Hi Matt and everyone else!! I am back from the Honeymoon! Had a GREAT time
To answer your question quickly:
The insulation will limit the maximum potential to somewhere around 5 to 6 KV before it breaks down and allows the surge currents to flow either to ground [prefered], or between the circuit conductors [not so bad]. This creates a better path of flow for the surge currents than through the load[s], so the majority of the surge will flow through this instead of the load[s].
Since the surges are transient, there is normally a minimal amount of damage done to the insulation at that point. Only when the surges are long and continuous does the insulation become damaged and causes a short or ground fault.
So to sum it up, Thermoplastic insulations [TW, THW, THWN, THHN] and the such-like XHHW- will only withstand a potential [voltage or EMF] to a certain level before they break down. Breakdown allows the leakage of currents to an opposite polarity. This limits the surge values to a maximum of 5 to 6 KV.
Scott "S.E.T."