Class 1 appliance failed insulation test

Q: We use a Seaward Europa Plus for testing at various sites. I am testing, what looks like a 'pre-war' bench grinder, using the standard tests for Class 1 Handheld test sequence. The item fails the insulation test when it applies 500V as well as when the 250V option is used. It gives a failure reading of <0.01 MOhm. Are there any circumstances during which an appliance would fail this test but still be deemed safe?

A: The test value would indicate that the appliance contains a short within the circuit, and therefore the appliance should be failed and removed from service immediately, without exception.