Topping the list of “things the restoration contractor doesn’t want you to know” is that an Insured can (and often times should) elect to pocket the money instead of paying the restoration contractor to restore equipment assets. I encountered an interesting project late last year that illustrates this point. The project also reinforces several conditions that, if implemented early in the recovery process, will maximize the opportunity for the Insured to “take the money and run”… with the full blessing of the Insurance Adjuster.
Consider this scenario…
An HVAC system failure could not have come at a worse time for a call center located in the normally temperate Southeast USA. An arctic blast made its way to the Deep South resulted in single digit temperatures for an entire weekend (when the call center was unoccupied). The HVAC system that failed provided heat for the open plenum area above the ceiling grid, which contained the plumbing for the fire sprinkler system. Multiple sprinkler lines froze, causing isolated (but significant) water damage within the facility. Saturated ceiling tiles littered the office work areas and water flooded the floor throughout the facility. While the data center was not affected (other than minor water pooling beneath the raised floor), the call center was out of commission until the facility could be cleaned-up, dried and repairs made.
The Insured notified their Insurance Company and then engaged a local restoration franchise contractor to complete the recovery efforts. The contractor engaged (as a subcontractor) an equipment restoration firm to address the IT equipment since the replacement values were valued over $1 million. After presenting a verbal cost estimate of $200,000 to restore the IT equipment, the subcontractor immediately dispatched Technicians to the site and worked feverishly over the next week to restore the affected equipment. The call center was fully operational nine (9) days after the unfotuante incident. Everyone involved with the project considered the recovery project a huge success story.
Coming clean… a critical review…
While the recovery project was, in fact, successful, the Insured would certainly have taken a different route had they been aware of the actual economics of the situation. Here’s a quick recap of the numbers presented (after the fact):
- $215,000 — Cost to clean/dry/restore affected IT equipment.
- $80,000 — Cost to replace IT equipment that could not be restored.
- $175,000 — Estimated replacement cost of office IT equipment (unaffected by the loss incident).
- $500,000 — Estimated replacement cost of IT equipment in data center (unaffected by the loss incident).
- $1,000,000 — Estimated replacement cost for ALL of the IT equipment at the damaged location.
According to the numbers, the Equipment Restoration Firm spent $215,000 to restore $245,000 worth of equipment ($1,000,000 – $500,000 – $175,000 – $80,000 = $245,000)… Not really a value, especially once you factor in depreciation (the actual cash value of the equipment serviced was later estimated to be less than $150,000). Had the Insured known that they would be paying the contractor $215,000to restore $150,000 worth of IT equipment (which was nearing its end-of-service cycle regardless) they would have elected to apply the money spent on newer replacements. Although the Insured was “made whole” (as defined by the insurance policy) the results certainly favored the Restoration Contractor over the Insured.
In retrospect, it made sense to restore most of the network switches, multi-function printers and high-end workstation computers. It didn’t, however, make sense to restore any of the monitors, keyboards/mice, desktop printers and most of the older workstation computers. Expending over an hour of Technician time (costing $185) to restore a typical monitor which could have been replaced with a new unit for $115 was an obvious mistake. Spending $647.50 to restore a computer workstation that cost $800.00 to replace wasn’t so obvious… until you consider that the restored systems were legacy systems (nearing their end-of-life product cycle). The Insured would have gladly made-up the difference ($152.50) between what the contractor spent on restoring the units and what it would have cost to upgrade the systems had the opportunity become evident.
Interestingly, Insurance Companies actually PREFER that the Insured elect to take the replace option. From an Adjuster’s perspective, restoring equipment can be risky proposition since it leaves open the possibility of re-opening a closed file. Any Adjuster that’s adjusted more than a couple of claims involving large-scale equipment restoration efforts understand the impact of dealing with “latent” damage claims months – and even years – after the file is closed. The seasoned Adjuster will jump at any opportunity to work with an Insured that’s interested in exploring equipment replacement options… as long as the replacement costs are not significantly more than the estimated restoration costs. Unfortunately, many Insured’s don’t appreciate the opportunity exists until long after the restoration ship has sailed and it’s too late to exercise this option.
Experienced claims professionals understand the dynamics of large-losses involving technology assets and recognize the importance of exploring all options EARLY in the recovery process. Especially true on recovery projects involving mission-critical technology assets, it’s easy for the contractor to overreact and mobilize resources unchecked. The experienced claim professionals know how to establish controls early so that Insured’s can make the appropriate business decisions. Sometimes, it enables them to pull money off the contractor’s table. Here’s how they do it:
Rule #1
Insist that contractors provide Time and Material (T&M) contracts, with a “Not to Exceed” monetary cap. In general, a properly managed (T&M) project is more effective and efficient than a fixed-price recovery project EVERY time… as long as accountability benchmarks are identified, monitored and enforced. Engage an outside expert to manage the contractor if you don’t have the resources in-house.
Rule #2
ALWAYS require that recovery cost estimates be supported by (line item) inventories that include (Technician) labor hours. Unless the contractor is simply basing their estimate on % of RCV (Replacement Cost Values) or pulling it out of “thin air”, they’ve calculated the estimate based on Technician hours… force them to share – and memorialize – the data that supports their proposal and estimate(s).
Rule #3
ALWAYS require that the contractor provide a fully-burdened hourly rate for the Technician (e.g., averaged billed labor rate plus all variable/incremental costs). For example, the burdened hourly rate was determined to be $185.00 (as opposed to the posted rate for Technicians at $95.00 per hour) on the project noted above. Knowing the estimated labor hours and associated rates upfront enables anyone to quickly review unit costing for restoration.
Rule #4
ALWAYS require that the contractor separate fixed costs (e.g., mobilization, set-up/take-down, etc.) from variable costs (labor/management, living expenses, chemicals/supplies/equipment, etc.). In addition to help establish the fully-burdened hourly rate, detailing the fixed cost estimates helps control costs that are often excessive when left unchecked.
Rule #5
Consider the intangible costs before opting replacement over restoration (e.g., OS and/or software learning curves, incompatibility issues, system set-up costs, etc.). Consult with the end-users AND IT personnel to reveal possible hidden costs that may come with new replacements.
Rule #6
Monitor the progress of the project by tracking the Technician labor hours expended on a daily AND per inventoried unit basis. Consider the inventory a living document, but hold the contractor accountable to the presented data and plans.
Accountability is the glue that ties commitment to results…
An expert or contractor that pushes-back from transparency – and accountability – may not be moving towards the results that favor the Insured or Insurance Company. Seek out the recovery experts that treat your misfortune as if it happened to their own organization. Gravitate to the experts that enthusiastically presents the most recovery options early in discussions… they are the ones that will deliver results based on YOUR objectives.
Leave a Reply