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DEFECTIVE MACHINERY & SYSTEM FAILURE LIABILITY
Why Defective Equipment Claims Can Be Existential
Industrial equipment manufacturers sit at the sharp end of “severity risk”. If a machine, system or integrated line fails, the consequences can go far beyond the cost of parts — injury, damage to third-party property, production stoppage at a customer site, contamination, fire or catastrophic mechanical failure.
These claims are rarely simple. They often involve questions about design intent, specifications, installation and commissioning, maintenance obligations, software/controls logic, operating conditions and contractual warranties. The dispute can quickly escalate into a combination of product liability, professional indemnity-style allegations, and contractual liability arguments.
Insure24 helps you structure liability protection that matches how equipment fails in the real world — focusing on resultant damage exposure, system integration and performance allegations, contractual terms, and claims defensibility (subject to underwriting and policy wording).
How System Failure & Defect Allegations Typically Arise
Defect disputes tend to start with operational impact: a machine trips, a component fails prematurely, a safety circuit triggers, output is out of tolerance, or a system causes collateral damage. The customer wants production back quickly — then the liability conversation begins.
Insurers will look at cause (defect vs wear/tear vs misuse), the contract, and whether the loss is third-party injury/property damage or “your own product” rectification (which is often treated differently by policy wordings).
- Mechanical / Electrical Failure – Premature failure, overheating, arcing, motor/drive issues, bearing seizure.
- Controls / Software Logic – PLC faults, interlocks, sensor calibration drift, unexpected sequencing outcomes.
- Hydraulics / Pneumatics – Pressure spikes, hose bursts, leaks causing slip hazards or contamination.
- Integration & Interfaces – Third-party components, utilities, upstream/downstream line interactions.
- Safety Systems – Guards, E-stops, light curtains, compliance allegations following incident.
- Performance & Tolerances – Output not meeting spec; disputes around acceptance testing and operating conditions.
What Insurance Can Cover in Defective Equipment Scenarios
“Defective machinery” risk usually spans multiple covers. The right solution depends on whether you manufacture a standalone product, design/assemble systems, provide installation/commissioning, or offer ongoing service contracts.
We help you map exposures to cover sections so you can see how product liability, public liability, professional indemnity and recall/rectification may respond (subject to the exact insurer wording and exclusions).
- Third-Party Injury – Claims arising from bodily injury due to equipment defect (policy dependent).
- Third-Party Property Damage – Resultant damage to customer property, adjacent plant, buildings or stock.
- Product Liability Defence – Legal defence costs for covered allegations.
- Design / Specification Negligence – Where PI is in place and you have design/spec responsibilities.
- Recall / Rectification Costs – Certain costs of withdrawing/rectifying products (if purchased and triggered).
- Products Supplied / Work Away – Risks tied to installation/commissioning and field work (where included).
The “Your Own Product” Gap: What Many Businesses Assume Is Covered
A common frustration in defect disputes is the difference between “resultant damage” and “fixing your own product”. Many liability wordings are designed to respond to injury and property damage to others, not the cost of replacing or repairing the defective item you supplied.
This is why contract terms, warranty language, and (where appropriate) recall/rectification covers matter. We help you understand where your exposure really sits and how to reduce grey areas before a claim happens.
- Resultant Damage – Damage caused by the defect (often insurable under PL/Product Liability).
- Own Product / Own Work – The cost to repair/replace your faulty part or workmanship (often excluded/restricted).
- Contractual Warranties – Extended warranties can create uninsured obligations if not aligned.
- Fitness for Purpose – Performance allegations can blur lines between PI and Product Liability.
- Acceptance Testing – Clear sign-off reduces later disputes about “when it failed”.
- Documentation – Traceability, test records and change control improve defensibility.
What Underwriters Want to See for Defect & Failure Risks
Underwriters focus on product safety, end-use severity, quality management and how you control changes. The goal is to show you are a “low frequency, controlled severity” manufacturer: defects are rare, and when they happen you can trace, fix and contain.
Strong submissions also explain your contractual position: warranties, limitation of liability, indemnities, and how you handle installation/commissioning and third-party components.
- Products, applications and safety criticality (what happens if it fails?)
- QA controls: inspection, testing, calibration and acceptance criteria
- Traceability: serial/batch records, suppliers, critical components and change control
- Installation/commissioning scope, training handover and operating manuals
- Contract terms: warranties, limitation of liability, indemnities and territories
- Loss history and how defects are investigated, corrected and prevented (CAPA)
A customer alleged our control system caused a line shutdown and collateral damage. Insure24 helped us present the documentation, clarify the contractual position and structure the right liability covers so we could defend the claim properly.
Managing Director, UK Equipment ManufacturerPROTECT YOUR BUSINESS
- Liability advice tailored to products, systems integration and real failure scenarios
- Support aligning warranties, limitation of liability and insurance wording
- Guidance on “resultant damage” vs “own product/own work” gaps
- Cover options for recall/rectification and claims preparation support (wording dependent)
- Clear documentation and submissions to help secure insurer appetite
Compliance & Governance Considerations
Defective machinery and system failure risk management often needs to align with practical expectations such as:
- Documented QA processes, inspections, calibration and traceability records
- Engineering change control (ECR/ECO) and versioning for drawings, software and BOMs
- Acceptance testing, commissioning sign-off and clear operating limitations
- Supplier management for critical parts and third-party components
- Contract governance: warranties, indemnities, liability caps and sign-off authority
FREQUENTLY ASKED QUESTIONS
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Does product liability cover the cost to repair our faulty machine?
Often no. Product liability is usually designed to cover third-party injury or property damage arising from a defect, not the cost of fixing the defective product itself (sometimes restricted under “own product/own work” exclusions). The exact answer depends on the wording.
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What is “resultant damage” in defective machinery claims?
“Resultant damage” is damage caused by the failure — for example damage to a customer’s building, line equipment, stock, or other property. Many liability policies are more likely to respond to resultant damage than to the cost of replacing your faulty part itself (wording dependent).
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Do we need professional indemnity if we also have product liability?
If you provide design, specification, system integration advice, controls software design, or commissioning sign-off, you may have negligence-style exposures that sit closer to professional indemnity. Product liability and PI can complement each other, depending on your scope and contracts.
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Can insurance cover recall or rectification costs?
Some policies offer recall/rectification extensions that can contribute to defined costs (notification, withdrawal, disposal and sometimes logistics). Triggers and exclusions vary widely, so it’s important to compare wordings carefully.
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Are customer penalties and liquidated damages covered after a system failure?
Usually not as a straightforward “pay the penalty” cover. Liability policies focus on legal liability for injury/property damage and defence costs, while penalties/LDs are commonly excluded or restricted. This is why contract terms and liability caps matter.
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What do insurers need to quote defective machinery and system failure risks?
Typically: product types and end-use, territories, turnover, installation/commissioning scope, QA/testing and traceability, contract terms (warranties/indemnities/liability caps), and claims/recall history. Evidence of change control and supplier management also helps.