A water pipe breaks in a healthcare provider's facility, saturating an MRI control cabinet. The manufacturer is called in and spends $200,000 on attempted repairs. The unit still doesn't work. The manufacturer says the entire unit needs to be replaced, at a cost of $240,000.
The local carrier might have only 1% retention of the risk, so it quickly agrees to the replacement recommendation to keep the insured customer happy. The reinsurers would like an independent assessment performed to determine the full scope of the loss, but both the insured and the local insurer generally lack the specialised expertise to properly evaluate damaged equipment immediately after the initial damage occurs.
In the US and in the UK, experts in equipment breakdown claims determine whether to apply the first-party property policy or the equipment breakdown policy coverage. With the insurance market still developing in Latin America, though, most property policies are all-risk policies.
Such scenarios illustrate the challenges insurers and reinsurers face when addressing equipment damage claims in Latin America.
Equipment vendors often generate more revenue from equipment sales than they do from equipment service. When asked for assessments, vendors tend to recommend that damaged equipment be replaced. Insured parties, worried about the potential business disruptions that could accompany repairing damaged equipment, tend to agree with vendors' equipment replacement recommendations.
Insurers worry about contesting equipment replacement recommendations, as litigation might follow. A court might rule that the insurer took a biased, uninformed stance by not complying with an equipment replacement recommendation. A costly judgment could follow. Whenever litigation is considered in certain Latam countries, a potential consideration is that undue infl uence could occur and produce a purchased result. Insurers also worry about damaging their reputations and losing current or potential customers.
Often, equipment replacement costs are higher in Latin America, which would make equipment restoration a much more viable alternative. To avoid litigation or unpleasant customers, though, insurers often pay for unnecessary equipment replacements, which results in unnecessarily high claim settlement amounts. Those payments raise costs for insurers and reinsurers, and in turn, to compensate for such costs, insurers and their customers must pay more for insurance premiums.
Being aware of available independent engineering options can benefit the insured, the primary insurer and the reinsurer.
LWG Consulting is a global leader in Forensic Engineering & Recovery Solutions. They provide Cause & Origin, Failure Analysis, Fire and Explosion Investigations, Accident Reconstruction, Damage Evaluations and Equipment Restoration Services following disasters of all kinds. LWG has served the insurance, legal and risk management industries for over 25 years. Their Experts travel globally from 19 offices located across the U.S., Canada, the U.K. and Singapore.
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