An engineering all-risk insurance policy covers the loss arising out of the erection and installation of machinery, plant, and steel structures. It protects coverage against physical damage to the contract works, equipment, and machinery. This policy also covers the liability for third-party bodily injury or property damage. Indemnity in general means the security against a loss. It helps the insured to recover a sum of money as compensation. So let’s understand the basis of indemnity in Engineering all-risk insurance.
Key Takeaways
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The Zero Depreciation Advantage: For repairable temporary damage, the general insurer settles invoices without applying age penalties, ensuring that depreciation does not deduct for machinery except for specialized limited-life parts.
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Internal Workshop Labor Coverage: If an engineering firm executes mechanical repairs within its own internal workshop, the EAR policy directly compensates for the exact cost of materials and employee wages incurred.
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The Pre-Accident Depreciation Cap: In permanent total loss scenarios, the contract switches valuation models, strictly calculating the payout based on the machinery’s actual value immediately before the damage, factoring in its full depreciation line.
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Premium Logistics & Labor Riders: Fast-tracking a delayed infrastructure project requires specialized riders to reimburse high-tariff express freight charges, overtime premiums, and night-work labor costs during a crisis.
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The Improvement Invalidation Barrier: EAR contracts act strictly as a safety net against accidental loss, completely refusing to cover the costs of structural alterations, operational enhancements, or routine equipment overhauls.
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Provisional Repair Conditions: Underwriters will allow temporary or provisional field fixes only on the condition that they merge smoothly into the final repair blueprint and do not increase the total claim budget.
In the case of engineering all-risk insurance policy the basis of indemnity is as follows:
- Temporary damage to the insured item or machinery
- Permanent damage to the insured item or machinery
Temporary damage to the insured item or machinery:
If the insured item is damaged and can be repaired, the insurance company pays the necessary expenses to restore the damaged machine to its original condition before the damage or the accident took place. The insurers also pay the additional cost of dismantling or re-erection during the repair process. Expenses incurred in the freight to the repair shop are also included, provided that such expenses are included in the sum insured. If the insured repairs the machinery at his own workshop, the insurers will pay him the cost of materials and wages incurred for the repairs. Depreciation does not deduct for items or machinery except when they fall in the limited life category. In such a case, can take their salvage value into consideration.
Read More: What is covered under Engineering All-Risk Insurance?
Permanent damage to the insured item or machinery:
When the insured item or machinery is totally damaged and cannot be repaired further, the insurers pay the actual value of the item immediately before it was damaged. It also covers the costs for freight, erection, and customs duties if included expenses in the sum insured. Properly calculating the actual value of the machinery considering the depreciation value. The insurers also pay the charges required for dismantling the machinery, provided that the salvage value, taking into account.
If any additional costs agree upon and included in the policy, they can also cover in the engineering all-risk insurance policy. Such costs may include:
- Overtime charges
- Night-work charges
- Charges for working on public holiday
- Express freight charges
The insurance company will cover provisional repairs if such expenses form a part of the final repair and do not increase the total cost. The policy generally does not cover the following costs:
- Cost of alteration
- The cost of improvements
- Cost of overhauls
Case Study:
A construction company was in the development business for the last decade. The company was into the construction of residential as well as commercial properties. In 2012, it got a huge project for building a residential complex. The estimated duration for the project completion was 4 years.
Read More: How to file a claim under Engineering All Risk Insurance?
The owners of the company started with the construction work. Four months had passed since the initiation of the project and two of the ‘Compactors’ stopped working.
The construction company had purchased an engineering all-risk insurance policy from a well know insurance company. The insurance company sent the surveyors to the site to identify the basis of indemnity.
Upon investigation, the surveyors found that the ‘Compactors’ were not totally damaged. They could repair and restore their sound function. Thus, the insurance company based the indemnity for the damaged ‘Compactors’ stating that they suffered temporary damage and can be restored.
Summary Table: Underwriting Framework for Engineering Indemnity Baselines
| Indemnity Classification | Technical Underwriting Trigger | Standard Included Expenses | Core Valuation Deductions | Case Study Operational Context |
| Temporary Structural Damage | The asset faces severe on-site physical failure but is entirely feasible to repair. |
• Direct components & labor. • Machinery dismantling & re-erection. • Freight to the repair workshop. |
No depreciation is deducted from replacement parts (except limited-life components). | Two industrial site compactors suddenly experienced breakdown four months into a project. |
| Permanent Total Damage | The asset undergoes catastrophic destruction and cannot be repaired further. |
• Actual value immediately prior. • Original site erection overheads. • Incurred customs & import duties. |
Strictly calculates the final payout by deducting depreciation and the asset’s residual salvage value. | Surveyors audited the physical units and classified the loss strictly as temporary damage. |
| Specialized Operational Add-ons | Must be explicitly agreed upon and factored into the primary Sum Insured. |
• Employee overtime allowances. • Mandatory night-work charges. • Holiday labor premiums. • Express shipping freight. |
All specialized premium labor lines must be underwritten up front to trigger a valid claim. | The insurer successfully settled the claim by covering direct repair costs and workshop freight. |
| Maintenance Exclusions | Routine site modifications or non-accidental mechanical enhancements. | Provisional field repairs only if they form part of the final repair and do not spike total costs. | Completely excludes the costs of alterations, improvements, and standard overhauls. | Baseline policy elements strictly focus on restoring the item to its pre-accident condition. |
The insurers paid the following expenses to the construction company and settled the claim:
- Expenses required to restore the damage
- Expenses incurred in the freight of the damaged ‘Compactors’ to the repair workshop
Frequently Asked Questions (FAQs)
1. What is the basis of indemnity under an engineering all-risk insurance policy?
A) The basis of indemnity under an engineering all-risk insurance policy is a contractual framework used by insurers to determine compensation following site damage. It is systematically divided into two technical paths: temporary damage (where the insurer funds all necessary parts, labor, and dismantling costs to repair the asset) and permanent damage (where the insurer issues a cash payout matching the asset’s depreciated actual value immediately prior to the total loss).
2. How does an insurer calculate claims for repairable machinery under an EAR policy?
A) For repairable machinery, the general insurance company pays the exact expenses required to successfully restore the damaged machine to its original operational condition. This comprehensive payout structure includes the cost of new spare parts, technician labor wages, the additional costs of dismantling and re-erection on-site, and transit freight to the repair workshop.
3. Is depreciation deducted from spare parts during a temporary machinery repair claim?
A) No, under standard engineering insurance terms, depreciation is not deducted for items or machinery when they undergo temporary repairs. The insurer covers the cost of new replacement components to restore functionality. The only exception to this rule applies to specific items that fall into a contractually defined limited-life category, where residual salvage values are factored into the settlement.
4. How is the payout determined when a construction asset suffers a permanent total loss?
A) When a construction asset or plant machine undergoes a permanent total loss and cannot be repaired further, the insurer calculates the payout based on the actual value of the item immediately before it was damaged. The underwriter adjusts this figure by deducting realistic depreciation and salvage value, while reimbursing original erection costs, express freight, and customs duties if they were included in the sum insured.
5. Can a contractor claim extra expenses for night work or express freight under an EAR cover?
A) Yes, a contractor can claim compensation for accelerated recovery costs like express freight charges, overtime wages, night-work charges, and public holiday labor premiums. However, these operational expenses are not covered under standard terms; they must be explicitly agreed upon, underwritten up front, and included within the policy’s primary sum insured framework.
6. Does engineering all risk insurance cover the cost of machine overhauls and site improvements?
A) No, an engineering all-risk policy is a strict contract of indemnity designed to return an asset to its exact pre-accident state; it is not a maintenance program. The policy systematically excludes the costs of structural alterations, system improvements, and routine equipment overhauls, meaning any operational upgrades executed during a repair must be paid for entirely out of pocket.
About The Author
Shivani
MBA Insurance and Risk
She has a passion for property insurance and a wealth of experience in the field, Shivani has been a valuable contributor to SecureNow for the past six years. As a seasoned writer, they specialize in crafting insightful articles and engaging blogs that educate and inform readers about the intricacies of property insurance. She brings a unique blend of expertise and practical knowledge to their writing, drawing from her extensive background in the insurance industry. Having worked in various capacities within the sector, she deeply understands the challenges and opportunities facing property owners and insurers alike.
