At JT Bates Group, we understand equipment rental and the associated risks. Equipment dealers want to protect their equipment investment, provide excellent products and service to their customers, and improve profitability of their rental business. One of the tools that equipment dealers use to satisfy these priorities is loss damage waiver or LDW. Trying to decide if LDW is right for your business? Read more to learn about your options.
Loss damage waiver waives the customer’s financial responsibility for physical damage to rented equipment. LDW is not insurance, but it does manage risk and cover rented equipment. LDW can speed rental transactions because they are paid for at the point-of-sale and effective immediately rather than waiting for proof of coverage from an insurance company. The price of LDW is set by the dealer and is usually calculated as a percentage of the rental fee based on market conditions and quality of coverage.
LDW can be divided into two types of coverage: named perils and all-risk. Named perils coverage means that only the losses specifically listed in the contract will be covered. Common named perils are fire, theft and vandalism. (Note: LDW can sometimes be referred to as FTV for fire, theft and vandalism.) If a loss occurs that is not specifically listed on the named perils list, it is not waived and the customer will have to pay for damages to make the dealer whole again. The downside to a named perils LDW is twofold: not only is coverage limited, but it can damage the dealer’s relationship with its customer when a loss occurs, the customer thought it would be covered, and is disappointed when it is not. Named perils LDW have received some press in recent years due to the class-action lawsuit “Hertz Case” linked here.
The better option for LDW coverage is all-risk. All-risk means that unless it is specifically stated as an exclusion, the damage will be covered. The best all-risk damage waivers have a very short list of exclusions. At JT Bates Group, we provide an all-risk damage waiver called Rental Equipment Protection (REP™). REP provides wide-ranging coverage to most causes of damage to rented equipment because it was designed specifically for the equipment industry. REP protects equipment and enhances profitability for equipment dealers by mitigating risk and preserving the dealer-customer relationship when a loss occurs.
Equipment dealers need to decide how the deductible will be handled before selling damage waivers. Some dealers will consider the deductible a customer contribution and require the customer to pay for losses up to the deductible. Other dealers may choose to cover the deductible for their customers, or some combination of the two. As with any other insurance product, high claims even for damage waivers can result in cancellation because it is counted in the loss ratio.
Loss damage waiver deductible may be less than, equal to, or in some cases, much higher than a customer’s insurance deductible. High deductible can make LDW seem less attractive to equipment renters. However, if a loss occurs, the claim is not submitted to the renter’s insurance company. The benefit is that normal insurance premiums will not increase because the loss is not recorded to the insurance company, which may result in overall savings. Additionally, with LDW, the customer only pays for what they need during the rental period, rather than paying insurance premiums all year.
Another issue that may arise in a claim is called subrogation. (Related blog post: Waiver of Subrogation: What is it and why do you need it?) Subrogation can be described as follows:
James went to ABC Equipment Company where he rented an excavator and purchased a damage waiver that allows for subrogation. The excavator caught on fire during normal use (a peril covered by the damage waiver), and ABC Equipment Company submitted the claim to the damage waiver carrier. The carrier paid ABC Equipment for the damages, making ABC Equipment Company happy. Then, the carrier subrogates against James’ insurance company, or requires James’ insurance company to pay for the damages. James is not happy because now his premiums increase and he is at risk for being dropped from his insurance carrier because his loss ratio is so high.
REP from JT Bates Group includes a waiver of subrogation, which means we will not subrogate against the responsible party or their insurance company. The benefit is that our clients are still paid for losses, and they preserve their relationship with their customers.
Damage waivers typically fall into one of two camps on this issue. The first option, and probably the most familiar to most people, is actual cash value. Actual cash value is calculated by subtracting depreciation from replacement cost. Actual cash value is similar to market price for a used piece of equipment. So, if an excavator rolls down a hill or falls off a cliff, the dealership is paid the amount that the excavator likely would have brought in a sale.
The second option is replacement cost. Replacement cost is simple, it is the cost to replace a piece of equipment. The best damage waivers provide replacement cost for rented equipment in the event of a total loss, saving the dealership the cost of depreciation of the asset. Using our example of an excavator taking a nosedive, the dealership is paid the amount equal to replacing the excavator with a new piece of equipment. Replacement cost is a much better value than actual cash value. To learn more about damage waivers, or REP, check out these blog posts.
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