MICA Panel Discussion

12-3-04

Control of Damaged Goods/ Brands & Labels /

Last Right of Refusal: Issues and Options

 Options and Examples

 

Ron Chamness - SalvageSale, Inc

w) 713-286-4614

c) 713-545-8042

rchamness@salvagesale.com

Common issues and options:

 

  • Labiality

  • Warranty

  • Returns

  • Brand Protection

  • Market share or Reputation

 

Issue

Option / Consideration

Liability

 

-     Suit from 3rd party after the sale.

 

 

Case regarding validity of "as is where is" sale.

 

TOKIO MARINE AND FIRE INSURANCE CO., LTD., Plaintiff, v.

             NORFOLK AND WESTERN RAILWAY COMPANY and NORFOLK SOUTHERN
 

RAILWAY COMPANY, Defendants. 

 

CIVIL ACTION No. 6:94CV535

 

 

Case regarding selling salvage to the insured and issues this can cause if value is challenged.

 

Breffka & Hehnke GMBH & Co KG, ET AL. & M/V Glorious Success, ET AL" United States District Court, Southern District of New York, November 24th 2003 01 Civ. 10599

 

 

1.  Sell "as is where is" (from SalvageSale, Inc terms and conditions)

 

(a) ALL ITEMS LISTED ON THE SITE ARE SOLD "AS-IS, WHERE IS" WITH NO WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, UNLESS OTHERWISE EXPRESSLY SET FORTH IN THE TERMS OF SALE FOR SUCH ITEM AND LABELED AS A "WARRANTY".

(b) IN NO EVENT SHALL BUYER OR SELLER BE LIABLE TO EACH OTHER FOR SPECIAL, INCIDENTAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY KIND, OR ANY LOST REVENUE OR ANTICIPATED PROFITS, ARISING OUT OF OR IN CONNECTION WITH SUCH TRANSACTION.

(c) IN NO EVENT SHALL THE LIABILITY OF SELLER TO BUYER, OR BUYER TO SELLER, FOR ANY SUCH TRANSACTION EXCEED THE PURCHASE PRICE OF THE PURCHASED ITEMS AND, IF THE PURCHASED ITEMS HAVE ALREADY BEEN RELEASED TO BUYER, THE REASONABLE LOGISTICS COSTS INCURRED BY BUYER FOR THE TRANSPORTATION AND STORAGE OF THE PURCHASED ITEMS.

 

2.  Insured includes additional contract language that buyers sign prior to completing the sale. (example from damaged aircraft sale on SalvageSale, Inc.)

 

-     SALVAGE AIRCRAFT IS OFFERED AS IS / WHERE IS. INSPECTION OF THE SALVAGE AIRCRAFT IS HIGHLY RECOMMENDED PRIOR TO BIDDING, AS THE INFORMATION PROVIDED ABOVE IS NOT WARRANTED.

1.   Failure to inspect, research or otherwise educate oneself regarding the current status, condition or state of the salvage aircraft will not constitute grounds for a claim of damages, withdrawal of a bid or rescission of a sale. The winning bidder (Buyer) shall assume all risks as to the quality and condition of the salvage aircraft being offered.

2.   All inspections must be scheduled with _____.

3.   The seller and its agents make no warranties or guarantees of any kind, expressed or implied, as to the salvage item or its various components, parts, and/or sub-parts, regarding the quality, fitness or condition or the subsequent reuse of any item. Further, the seller and its agents make no representations and offer no guarantees or commitments as to the condition or form of title, the status of any liens or lien releases, other judgments or encumbrances of any kind, or the availability of the registration certificate and airworthiness certificate.

4.   Liability Limitation: Should a situation develop where liability of the seller or its agents has been established, the liability of seller and its agents shall not under any event or circumstance exceed the refund of the purchase price upon the return of the salvage aircraft. 

5.   Title Transfer and Release Process - Upon funding, the Buyer will be sent a Release Letter that Buyer will be required to sign and return in order to facilitate title transfer. Upon receiving the signed Release Letter from the Buyer, title of salvage will transfer to the Buyer and the seller will send to the Buyer via overnight courier the Bill of Sale, all log books, documents and if applicable, any component parts previously removed and not stored with the salvage aircraft. All overnight courier charges are for Buyer's account.

6.   Release of Liability and Indemnity: Under no circumstance shall the Seller or its agents, representatives, clients, partners or associates be liable or responsible for any injury or damage sustained by a prospective bidder or Buyer while on the property of any storage facility where salvage might be kept, or incurred during the course of inspecting, removing or examining any salvage item, whether or not they are negligent. Any bidder, acting on their own behalf and for the purpose of bidding on offered salvage, who enters into any structure or area where salvage may be stored, shall indemnify and hold harmless the Seller or any of its employees, officers, agents, representatives, partners or associates from and against any and all loss, detriments, costs, damages, or expenses of any kind which they may suffer or sustain, including claims for injury or death.

7.   No statement(s) by any agent or representative of Seller and/or the insurance company, the storage facility, or any other party can alter or confer any right upon any bidder or Buyer that alters or otherwise changes the terms of the sale or alters the bid description.

8.   THESE OFFER TERMS SET FORTH THE TERMS OF SALE FOR THE SALVAGE AIRCRAFT BETWEEN SELLER AND BUYER. THE LEGAL RELATIONSHIP WITH SALVAGESALE IS GOVERNED BY THE TERMS AND CONDITIONS SET FORTH ON THE SALVAGESALE WEBSITE (http://www.salvagesale.com/TermsOfUse.asp) WHICH, AMONG OTHER THINGS, INCLUDE LIMITATIONS OF LIABILITY AND WARRANTY DISCLAIMERS, TO WHICH REFERENCE IS MADE FOR ALL PURPOSES. SALVAGESALE IS A MARKETPLACE AND AS SUCH IS NOT AN AGENT OF EITHER SELLER OR BUYER.

 

3.    Test product before the sale: (food, high-tech equipment)

4.    Follow governmental guidelines for sale of assets (i.e. ATF, USDA, FDA)

 

Warranty

 

  • Items sold to buyer who tries to have repaired as under warranty.

 

 

 

-     See previous "standard" as is, no warranty terms of sale

-     Remove or deface serial number.

-     Remove warranty cards from packaging

-     Remove serial number from insured's tracking systems

-     Mark item or packaging as out of warranty

-     Mark items as sold for salvage, no warranty

Returns

 

  • Damaged items returned to insured or insured's distributor.

 

 

-     Understand insured's return process and develop solution to address constraints.

-     Mark asset as "no returns or refunds"

-     Remove item asset tag

-     Remove or deface label on item or packaging

-     Sell only to "salvage stores" where buyer understand salvage and returns policies.

Brands & Labels Protection

 

  • Clause gives insured rights to protect brands in the sale.

 

 

-     Remove labels on item or packaging

-     Deface labels

-     Perform services prior to sale or have buyer perform after the sale.

-     Buyer signs sale or use restriction agreement

-     Buyer performance bond

-     Buyer performs delabeling and insurance professional picks up the labels and counts them to ensure process is completed.

Market share / Reputation

 

  • Insured is in small market and fears sale will damage reputation

-     Investigate alternative uses.

-     Sell key valuable parts.

-     Sell to other markets (Europe, South America...)

-     Remove all brands and labels

 


 What do companies do with excess inventory or returns and how does that apply to insurance claims?

  1. Companies have channels of distribution for these items in their core business.  These solutions address their core issues and are sold via:

    1. Online open auctions,

    2. Private sales to distributors,

    3. Private sales to approved buyers, and others
       

  2. Distribution and store operations commonly re-sell returns, abandoned & excess inventory to reduce costs.  Insured's can use the same principals in a claim.
     

  3. These channels are rarely used or on insurance claims, but the process can provide insight into potential solutions.

  


Client's Concerns - "Fear Uncertainty and Doubt":

  1. Non-standard Process for handling insurance "salvage" around the world

    1. Example:  Surveyor in Singapore, London and New York will likely have a different approach to selling items and addressing issues.

    2. Contract for sale vary widely.

    3. Limited visibility into the process

    4. Non-transparent process can not be audited - "Sarbanes Oxley"
       

  2. Unknown Vendors:

    1. Carrier brings in different surveyor, adjustor and other vendors on each claim.

    2. The insured does not know them and their practices.
       

  3. Unforeseen situations: Losses in various locations around the world.

 

 

Case Studies:

 

Examples:

1.   Global technology manufacturer who is concerned about salvage assets being send back as under warranty, sold to unauthorized countries or they have a constraint on parts and need parts.

 

Types of Losses:

-     Varying degree of physical damage to items.(i.e. "tip and tell", cosmetic damage, frame damage, internal damage, packaging damage). Losses occur worldwide.
 

Problem:

-     Large computer manufacturer (desktops, laptops, servers, and etc).

-     Physical damaged claims worldwide.

-     Concerned about returns, proprietary technology and possibility of constrained parts.

-     Control of Damaged Goods, assets cannibalized or destroyed.  Low credit or salvage.
 

Solution:

-     Aggregation facility in Denver and London. Damaged assets shipped to closest location.

-     Track asset inventory in web based application that insured, broker and carrier can access.

-     Capture serial numbers and pass to manufacturer to take out of warranty tracking system.

-     Perform computer diagnostics on higher valued assets to provide buyers with accurate independent analysis of product condition.

-     Sell "as is where is with no warranties or guarantees for fitness for use…" and leave all labels on the machine.

-     Insured will put under maintenance contract and sell additional software if asset is fully repaired and certified by manufacturer certified engineer.

-     Sell for high return (30% to 60%) to end buyers.
 

Keys to Success

-     Salvage solutions provider worked closely with the insured, broker and insurer

-     Insured had control of the process

-     All parties could track assets and receive monthly reports on sales and inventory in the process.

-     Reduced premium

 

 

2.   Manufacturer of DVD players, televisions and VCR's whose main client is one of the world's largest retailers.

 

Type of Loss:

-     Container involved in roll-over accident and items have some water damage on packaging.

-     DVD's and etc. packaged in " several boxes…"
 

Problem:

-     Fear items will be returned to store as defective and will cause serious problems on their largest account.

-     Insured will have to credit retailer's account for returns.

-     Warranty cards are in each box & serial numbers is on each asset.
 

Solution:

-     Salvor put in direct contact with manufacturer to discuss options.

-     Gather detail about returns process with retailer. (process, documents, tracking) and presented several options to address issues.

-     Presented historical data to set expectations.

-     Took several steps to ensure sold into ternary markets (salvage)

-     Deface each box

-     Pull warranty cards

-     Track serial numbers on each item
 

Keys to Success

-     Manufacturer was part of the solution

-     Manufacturer had control of the process and was involved in the defacement

-     Higher return than insured thought possible (64% return)

 

3.   Large retailer who develops their strategic advantage through their brand name product and are concerned about a public sale.

 

Type of Loss:

-     Warehouse with smoke, water damaged product in a large warehouse
 

Problem:

-    Carrier wanted to sell the assets and maximize return through online marketplace (versus traditional sale to insurance salvage buyers).

-     Retailer "did not want their assets sold on the internet" and had control of damage goods.
 

Solution:

-     Carrier and salvage solutions vendor asked "what do you do with your store returns"?  Their reply was… "we sell them to pre-approved buyers in sealed bid sales" (retail "jobbers" who re-brand, repackage, and sell).

-     Proposed solution to hold an online competitive "private" auction with pre-approved buyers who signed the retailer's brand protection agreement.

-     Salvage solutions vendor researched additional buyers with same profile, had them approved by retailer and sign contract.

-     Resulted in most successful sale in retailer's history. (speed, control, return, recourse to buyers)

-     Salvage solutions vendor started handling product returns for retailer

-     Carrier and broker given credit for bring innovative solution to the table.
 

Keys to Success

-     Leveraged insured's existing returns process

-     Control over the process

-     Legal recourse against buyers if they did not fulfill obligations

 

 

Brief Descriptions of Claims:

4.   Computer monitor manufacturer who makes monitors for major retailers.

1.   Insured removed all brands, labels, serial number tags and re-boxes monitors

2.   Sell trailer load of generic monitors for 45-70% of claim value

3.   Existing process returned less that 15% return for assets.
 

5.   Food products rejected due to temperature variance in container.

1.   Food consultant reviewed temperature variance and confirmed the product could be sold with additional testing to verify condition.

2.   Re-bagged 36,000 pounds of shrimp into generic bags.

3.   Product tested by FDA approved lab and sold for 76% of claim value.

 

 

Keys to success

 

"Help your insured leverage secondary markets while protecting their interest"

 

  1. Where possible address issues before a claim occurs.

  2. Identify the root business issue; it may not be their initial reason for destroying the assets.

  3. Bring in experts who can assist in solving problems, evaluating option/cost and presenting solutions.

  4. Get clarity on what Brands & Labels protection means and who pays for addressing this issue.

  5. Use historical data to develop a case to sell.

  6. Cooperation of the carrier and the broker are key to communicate value and impact.

  7. Get plan in writing and have insured's sign off on plan.

 

 

 

Outline Problem  > Develop Solutions  > Propose Alternatives  > Signoff on Plan  > Implement Solution

                                                                                     

 

 

 

Questions and Answer: