Monday, 03 May 2021

Machinery Breakdown – Is your business covered?

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Article by Garth Rowe, Principal Claims Officer at Aon South Africa.

If your business relies on high value or specialist machinery in its daily operations and service/product delivery, the breakdown of such machinery can incur significant losses - not only from a repair or replacement perspective, but also in terms of business interruption losses and reputational damage incurred during down time.

Machinery breakdown insurance cover is designed to provide indemnity for sudden and unforeseen physical loss or damage to insured machinery.

Whilst a standard assets policy provides cover for damage to property arising from perils such as fire, storm, flood, theft or malicious damage, machinery breakdown insurance is intended to cover the risk of damage to machinery arising from its own mechanical breakdown.  It is critical, therefore, for any business that relies on specialist machinery to have adequate machinery breakdown insurance in place.

An assets policy may be structured as a composite policy with separate sections that provides for specific machinery breakdown and electronic equipment breakdown sections in addition to the standard property damage section.  The business interruption section of such a policy would usually be triggered in the event of damage to property whether arising in terms of the general property damage section, the machinery breakdown section or the electronic equipment breakdown section of the policy.

The adequacy of the sums insured in respect of each section of the policy is important, as the severity of business interruption losses following a machinery breakdown event can be just as devastating as the losses following an event such as a fire.

What is meant by sudden and unforeseen physical loss or damage?

The “sudden and unforeseen” requirement in a typical machinery breakdown policy often poses challenges in circumstances where a post-loss investigation reveals that even though the breakdown event itself may have occurred suddenly and was unforeseen from the insured’s point of view, the breakdown was due to a gradually developing process or deterioration that the insured may not even have been aware of until the actual breakdown occurred.

 

Case Study

The question of what constitutes a “sudden” event was the subject of much debate until the Supreme Court of Appeal judgment in the case of African Products (Pty) Limited v AIG South Africa Limited 2009 (3) SA 473 (SCA) finally established the precedent that informs this aspect of insurance and legal practice.

In this case a machinery breakdown and business interruption claim arose when production at a maize milling facility had to be stopped because of an electrical failure. The electrical failure occurred when the PVC insulation covering the copper conductors in certain electrical cables had, over time, softened and worn away.  Consequently, some of the copper conductors came into contact with each other and this caused the cable failure and the consequent electrical failure.  The cables had been laid underground beneath a concrete slab and were not visible from above.  The cables had also been laid very close to each other with the result that the heat generated by the electric current which passed through the cables was not able to dissipate sufficiently.  This caused the PVC insulation to deteriorate.

The Court did not agree with the argument advanced by the insured’s counsel that the physical damage to the cables only occurred when the copper conductors came into contact with each other.  In the Court’s view, the damage to the cables occurred when the PVC wore away, resulting in the copper conductors becoming exposed, with the inevitability of them coming into contact with each other at some later stage.

The Court held that the physical damage to the cables had not been sudden.  It was the manifestation of the damage that was sudden and not the actual damage, which had occurred over a lengthy period.  The insured was, therefore, unsuccessful in obtaining indemnity for its loss in terms of the machinery breakdown policy.

There are many other examples of machinery breakdown failures where the manifestation of the damage may have been sudden but when the cause was investigated it turned out that the damage was caused by a gradually developing condition that inevitably led to a mechanical failure.  Metal fatigue failure, for example, is sometimes associated with the formation and propagation of cracks due to a repetitive or cyclic load placed on a structure over time.

Managing the risks associated with machinery breakdown

The implementation of a sound engineering risk management program that can anticipate and mitigate the risk of machinery breakdowns, compliments your machinery breakdown insurance and will address the challenges identified above.

Depending on the circumstances, the various risk management strategies and techniques could range from simple visual inspection programs to more sophisticated pre-emptive analysis, for example, using thermographic testing or ultrasonic/X-ray inspections.  Such programs could assist in predicting machinery breakdown failures and allow businesses to take the necessary steps to avoid or reduce the risks associated with gradually developing mechanical failures.

The value that an expert broker brings in the field of business insurance comes to the fore when addressing the risks faced by your business from every possible angle. The long-term sustainability and protection of a business enterprise is critical, making it important to understand exactly what your insurance and risk management program covers.

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About Aon

Aon plc(NYSE: AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.