How Surge Protection works

Ideally, Surge protection operates by either clamping the maximum voltage to an acceptable level, or by disconnecting the supply if the voltage goes too high.
This is typically achieved by the use of a large MOV type device and/or a spark gap type of device.

Voltage Breakdown (Spark Gap)

Voltage Breakdown devices such as Spark Gaps and some solid state devices, are designed such that when their threshold voltage is exceeded, the device “breaks down” and behaves like a short circuit until the surge current ceases to flow.
Typically, this will cause an over current protection device on the supply circuit to operate and the connected equipment will be protected provided that the voltage breakdown device operates before the other equipment is damaged. If the fault current is insufficient to operate the protection device, and insufficient to damage the breakdown device, then once the current passes through zero, the device will effectively reset and operation can resume.
Spark gaps are commonly used on high impedance telecommunications circuits and only fail, or cause fuse failure on particularly severe faults such as direct lightening strikes.

Voltage Clamp (MOV)

A MOV or Metal Oxide Varistor is sensitive to the applied voltage and provides a bi-directional clamp to the applied voltage to prevent the voltage from increasing. In effect, it behaves like an AC Zener Diode. As the voltage is increased across the MOV terminals, minimal current passes through the MOV until a voltage threshold is reached. As the voltage increases beyond this threshold voltage, the current through the MOV rapidly increases. The increasing current from the supply, causes an increasing voltage drop in the impedance of the supply and the voltage rise is restricted.
The increasing current flowing through the Varistor equates to energy that must be absorbed by the body of the varistor and of course, energy becomes heat. There is a limit to the maximum energy that a device can absorb and this determines the maximum surge that can be limited by the MOV.
Surge clamping devices are usually rated in a maximum energy absorbtion (Joules) and a maximum short term current rating (KA). Exceeding either of these ratings will usually result in the device rupturing and turning into a short circuit.
If the potential surge (or fault) current is limited by a high supply impedance, then a MOV clamp can be a viable option.
In reality, with most MOV type surge limiting devices, the device must be protected by a current limiting fuse. If the current limiting fuse is significantly lower rated than the supply protection fuse, then a significant surge will cause the MOV protection fuse to rupture and clear, disconnecting the MOV from the circuit and leaving no surge protection operational. The next surge could result in equipment failure.
To ensure that adequate surge protection is provided to the equipment connected to a circuit, the MOV or voltage clamp must be large enough to cause the circuit protection to operate, disconnecting the circuit from the supply. This will require that the circuit protection is reset for the equipment to be able to continue to operate, but this is usually better than the equipment needing to be replaced because it has failed under the surge conditions.