing from my extensive engineering background across diesel power plants, oil and gas infrastructure construction, equipment fabrication, shipbuilding and insurance survey, I’ve found these hands-on experiences to be invaluable in my current specialization—insurance valuation. In the course of valuing industrial assets for insurance purposes, one insight consistently stands out: while insurance is designed to protect against unforeseen risks, a sound maintenance strategy is equally critical. 

Take diesel generators, for example—they're not just essential assets but often form the core of a risk profile in sectors from manufacturing plants, construction projects to marine installations. and even commercial and residential setups. Ensuring these generators run efficiently and reliably isn’t just a technical necessity; it's a major factor in controlling operational costs.

A recent study presented at the International Maritime and Logistics Conference “Marlog 13” (Arab Academy for Science, Technology, and Maritime Transport, March 2024) sheds light on the significant cost benefits of adopting smarter maintenance strategies—particularly proactive maintenance—for diesel-powered equipment.

🔍 Research Overview: Cost Savings Through Predictive Maintenance

The study applied a mathematical model to evaluate the maintenance costs of 500 kV, 600 kV, and 800 kV diesel generators under different maintenance approaches. The results were clear:

• Predictive maintenance saved approximately 9% compared to corrective (reactive) maintenance.
• while implementing predictive maintenance reduced maintenance costs by an average of:
• 47% for 500 kV diesel generators
• 46% for 600 kV diesel generators
• 49% for 800 kV diesel generators

These findings echo broader industry research. For example, Deloitte reports that proactive maintenance can reduce overall maintenance costs by 5–10%, depending on factors like workforce skill, implementation efficiency, and management systems.

For firms operating fleets of heavy machinery, these savings translate into tangible competitive advantages—less downtime, longer equipment life, and more predictable budgets.

Reference Publication:

OPTIMIZING MARINE DIESEL ENGINE MAINTENANCE: A PROACTIVE COST-EFFICIENCY STRATEGY

Arab Academy for Science, Technology, and Maritime Transport 

The International Maritime and Logistics Conference “Marlog 13”

“Towards Smart Green Blue Infrastructure”

3 – 5 March 2024

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🛠 Understanding the Different Maintenance Strategies

To make informed decisions, it’s essential to understand the four primary maintenance strategies used in industrial environments:

1. Corrective Maintenance (Reactive)

• When: Performed after equipment failure.
• Goal: Restore functionality ASAP.
• Approach: Reactive—responding to issues as they happen.
• Example: Fixing a generator after a sudden shutdown.

This method often results in higher costs due to unplanned downtime, emergency repairs, and potential collateral damage.

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2. Preventive Maintenance

• When: Done on a scheduled basis (time or usage-based).
• Goal: Prevent failures and extend equipment life.
• Approach: Planned tasks such as lubrication, cleaning, and inspections.
• Example: Monthly inspection of diesel engine filters and fluids.

While preventive maintenance helps reduce unexpected failures, it can still lead to over-servicing or replacing parts unnecessarily.

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3. Predictive Maintenance

• When: Triggered based on real-time data and condition monitoring.
• Goal: Perform maintenance only when necessary.
• Approach: Uses sensors and analytics (e.g., vibration, temperature monitoring).
• Example: Replacing a generator bearing after data shows it's close to failing.

This strategy minimizes unnecessary downtime and part replacement, making it more cost-effective and efficient.

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4. Proactive Maintenance

• When: Combines predictive and preventive elements with a focus on root cause analysis.
• Goal: Eliminate causes of failure before they occur.
• Approach: Data-driven, continuous improvement-oriented.
• Example: Identifying recurring wear patterns in diesel injectors and redesigning maintenance procedures to address them long-term.

Proactive maintenance represents the future of industrial reliability. It's about fixing the root, not just the symptom.

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

 

ASSET MANAGEMENTWITH LIFE CYCLE COSTING

 

Life cycle costing is much useful for equipment replacement decisions because LCC provides the total cost of owning and operating equipment over its entire lifespan, which is crucial for informed replacement decisions. By considering all costs associated with an asset, from initial purchase to disposal, LCC helps determine the most cost-effective time to replace equipment. 

Here's a detailed look on the subject:

1.  LCC considers all costs related to equipment, including:

• Initial purchase price: The cost of acquiring the new equipment. 
• Operating costs: Expenses like fuel, electricity, and other inputs. 
• Maintenance costs: Costs associated with repairs, inspections, and preventative maintenance. 
• Replacement costs: Expenses incurred when the equipment needs to be replaced. 
• Residual value: The estimated value of the equipment at the end of its useful life. 

2. By analyzing LCC, organizations can make more informed decisions about equipment replacement, including:

• Determining the optimal replacement timing:

LCC helps identify the point where the cost of maintaining an older piece of equipment exceeds the cost of replacing it with a newer, more efficient model. 

• Comparing different replacement options:

LCC allows for a comparison of different equipment options, considering factors like initial cost, efficiency, and maintenance requirements. 

• Choosing the right maintenance strategy:

LCC can help determine the most cost-effective maintenance strategy to prolong the life of equipment, such as predictive or preventive maintenance. 

• Evaluating repair vs. replacement:

LCC can help determine whether it's more cost-effective to repair an existing piece of equipment or replace it with a new one. 

3. Examples:

• Refrigeration equipment:

LCC can reveal that a cheaper, less efficient refrigeration unit may have higher operating costs (energy consumption) over its lifespan, making a more expensive, efficient unit a better long-term investment. 

• Boilers and air-conditioning units:

LCC can help determine the optimal time to replace these items based on their overall operating costs and energy consumption. 

4. Benefits of Using LCC for Equipment Replacement:

• Reduced long-term costs:

By making informed decisions based on LCC, organizations can minimize overall operating expenses and maximize the value of their equipment. 

• Improved decision-making:

LCC provides a comprehensive and objective basis for making equipment replacement decisions, reducing the risk of costly errors. 

The above points have been collected from various web pages, hoping that busy small industry owners may find the topic useful.  

Interpretation is absolutely personal in nature and is not binding on any individual or organization in particular.

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.