Engineering claims demystified: what insurers and businesses need to know

Engineering claims sit at the intersection of technical complexity and policy interpretation. From plant and machinery breakdowns to electrical events, understanding how these claims are assessed and where common misconceptions arise, is critical for insurers, brokers and businesses alike.

Understanding engineering claims

Engineering claims typically relate to plant, equipment and machinery, as well as civil and structural elements. These assets are often essential to business operations, where physical loss or damage can result in significant financial and operational impact.

Coverage for these risks can sit across multiple policy types, including:

• Business pack policies
• Industrial Special Risks (ISR)
• Standalone machinery or breakdown cover

Claims can arise from a wide range of events, such as:

• Fire, flood, theft or accidental damage
• Mechanical or electrical breakdown
• Third-party liability exposures

At the core is a broad definition of machinery – covering any apparatus that generates, controls or transmits energy – highlighting just how wide-ranging engineering exposures can be.

Why definitions matter

One of the most important aspects of engineering claims is the precise interpretation of policy wording. For example, “machine” in some policy wording encompasses not only the core equipment or plant but also includes interconnected electronic control systems, which typically consist of some form of computer. In other policies, “electronic equipment” can be intentionally defined as being separate from “machine”, sometimes described as data processing systems and associated media. The distinction between “machine” and “electronic equipment”, depending on the policy definition, may affect policy coverage or exclusion.

Challenging common misconceptions

Misunderstandings in engineering insurance principles can often lead to unnecessary disputes. Addressing these myths is essential for improving claim accuracy and claims experience.

1. Lightning vs equipment breakdown

A frequent misconception is the assumption that all damage identified post-storm is caused by lightning. Statistically, most of us do not witness damage to electrical appliances and electronic devices during majority of storm experienced throughout our life. This experience is consistent with the fact that lightning generally confines to specific characteristics, such as increased likelihood of strike contact with the highest point from the ground. This specific character is the basis of most building lightning arrester rods, frequently directing and confining the location of lightning strike in the vicinity to one safe spot.

Incidentally, this lightning disposition demystifies the phase “lightning never strikes the same place twice”. In reality, many electric motor and refrigeration compressor breakdowns are caused by issues with electrical windings or worn mechanical bearings, however, a power supply anomality during a storm (caused by damage to distribution cables or substations) could contribute to sudden failure of electrical or electronic equipment. If this were to occur, there would typically be a trail of evidence left in the wake of the incident.

Determining whether the cause is a storm event or an internal breakdown is therefore critical to application of the appropriate section and subsequent coverage, or lack of.

2. “All corrosion is excluded”

Rust or corrosion is a common exclusion found in many policies, and not limited to standalone machinery breakdown covers, which can often be misconstrued to be automatically applicable when observed – but this is not always the case.

Corrosion-related damage can arise in different ways:

• Gradual and normal operation corrosion (typically excluded)
• Accelerated corrosion from exposure to chemical reactions or overheating
• Localised crack/leak NOT from corrosion pitting

Corrosion on parts may fall outside a policy’s intended cover, but damage to parts with corrosion (which may have been a contribution to the failure) may trigger a policy response.

3. “Electrical arcing equals fire”

Another common consideration when it comes to electrical losses involving burnout flashover or burnout. While a flashover, or electrical arcing involves almost instantaneous significant heat release typically involving components such as motor windings or switchboards, the damage may not necessarily constitute a fire event under policy definitions. While the resulting damage to the surrounding from an electrical arc may appear similar to burning flame, there are key differences between the two breakdown mechanisms, summarised in the table below.

This distinction is important, as different policy sections and limits may apply depending on the classification.

Key technical concepts in claims assessment

Clear understanding of engineering terminology plays a vital role in accurate claims handling. Common key terms used in damage reports can be misleading or inaccurate if not understood correctly:

1. Power surge
   • Current overload/draw: Excessive demand from loads placed on the available power supply, commonly lead to tripping of safety circuit breaker (an example would be excessive household appliances being operated at the same time on a shared power point).
   • Voltage spike: High voltage introduced to a low voltage power supply line, resulting in voltage spike downstream (an example would be a lightning striking a power supply distribution line/pole, or when a high voltage transmission cable come into contact with a low voltage cable).
2. Fusion
   • A physicist would describe fusion as the process of combining two isotopes (typically hydrogen) resulting in a release of immense energy.
   • The etymology of fusion comes from the Latin word “fundere” to mean the act of melting things together, for example the welding of steel rods.
   • Fusion to the culinary industry may mean integration of food cultures to form a new dish.
   • However, from an insurance perspective, fusion is usually referred to machinery breakdown and not even limited to electrical damage but commonly extended to even mechanical damage.

These concepts often underpin the root cause of loss and influence how claims are categorised, and subsequently how policy responds to a loss.

Emerging pressures on engineering claims

Beyond technical considerations, broader industry forces are reshaping how engineering claims are assessed and managed.

The growing role of AI 

Artificial intelligence is increasingly influencing claims environments, including:

• Claims processing with the use of chat bots
• Factual decision-making based on preset engineering parameters
• Assessment quality and consistency through verification algorithm
• Professional liability risks for AI-based solutions
• Regulatory scrutiny

While AI presents opportunities for efficiency, it also introduces new challenges of reliability and public confidence that requires careful management and further.

Geopolitical and market impacts

Global instability is also affecting engineering claims through:

• Rising premiums
• Increased claim costs due to supply chain disruptions
• Greater attention to exclusions such as “automatic war” clauses
• Changing balance between material damage and business interruption exposures

Traditional application of replacement and indemnity value covers are being challenged following domino effects from geopolitical risks and uncertainties on global supply chains. These factors are driving a need for more robust risk assessment and clearer policy interpretation.

How we can help

Ultimately, navigating engineering claims requires more than just policy knowledge, it demands genuine technical expertise and practical experience in diagnosing complex failures. Our engineering team brings together multidisciplinary specialists with deep industry knowledge, enabling us to accurately determine causation, assist policy interpretation and deliver clear, pragmatic, defensible outcomes.

Whether supporting insurers, brokers or businesses, we combine hands-on engineering insight with claims expertise to reduce uncertainty, resolve disputes efficiently and ensure claims are managed with precision. With the right knowledge and experience, we help clients confidently navigate even the most complex engineering losses.