This article is intended for claims managers, loss adjusters, underwriters, and other insurance professionals who handle equipment breakdown claims, particularly within Industrial All Risk (IAR) or specific Machinery Breakdown policies.
 

Accurately determining the root cause of equipment failure, especially differentiating between mechanical and electrical origins, presents a significant challenge in claims handling.
 

The initial symptoms can often be misleading, and a misdiagnosis can lead to incorrect application of policy terms and ultimately, inaccurate claim settlements. This complexity underscores the need for diligent investigation and technical understanding.
 

To address this, the following sections analyse an anonymized, real-world claim involving the breakdown of an industrial diesel generator, detailing the investigation process and the factors that led to identifying the true cause of failure. The goal is to equip readers with practical insights and actionable lessons derived from this case study, enhancing their diagnostic skills and strategic approach when managing similar equipment breakdown claims.
 

Background: Understanding Generator Failures

We centre on equipment breakdown, specifically concerning industrial diesel generators. Failures in these critical assets are a frequent source of claims under Industrial All Risk (IAR) or specific Machinery Breakdown insurance policies. Understanding the potential failure points is the first step toward accurate diagnosis.  

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Mechanical Systems Overview

The mechanical heart of a diesel generator is the engine, acting as the “prime mover”. Key mechanical systems include:

- Engine Components: Pistons, cylinders, crankshaft, etc., performing the internal combustion cycle.  
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- Fuel System: Transports diesel from the tank to the engine via components like the lift pump and injectors.  
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- Lubrication System: Circulates oil to reduce friction and wear on moving engine parts.  
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- Cooling System: Uses coolant (water/antifreeze) circulated through a radiator and engine jackets to manage heat.  
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- Exhaust System: Vents combustion byproducts. Common mechanical failures often involve issues like fuel delivery problems (e.g., pump failure, blocked injectors), lubrication failures, overheating due to cooling system malfunctions, or general wear and tear leading to component breakage.  
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Electrical Systems Overview

The generator converts the engine's mechanical energy into electrical energy. Key electrical systems include:

- Alternator (Gen-Head): The primary component producing electrical output. It houses the stator (stationary windings) and rotor (rotating magnetic field component). Interaction between these generates electricity.  
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- Exciter: Part of the alternator assembly that helps create the magnetic field.  
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- Voltage Regulator: Maintains consistent output voltage.  
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- Control Panel: Houses instruments, controls, and safety shutdowns. Common electrical failures can include winding faults in the stator or rotor, short circuits, failure of the voltage regulator, control panel malfunctions, or damage from external events like electrical surges.  

The Diagnostic Difficulty

 A significant challenge in claims handling arises because the initial symptoms of mechanical and electrical failures can overlap. For instance, a generator failing to start or suddenly stopping could stem from fuel starvation (mechanical) or a control system fault (electrical). As seen in the case study, an initial report might suggest an electrical cause (like a surge), while detailed investigation reveals an underlying mechanical failure (like a lift pump breakdown). Therefore, a systematic investigation is crucial to look beyond the immediate symptoms and pinpoint the true root cause.  

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Case Study Analysis: Pre-Incident Factors & Risk Assessment

Introduction to Case

We examine a claim involving the breakdown of an 800kVA soundproof diesel generator. This unit was located at the extensive factory premises of a large steel manufacturing company. It served as one of three backup generators supplementing the primary power supply from the national grid. 

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Risk Factors & Mitigation

- Operational Context: The generator played a critical role, providing essential backup power to maintain operations in the factory, administrative building, and onsite expatriate residential quarters during grid outages. Its reliable function was therefore important to business continuity.  
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- Maintenance Practices: A key risk mitigation factor was the insured's proactive maintenance approach. An in-house team performed routine daily checks (water level, oil level, fuel, etc.). Furthermore, documented preventive maintenance, including changing lubricants and filters, was carried out regularly every 200 running hours. These practices were supported by maintenance logs reviewed during the claim investigation and were considered satisfactory, suggesting the equipment was well-cared-for before the incident. Reportedly, the generators were not subjected to excessive use due to the general reliability of the grid supply.  

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Underwriting/Policy Insights

- Maintenance Verification: The documented and satisfactory maintenance regime presented a positive risk feature. From an underwriting perspective, this highlights the value of obtaining and reviewing maintenance records as part of the risk assessment process for machinery risks.  

- Valuation Accuracy - A Critical Gap: Despite the positive maintenance picture, a critical pre-incident risk factor emerged during the claim adjustment concerning asset valuation. 
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While a pre-loss survey provided an inventory, the declared insurance value for this specific 800kVA generator was approximately €23.1 million. 
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However, its actual replacement value at the time of loss was determined to be closer to €133.9 million. This significant discrepancy revealed substantial underinsurance. This situation strongly underscores a crucial lesson for risk assessment and policy structuring: underwriters must diligently verify the adequacy of declared values against current market replacement costs, particularly for high-value machinery. Relying solely on inventory lists or client declarations without current cost verification exposes both the insurer and insured to the potential application of the Average clause, significantly impacting claim recovery. 

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Case Study Analysis: The Claim & Adjustment Process

The Incident

The breakdown occurred on November 11th, 2024. While operating normally following a grid power outage, the 800kVA generator suddenly shut down in the afternoon. Attempts by the onsite team to restart the unit were unsuccessful, necessitating the activation of an alternative 1000kVA generator to restore power to the facility.  

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Claims Adjustment Process

- Initial Response: The insured promptly notified their insurance broker and insurer about the incident. They also contacted the generator's supplier/OEM representative to assess the situation. Insurers appointed experienced loss adjusters to investigate and manage the claim. 
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- Investigation & Cause Determination: The appointed loss adjusters, collaborating with a consulting engineer, conducted a site visit. They inspected the still-unrepaired generator, interviewed key personnel (including the Electrical Maintenance Manager), and reviewed relevant documents. 
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A critical document was the initial report from the OEM representative, which attributed the breakdown vaguely to a "sudden electrical surge that resulted in mechanical failure" but was indecisive on the root cause. 
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The adjusters' independent investigation found no physical evidence supporting an electrical surge (no burnt components or short-circuit indicators). Instead, their technical analysis concluded the root cause was mechanical: a failure of the diesel lift pump. This pump failure led to fuel starvation, causing the engine to stall and inducing consequential damage to related fuel system components, specifically the six diesel injector nozzles. Maintenance logs were also reviewed and confirmed the previously noted satisfactory maintenance regime. 
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- Damage Quantification & Cost Verification: The insured submitted a repair quotation from the OEM representative totalling approximately €51.4 million (including repair costs and a visitation charge). 
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The adjusters meticulously reviewed this quote. Costs for items deemed unrelated to the insured breakdown (consumables like battery terminals, coolant, filters, cables, and a pre-existing service offer) were disallowed.

The labour component was adjusted downwards to reflect the reduced scope of work after disallowing certain items. The costs for the necessary replacement parts (lift pump, injector nozzles, top overhaul kit for decarbonizing, cleaning agents) and the supplier's initial visitation/inspection charge were verified and allowed. This detailed verification resulted in an adjusted gross loss figure of €45.7 million. The damaged components were assessed as having negligible salvage value. 

Applying Policy Terms

- Coverage Confirmation: The investigation confirmed the incident was a mechanical breakdown. As such, the claim was deemed recoverable under the Mechanical/Electrical Breakdown extension of the insured's Industrial All Risk (IAR) policy.  
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- Impact of Underinsurance (Average): The most significant factor in the settlement was the application of the Average clause due to severe underinsurance identified in Part 1. The policy stipulated an 85% condition of average. 
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The calculation was applied as follows: (Declared Value €23.1M / Actual Replacement Value €133.9M) * Adjusted Loss €45.7M. This resulted in a dramatically reduced figure of approximately €7.9 million, demonstrating the profound effect of underinsurance.  
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- Deductible: Finally, the applicable policy deductible for this type of claim (based on the sum insured tier for the breakdown extension, amounting to €1.5 million in this case) was subtracted from the post-average figure.  
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- Net Settlement: The application of Average followed by the deductible resulted in a final recommended net settlement figure of approximately €6.4 million.

Key Lessons & Strategic Considerations for Claim Managers

The analysis of this generator breakdown claim offers several crucial lessons and strategic takeaways for claims managers and insurance professionals involved in handling equipment breakdown losses:

Synthesized Learnings

- Investigate Beyond Initial Reports: Do not accept preliminary assessments, even from OEM representatives or suppliers, at face value, especially if they lack clarity or definitive conclusions. 
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As demonstrated in this case, an independent, technically proficient investigation (often involving consulting engineers) is vital to uncover the true root cause, which may differ significantly from initial assumptions.  
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- Distinguish Root Cause from Consequential Damage: Effective claims handling requires differentiating the primary failure event (here, the mechanical lift pump failure ) from subsequent or resultant damage (like the compromised injector nozzles ). This distinction is fundamental for applying policy terms correctly and assessing the scope of recoverable damage.  
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- Meticulously Scrutinize Repair Costs: A detailed review of repair quotations is non-negotiable. Claims professionals must identify and exclude costs unrelated to the insured event, such as routine consumables, unrelated service agreements, or elements of betterment. Labour charges should also be assessed for reasonableness relative to the necessary work.  
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- Recognize the Significance of Maintenance Records: While good maintenance doesn't prevent all failures, documented evidence of regular, appropriate servicing strengthens the validity of a claim and counters potential arguments of negligence or poor upkeep. Conversely, a lack of such records can complicate claims.  
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- Understand and Communicate the Impact of Underinsurance: This case starkly illustrates the devastating effect of the Average clause when assets are significantly undervalued. Claims managers must understand how Average is calculated and applied, and be prepared to explain its impact clearly to brokers and insureds. The pre-incident valuation gap was the single largest factor affecting the final settlement amount.  

Broader Implication

- Underwriting Feedback Loop: Insights derived from claims like this should be systematically fed back into underwriting processes. This includes reinforcing the critical importance of verifying declared asset values against current replacement costs and potentially refining policy language or warranties related to maintenance standards.  
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- Cultivating Expert Resources: Handling complex machinery breakdown claims necessitates access to reliable technical expertise. Building relationships with independent engineers and specialists is a strategic advantage for insurers to ensure accurate assessments.  
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- Informing Risk Management: Claims experiences provide valuable, real-world data that can inform risk management advice offered to policyholders. Highlighting the financial consequences of underinsurance, as seen in this case, can encourage clients to conduct more regular and accurate valuations of their assets

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Conclusion

This case study analysis has underscored the critical importance of meticulous investigation and technical rigour when handling equipment breakdown claims, particularly in differentiating mechanical from electrical failures. Key takeaways include the necessity of moving beyond initial, sometimes ambiguous, reports to establish the true root cause through independent expert assessment.

It highlights the need to distinguish primary failure from consequential damage, and the essential practice of carefully scrutinizing and verifying repair costs. Furthermore, the case vividly demonstrated the severe financial consequences of underinsurance, emphasizing the crucial role of accurate asset valuation from the outset.
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The lessons learned from this generator breakdown claim are not isolated; they represent fundamental principles applicable across complex machinery loss adjustments. For claims managers and insurance professionals, embracing a systematic approach focused on root cause analysis, detailed cost verification, and awareness of policy conditions like Average is paramount.

Applying these diligent practices ensures fairer and more accurate claim settlements, enhances the technical capabilities within claims departments, and ultimately fosters greater trust and professionalism in navigating the complexities of equipment breakdown insurance.

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