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Equipment Dealers: All Loss Damage Waivers Are Not Created Equal

By Amanda Murphy | Posted on April 23, 2020

REP™ (Rental Equipment Protection)| Equipment Industry

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 or which LDW is right for your rental fleet? Read more to learn about your options.

What is loss damage waiver?

A 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.

What are coverage options for damage waiver?

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. In fact, LDW can sometimes be referred to as FTV for fire, theft and vandalism. Typically, dealers that fund a damage waiver in-house will have a named perils damage waiver, but some insurance-backed damage waivers are also named perils only. Self-funding a damage waiver eliminates the need to pay an insurance company for coverage, but it does pose higher risk to the dealership and require large cash reserves to pay for repairs, and usually a loss ratio of 40-60% is required in order to show meaningful coverage. Some dealers feel that the benefits of providing a self-funded damage waiver outweigh these increased risks.

[Related: Named perils LDW have received some press in recent years due to the class-action lawsuit “Hertz Case” linked here.]

All-risk, in contrast, means that unless damage is specifically stated as an exclusion, the damage will be covered. This type of coverage is typically available from an insurance-backed damage waiver and not by a self-funded damage waiver. With an insurance-backed damage waiver, the equipment dealer purchases a policy from an insurance company, and then essentially sells the coverage of the policy to rental customers in the form of a damage waiver. The all-risk coverage is much broader than named perils, sometimes four times as broad. In many cases of insurance-backed damage waivers, the risk is transferred to a secondary policy, so the dealer takes on no risk and continues to make a predictable profit. Not all insurance-backed damage waivers are all-risk, but almost no self-funded damage waivers are all risk.

[Related: Click here for a list of REP™ most common covered losses and exclusions.]

What happens when a loss occurs?

Claims Process

This process varies from dealer to dealer, but typically the customer will inform the dealer of damage to the rented equipment and the claim is handled per the rental agreement. Most damage waivers include a deductible that must be paid before the benefits of the damage waiver begin. Sometimes the deductible is paid by the customer, and sometimes it is paid by the dealer, it just depends on how the dealer writes the agreement. The biggest differences for the dealer are found between a self-funded damage waiver and an insurance-backed damage waiver.

If the dealer provides a self-funded damage waiver, the dealer will need to follow-up on claims to make sure they are being paid in a timely manner. Sometimes these claims are paid relatively quickly, and sometimes they can drag out for several months. Usually a dealer will employ someone whose job is handling claims for mid- to large-size rental fleets.

With an insurance-backed damage waiver, usually the insurance company will handle the claims process from beginning to end. In our experience, claims are paid anywhere from three weeks to eight weeks with the average being one month. Insurance-backed damage waivers typically do not require staffing at the dealer since the claims process is outsourced.

Deductible

The issue of deductible is also handled in a few different ways. Equipment dealers decide how the deductible will be handled before selling any damage waiver. 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.

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 customers. However, if a loss occurs, the claim is not submitted to the customer’s insurance company. The benefit is that normal insurance premiums will not increase because the loss is not recorded to the customer’s insurance company, which may result in overall savings.

Subrogation

Another issue that may arise in a claim is called subrogation. Subrogation is when a claim is paid, and the company that paid the claim tries to recoup the paid amount from the responsible party’s insurance company.

With named perils coverage, subrogation may occur if the damage to the equipment is not covered by the damage waiver. The dealer may submit the claim to their insurance company, and the dealer’s insurance company may subrogate against the customer’s insurance company to have the claim paid. For example, a dealer’s named perils damage waiver only covers fire, theft and vandalism, but the damage to the equipment is from a collision. The customer may refuse to pay the claim, in which case the dealer may submit the claim to their insurance company. The dealer’s insurance company would then try to force the customer’s insurance company to pay the claim. The customer and the dealer would be exposed to the possibility of cancellation or at the very least higher premiums.

Many damage waivers include a waiver of subrogation. With a waiver of subrogation, the dealer will submit claims to their insurance company that meets requirements of: 1. the customer refuses to pay and 2. the damage waiver doesn’t cover the damages. The insurance company will usually cover the claim, and the dealer is still exposed to the risk of cancellation or higher premiums, but the customer is not at risk. (Dealers can avoid the possibility of submitting claims to their insurance companies by selecting an all-risk insurance-backed damage waiver.)

[Related blog post: Waiver of Subrogation: What is it and why do you need it?]

How is a total loss paid?

Coverage typically falls 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 simply the cost to replace a piece of damaged equipment. The best insurance-backed 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, but is usually timebound based on the age of the equipment. For example, an insurance-backed damage waiver may provide replacement cost on a piece of equipment that is a total loss and less than five years old. For older equipment, these policies typically default to actual cash value.

To learn more about damage waivers, or REP, check out these related blog posts.
Damage Waivers: 5 Things Every Equipment Dealer Needs to Know

Top 10 (Okay, 11) Reasons You Need Rental Equipment Protection: Part 1

Top 10 (Okay, 11) Reasons You need Rental Equipment Protection: Part 2

Waiver of Subrogation: What Is It and Why Do You Need It

Reduce Business Insurance Premiums with REP™ and Save Thousands

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