July 31, 2011 by David George Weldon
Once it has been determined the insured is covered for the loss, property policies often state the damaged equipment or system is to be replaced or repaired, whichever is most cost-effective and fully returns the insured to their pre-loss condition. The decision to either replace or repair the equipment or system directly affects the loss size and depends on many factors including: the age of the equipment, the specific component(s) that were damaged (i.e., electronics, mechanical elements), the equipment’s maintenance history, its application-criticality (i.e. life-safety), the impact on business-interruption costs, and whether the equipment manufacturer’s warranty is current or has expired.
Obsolescence due to old age may hamper efforts to obtain spare parts and a repair warranty. Repair of electronic circuitry that relies on application-specific firmware may be restricted by the manufacturer, leaving customers with no choice but to buy new product. The maintenance history, or more specifically, the lack of knowledge of the equipment’s maintenance history, increases the risk the insured may later claim that subsequent equipment problems due to non-loss-related events are associated with the original loss event. Finally, the insured’s equipment may still have been under the manufacturer’s warranty when the loss event occurred. Although most manufacturer’s void their warranty once the equipment has been exposed to lightning, water, heat and/or smoke, the insured expects that any repairs are covered by some level of warranty (90 days, 180 days etc.) against poor workmanship or the infantile failure of replaced parts.
The following are just two examples of many repair/replace decisions and show the large cost savings that can be realized if ingenuity and correct evaluation of the potential success of repair are applied.
A paving company experienced a direct lightning strike to its communication tower. Among other damage, the power supply for the in-ground truck scale was damaged. Due to the old age of the scale, the manufacturer no longer built or supplied spare parts for that particular model of scale. Furthermore, the new power supplies that were available were incompatible with the old load cells in the damaged scale. Replacement of the entire scale including new load cells was suggested by the vendor as the only solution and at a cost of $14,800. Furthermore, the vendor estimated the replacement scale could not be delivered for at least eight weeks. Engineers, retained by the insurer, correctly assessed the electronic components within the power supply could be repaired with minimal risk since there were no firmware chips in the circuitry. The power supply was successfully repaired for a cost of $400 and the scale was fully operational within two days of the loss occurrence.
A private golf course in Ontario experienced flooding of many of its fairways and greens when the river that meandered through the course overflowed its banks during the month of January. Large rolling blocks of ice pushed and twisted small bridges and gouged fairways and greens, tearing up sections of the irrigation piping. The golf course’s irrigation contractor attempted to repair the piping and flushing of the sand, stones and other debris that had entered the piping system was unsuccessful. Replacement of the irrigation system was thought to be the only solution and the cost was estimated at $1.3 million, taking a minimum of 13 weeks. Since the golf season in Ontario starts in late April and typically lasts for 24 weeks, the impact to the golf course’s business interruption claim was significant. Not to mention the ire of the members who would not have access to their course for more than half the season. Engineers were retained by the insurer to evaluate whether all options for the system repair had been considered. The engineers were able to identify the problem with the original flushing attempt by the irrigation contactor. Since the water loops were inter-connected, flushing of one loop allowed debris to be forced into the other loops. Further, the sand, stones and debris were being forced into the sprinklers causing blockages and jamming of the solenoid-activated pop-up heads. The engineers suggested that backflow preventers (check valves) be temporarily installed at strategic points to isolate the loops from each other such that the flushing of one loop would not contaminate the others. The engineers were asked to work with the irrigation contractor to monitor the implementation of the repair procedure and ensure costs did not balloon out of control. The concept worked and the irrigation system was successfully repaired for a total cost of $620,000 versus the original cost estimate of $1.3 million. The job was completed in five weeks – eight weeks ahead of the original schedule. The final result was, at a minimum, a two-fold reduction in both the loss size and the business-interruption costs.
It should be understood that not all equipment that has been damaged by certain loss events can be repaired; it depends on the particular circumstances. However, given the potential for the large cost savings associated with the repair option, consideration should first be given to an assessment of the likelihood of a successful repair by a third party expert before the replacement option is entertained.
David George Weldon is a chief engineer at Newtron Engineering Services, Inc.
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