I found a water heater inside a panel by the kitchen sink that was completely covered with insulation. It made the heater nearly impossible to inspect. Is there a reason someone would do this?
I suspect their shoe size is larger than their IQ.
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Sometimes people think they can save $$ by insulating the WH beyond factory insulation. Other times they may do that to protect the tank from freezing should the house go below freezing (seasonal house? what about the pipes :)).
The WH is already insulated, no need to add more. Beside it hides the manufacturer safety decals and also void the warranty with some manufacturers.
It’s an old table top style, may have come that way from the OEM.
I used to work for an Industrial Insulation Supplier they also did some residential and commercial. We would sell tank kits though it had to have FSK on it otherwise if any moisture got between the insulation and the tank would cause CUI (Corrosion Under Insulation) As well it was always OEM and fiberglass. Never batt insulation
30+ years ago you could save a few bucks by insulating a water heater but with modern advancement in material there’s really no reason. I remember as a kid I played in the basement in a room with the water heater and it was super warm. Then, the old tank failed and was replaced and my playroom was cold… as in, the new water heater did not put out heat. This probably would have been in the mid-80s so there has been no reason to insulate them for years. If you put your hand on one of those old tanks you could easily feel the warmth being lost. Modern day you really can’t feel anything.
I still do see some “insulation blankets” from time to time. They are usually white and specifically made to wrap a tank. 
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