The purpose of this article is to guide contractors and technicians in handling claims of high-voltage surge (HVS) damage to a refrigeration or air conditioning compressor. This is usually done to ascertain whether or not an insurance company is liable for the repair or replacement and may involve evaluating a fair and honest price.
There is a large and growing problem in our industry whereby lightning damage is fraudulently or erroneously claimed, and a technician or policyholder then inflates the claim beyond reason by also claiming that the unit is beyond repair and must be replaced. The insurance industry has recognized this pattern and is increasingly looking for independent evaluations of these claims. This can increase the difficulty in getting a claim settled. But an honest and competent service technician should look upon it as an opportunity for an additional profitable business.
The situation can be viewed from three different perspectives:
ETHICSThe three divergent interests of the technician, the policyholder, and the adjuster can be conflicting but should not create a problem if handled ethically and properly. Honest and ethical practices are the only acceptable standards. The outcome of an analysis cannot and must not be influenced by the technician’s position or perspective.
An obvious adherence to professionalism and ethics will disarm most disagreements before they begin.
The technician cannot avoid all conflicts of interest, but must be prepared to rise above them and realize that the most important asset is a good reputation.
One classic example of such a conflict is the customer who says, “If you can get the insurance company to pay for it, I want you to change out the compressor (or equipment) and I don’t care what it costs. But if I have to pay for it I will get someone cheaper.” This customer has no ethics and it would be wise not to extend trust or credit to such a person.
Another issue is the internal conflict of interest within the service company. It is obvious that the technician or business owner has some conflict of interest in that profits will increase if the unit is replaced instead of repaired and that the insurance company might be more generous in payment than the average customer. For all practical purposes this conflict cannot be avoided.
For a larger company that separates technicians from installers, this conflict can be exacerbated by offering an incentive to the technician for the sales lead toward an installation or change-out. Now the technician is choosing between several hours of hard work to make the repairs at his normal pay, often during the peak of the season, against letting the installation crew do a change-out of the equipment while the technician is given a bonus for the sales lead.
This can evolve into a circumstance such that the customer is paying for a technician, but is in reality getting a salesperson instead. To maintain a respectable reputation, especially with the adjusters, this type of internal conflict must be carefully monitored or preferably avoided.
THE PRIMARY TECHNICIANThe first question usually is, “How can I tell whether a compressor is damaged by lightning without removing it from the system and performing a teardown failure analysis?”
The technology as of today cannot definitely determine if HVS is the cause of failure of a hermetic compressor without performing a physical teardown. It is possible to determine that there is no HVS damage if the compressor is operational. The compressor may not be damaged even if there are external marks of large electrical arc, splatters of molten metals, burned electrical contacts or wires that cannot be explained any other way, or obvious evidence of a lightning strike (Figure 1). Never accept anecdotal evidence at face value. It may be partially considered in reaching the final conclusion, but beware that the source is usually untrained in this field, rarely unbiased, and may be quite creative. Since the primary technician will be working on an intact system, good service procedures will verify or eliminate many of the other causes of failure.
If all other external causes of failure are eliminated, it may then be necessary to recover the refrigerant, remove the compressor from the system, and perform a teardown failure analysis.
Assume that the compressor has been diagnosed as failed and all indications are that it may be covered by the insurance policy. There is no conflict of interest if the technician wants to offer to perform a teardown failure analysis for his customer as long as the charges for this service are not dependent upon the result and the technician is qualified to perform this function.
All physical evidence should be preserved for at least one year so that a third party may examine it if requested.
Of course, the primary technician would be wise to discuss the terms of payment before changing out the compressor. In this case, be extra careful that payment not be contingent upon the policyholder receiving payment from the insurance company. That reduces or removes the policyholder’s motivation to file his claim and pursue getting it settled.
How is the technician going to know when the claim is paid? A simple and prudent solution is for the technician to discuss the situation with the adjuster and have the check written to both the policyholder and the service company.
Following the above practices should aid in making what could be a losing situation become more profitable as well as increasing a reputation for integrity and professionalism.
THE SECOND OPINIONThe insurance companies are usually willing, often anxious, to pay any valid claim. This increases their reputation and standing in the community and will thereby help their future sales.
However, the abuse mentioned above has forced them to take preventive measures to ensure that the claim is at least possibly valid. The primary technician may wonder why the policyholder may think it necessary to ask for a second opinion, and may even resent someone else being called. This is usually no problem to handle if the technician is assured that this is no reflection on his or her competence or honesty, that payment will be as usual, and you can help get this claim accepted and paid.
Usually this help is needed to convince the adjuster, or a second opinion would not have been requested. Verify the primary technician’s diagnostic procedures before proceeding further. The technician could have misdiagnosed the problem. Carefully discern between what the technician has to report and the physical evidence that will be the basis for the final determination.
Remember the final report and decision has your name on it. Be sure it is based on facts, not fiction that the policyholder or technician wants someone to accept. It becomes very interesting and amusing to see how creative the deceptions can be.
As discussed above, ethical standards will require that your fee not be contingent upon payment of the claim.
Be prepared to explain your findings to the adjuster or representative. Allow them access to the physical evidence after having completed the analysis. This may even include letting them take possession for a limited time.
Create a document with all possible identification, such as the equipment and compressor brand, model, and serial number. Use this to document this transfer. This document should also clearly state that the policyholder does not yield ownership unless the claim is paid. If the claim is not paid, the physical evidence is to be returned within a stated time, perhaps 30 days. It would be prudent to take pictures of the relevant physical findings from the teardown analysis. Photographs are a small investment and could be of invaluable assistance if something happened to the physical evidence while out of your care, custody, and control. Note that digital pictures are not acceptable in some courts of law.
THE CONSULTANTThere is a rising business opportunity for working with the insurance companies to provide an honest and competent evaluation of these damage claims.
The adjusters need our expertise and they are quite willing to pay for it. After establishing proper rapport with the adjuster, you will usually be paid for your phone time if you need to spend more than the usual amount on their behalf. (Do you have any other customer that will pay you for your expertise without leaving the office?)
It is wise to discuss your perspective with each adjuster that is new to you in order to agree on mutual objectives. The primary objective should be to ensure that the policyholder gets everything to which that person is entitled.
If the adjuster does not agree with this approach, it would be prudent to deal very carefully with him or her, if at all. Realize that adjusters may be employees of the insurance company or independents that are hired on a job-by-job basis, just as you are. Do not be surprised to have an independent adjuster ask you to work claims for several different insurance companies. Payment from an independent adjuster may not be as rapid, since they may wait until the entire claim is settled and they receive their payment before paying you.
You are certainly within your rights to establish your payment terms upon initial contact and perhaps avoid the wait. That is your judgment call. Even though it may not happen, always assume that any claim could end up in court and act accordingly. Do not file a report that you would not be willing and able to defend. It will enhance your reputation and assist you with future dealings with any adjuster if you invest some of your time in guiding them as to how to handle these claims.
It should be emphasized to the adjuster that it is in the best interest of all concerned that the policyholder be informed upon initial contact not to repair or replace the equipment until it has been inspected. It would be ideal if the evaluation could be done on the equipment while it is still installed.
Quite a few of these HVS claims are settled by simply replacing a run capacitor, compressor contactor, start thermistor, or other component that failed for causes other than HVS or were damaged by HVS but did not come up to the amount of the deductible as a service repair. There have even been a few systems that were merely low on refrigerant that were filed as lightning damage.
Discuss this with your adjuster and most of them will be willing to pay for a simple repair and write it off as the cost of investigating the claim. If the equipment is operational when you leave the jobsite, the policyholder is usually pleased because they had the repair done without having to pay a deductible. Having saved several hundred or several thousand dollars pleases the adjuster. If policyholders are not pleased, then they usually were trying to get something to which they knew they were not entitled.
If the equipment or the compressor has been replaced and the analysis shows that the compressor was still operational and/or the equipment did not need to be replaced, the policyholder may be upset, usually with the technician-salesman that performed the replacement. Contact the policyholder as soon as you receive the claim to avoid these complications.
Always be alert to attempts to fabricate evidence, sometimes quite creative, usually quite crude. Several times we have encountered wiring or wiring terminals that were obviously burned with an external heat source such as a torch to simulate electrical overheating (Figure 2).
There is no conflict of interest if the policyholder wants you to perform the repair or replacement if it is clearly understood that this is not contingent upon your certifying it a valid lightning claim. You would then become the primary technician and would be wise to consult the guidelines above for that. This is a new customer for you, and he or she will owe for the deductible, at least. A check of the policyholder’s credit rating and reputation is prudent at this time.
Another service that often is requested is to provide an honest, reasonable, and valid estimate and/or bid for the necessary repairs or replacement. The adjusters are simply trying to avoid being grossly overcharged.
Do not try to lowball the price and make the primary technician look bad because the job might be given to you. We have found the companies to be fair and even generous in their acceptance of pricing. They are willing to pay a little more and have confidence that the policyholder is receiving a good job but do not want to pay a grossly inflated price for work that might be poorly done or unnecessary.
There is no need for this to become a confrontational situation. All you are doing is providing a professional service at a fair and reasonable price, and most people will recognize and respect this.
Some adjusters do not require a formal written report if the claim is valid. A simple note on the invoice is usually sufficient. If the claim is denied, they will need a report that can be put in that case file for future reference, forwarded to their superior if there are any questions, and forwarded to the policyholder if requested.
It quite common for policyholders to request a copy, and they are certainly entitled to one. The report should be written immediately after the analysis is completed, before the memory degrades. The report will not only be a way of transmitting information but storing it for future reference. Be as detailed as necessary and include anything that might be important if this happens to be the one that goes to court a year or so later. Remember the above warning about not writing anything you could not defend. There is a natural tendency to assume that the memory will be better than it ever actually is. The written record is infinitely more reliable.
It is wise to store the remains of the “autopsy” for at least a year or until notified otherwise by the adjuster or the policyholder. The physical evidence is still the property of the policyholder unless and until the claim is paid.
WARRANTIESFor residential equipment, it is almost universal for a piece of hvac equipment to be sold with one-year parts warranty from the equipment manufacturer for the entire unit. The compressor usually has an additional four years, for a total of five.
There are many different extended warranties for parts or labor available and the first question should be to ask the age of the equipment. If it is less than ten years, there may be a warranty. If it less than five years, it is very likely. At this time, most deductibles are $500, with the $250 deductibles being phased out. This amount often is more than the cost of the compressor.
For commercial equipment, the warranties are not as generous and the compressors are more expensive. Advise the policyholder that if the compressor is removed from the system and the hermetic shell cut to perform a failure analysis, the warranty will be voided. It is much wiser to replace the compressor under warranty than to risk losing the warranty by attempting to prove a lightning claim.
The compressor manufacturers usually give the equipment manufacturers a one-year warranty on the compressor. Therefore, if the compressor fails within the first year, the equipment manufacturer will return the compressor to the compressor manufacturer and a failure analysis may be done at that time. If the compressor is out of the first-year warranty, the chance of it being analyzed is extremely remote. Usually the equipment distributor simply removes the nametag, returns that to the equipment manufacturer, and the compressor is field-scrapped.
Also advise the policyholder that if the compressor manufacturer denies warranty coverage because they believe it to be lightning damage, the adjuster will accept that as proof and pay the claim. We have known of dozens of HVS claims that were persuaded to exercise their warranty coverage instead and thus far know of none that have been turned down by the compressor or equipment manufacturer.
If the compressor is manufactured by the equipment manufacturer, the warranty situation might be different and it would be worth giving the distributor the model and serial and asking about the warranty status.
All of this is better handled by you as a consultant than by the adjuster. The adjuster is usually quite willing to pay you for the time you spend with the policyholder, manufacturer, and distributor to settle the claim by exercising the warranty.
If you are in a situation that the compressor shell has been cut, the failure mode is not found to be HVS, and the compressor is within the two- to five-year warranty, discuss the situation with the equipment distributor. The distributor may honor the warranty. This is entirely at his option and is only to be used as a last resort. Always stay alert to the possibility of warranty coverage.
Estes is president of W. E. Estes & Son, Inc., of Athens, AL. He can be reached via e-mail at email@example.com.
Publication date: 06/04/2001