Warranty Insurance: Keeping Vendors Honest

Annually in North America, billions of dollars are paid out by insurers for overstated equipment claims. Up until about ten years ago the insurance industry would look to manufacturers and service vendors to provide an assessment of the extent of damage to equipment. Of course, it is in their best interest to tell the adjuster that the equipment cannot be repaired cost-effectively.

As equipment ages, the service vendor’s exposure increases. They would much prefer to service new equipment because there is less chance of breakdown. Furthermore, a new service contract on a new piece of equipment will allow the vendor to hold on to their customer for a few more years.

Both first-party and third-party claims are very often initiated based on a biased report from a vendor, recommending replacement of the equipment. Based on experience, we have found that in 90% of cases, these claims are unfounded. Fortunately, there are methods that can be used by adjusters to keep greedy vendors and their customers honest.

CLOSER LOOK

Fortunately, today there are independent consultants out there who can assist the adjuster in determining whether or not a claim is legitimate. These consultants are typically engineers and/or scientists who understand how different types of losses affect equipment and can provide the necessary expertise in order to refute a bogus claim. Many of these consultants are court qualified and can provide expert testimony in the event the file goes to litigation.

For example, in the case of water losses, many people believe that once a piece of equipment, especially high-tech equipment, comes in contact with water that it needs to be replaced. The average vendor is aware of the public’s perception and uses this to advantage. The truth of the matter is that unless the equipment was powered on when it was exposed to water it can typically be returned to pre-loss condition. After being “decontaminated”, the equipment is usually cleaner than it was before the loss. In fact, equipment manufacturers routinely “wash” the various components prior to assembly in order to remove contaminants from the manufacturing process.

Equipment involved in fire losses is handled very similarly except that the method of decontamination and/or the chemicals used may be different. With fire losses, there is a concern about the type and levels of contamination produced by the fire. In addition to the soot that is typically visible, fires produce ionic contamination that is typically not visible to the naked eye. This ionic contamination when combined with the moisture in the air can produce weak acids which if not removed can damage components. The important thing to know is that this contamination can usually be easily removed before it causes irreparable damage provided the equipment is attended to in a timely manner. The “window of opportunity” will vary with the type and levels of contamination. These variables can be determined by means of quantitative methods such as wipe sampling. Wipe sampling can determine to what degree the equipment has been exposed or if it has been exposed at all.

SKIN LEVEL

Handling losses where equipment is mechanically damaged is another area that gives adjusters a difficult time. Like some of the other perceptions out there many people believe that a physical impact to a piece of sophisticated equipment warrants it be replaced. Despite this popular belief, hi-tech components are manufactured to withstand tremendous stresses. Just because the relatively inexpensive outside cover has been damaged does not mean that the much more expensive printed circuit boards mounted inside have been affected. Consultants knowledgeable in this area are able to verify the extent of damage and confirm whether or not the vendor’s assessment is fair and accurate. Having the necessary facts and supporting documentation from your experts is important when it is time to negotiate with the insured’s vendors.

If you are dealing with an extremely large organization like an IBM, Xerox or General Electric, very often you can use their own bureaucracy against them. For example, within these “mega-firms” there are different departments that do not communicate very well with each other. The sales people do not talk to the service people and vice-versa. What this means is that after a large loss has occurred and the sales people have gone out and performed their “song and dance” for the insured recommending replacement of the equipment, it is very likely that the service department has not been made aware of the loss (especially their service department from another office).

Generally, if you can contact the service people soon after the loss has occurred there is a good chance you can get them on your side provided the equipment has not been “blacklisted” by their salespeople. This is done by entering the serial number of the unit in question into an internal data base. Another way to keep greedy vendors honest is to go out and obtain a competitive bid for a warranty or service contract.

NEGOTIATION SKILLS

There are many third-party service providers “on the market” who offer service on a wide range of equipment at or beyond the level of the original manufacturer. Many of these vendors are former employees of the original equipment manufacturers who have decided to go out on their own.

Typically, such service providers are hungry for new business and will be more than willing to put forward a proposal to service the insured’s equipment. This in turn creates a concern for the original vendor who cancelled the contract on the equipment in the first place. More often than not that same vendor will change their position and agree to continue to service the equipment so as not lose a customer. This is somewhat of an over-simplification of what is involved but it gives the adjuster an idea of how valuable of a tool negotiation is in fighting the everyday claims battle.