If you look at the photo I just uploaded, the circle looks like it was the source of initial failure.
The terminal, caused by corrosion.
The evidence is the circular burn pattern of the cardboard. The burn started there, and worked it way upward.
Interesting observation. What I do not understand is there are 3 pieces of black wire. Each one terminated in a crimped ring terminal. All thermally separated from each other, the terminated ends of the wires are maybe inch apart. All three black wires melted within seconds of each other. The white wire that is connected to the opposite side of the heating element to where you believe the fire started did not melt. It should be carrying the same current as the black wires but it does not melt, so the white wire and its terminals do not have high resistance I assume.
I'm really not trying to give you a hard time, just trying to understand what happened and if there is anything I can do to my new heater to reduce the chance this might happen again. I did check how tight all the terminals were on the new tank. As a matter of fact they were all tight on the old tank, I had to remove them to send the components into Seaward for their laboratory analysis of the reason this happened.
If that terminal you identified was corroded, had high resistance, and it started melting the black wire attached to the heating element, so then once that first black wire melted back to the thermostat why would the second piece of black wire attached to the other side of the thermostat melt ? Then the second piece of black wire melts back to the high temp reset and an inch away the third piece black wire starts to melt ?
It did not mention this before. This incident occurred just after supper as we were doing the dishes, the tank had probably been on since the morning. So we were drawing hot water from the tank and the heating element must have been on. We usually switched our hot water tank off at night because it was under our aft berth and in Florida it generated unwanted heat (not because we thought it was a safety issue). We found there was plenty of hot water in the morning if the heater was off all night.
While the Seaward owners manual has several pages of warning and cautions, no where does it mention it is intended for intermittent use and should only turned on while in use, or that the hot water tank should be turned off when the vessel was unattended.
The heater is controlled only by the breaker, if it had a control panel with a switch with a pilot light, I think people might have the idea to turn it off when not needed. It is the only 110 V device that is only turned on and off by a breaker, the air conditioner, battery charger ect all have their own power switch.
I don't think it would have burned up our boat had we not been on board when this happened. If the boat had been closed up with our dog inside I don't know if he would have made it. If the boat had not been vented right away after this incident I don't know if the smell could have been removed after a day or two of sitting closed up. The burning plastic smell was very strong. Fortunately there was a bit of a breeze, we have a large hatch in our aft cabin right above the hot water tank and I was able to quickly remove the tank from the boat.
I'm looking for a timer type switch for the hot water tank that only allows it to run for 60 minutes and then turns off. I assume they must make these for outdoor lights and such. Trying to keep an eye on the breaker for the hot water tank to be sure it has been turned off all the time is too hard at my age

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Bob