The Poskim discuss whether it is permissible to insulate pots on the Blech with towels before Shabbat. The general principle regarding Hatmana (insulating) is that any material which does not "Mosif Haval" (add heat), such a quilts or towels, may only be applied before Shabbat. On Shabbat, it is prohibited to cover the pots with any material. This principle applies to a standard case in which the pots are not on a source of heat. In the current question, there is a new element-the pots are on the Blech. While the towels themselves are not Mosif Haval, does the fact that the pots are on the Blech change the status of the towels to Mosif Haval? If they are regarded as not Mosif Haval, the pots could be covered before Shabbat. If the Blech renders this Mosif Haval, it would be prohibited to cover the pots, even before Shabbat.
One might argue that since the insulating element itself, the towel, does not add heat, it should be considered as not Mosif Haval. This logic is found in the Ran in the name of the Ramban (listen to recording for exact quote). He says that their custom was to cover the pot of Hamin with cloth that is not Mosif Haval on top of a "Kirah Ketuma" (covered stovetop). He clearly says that the Hatmana and the Shehiya (leaving the pot on the stove) are two unrelated Halachic issues, since the pot separates between them. The Hatmana is permitted because it’s not Mosif Haval, and the Shehiya is permitted because it’s on the covered fire. The heating element does not transform the insulating cloth into Mosif Haval.
However, Rabbenu Yonah ruled that it is prohibited, since the act of insulating even when it’s a covered fire, demonstrates that he is very keen on preserving the heat. Therefore, the Hachamim are concerned that he may adjust the flame to achieve the desired heating effect. Thus, there is a Machloket Rishonim (disagreement among the early authorities) whether it is permitted to insulate pots on a blech with towels before Shabbat.
Maran in Siman 257:8 rules in accordance with Rabbenu Yonah that it is prohibited. He says that the combination of the towels with the covered fire transforms the towels into Mosif Haval. However, he does permit a case in which the towels do not directly touch the pot. Nevertheless, Hacham Bension ruled that the custom is to be lenient even if the towel is touching the pot.
SUMMARY
The custom is to permit covering pots on the Blech with towels before Shabbat.
