How much can a device that fits into your
pocket be worth? More than $10,000, according to the Apple
Corporation.
Apple says that its new “iPods,” portable
information storage devices, can store up to 10,000 songs.
If someone were industrious enough to download
songs one-by-one from legal sources at a market rate of 99 cents
per song, that would amount to $9,900 worth of information on a
$250-$500 piece of equipment.
What if an iPod so loaded were stolen or
destroyed by fire? Would the enhanced value of the property be
covered under a homeowners policy?
Years ago, a theft loss for a comparably
priced piece of electronic equipment may have fallen under the
deductible level for a homeowner’s policy, assuming the loss was
covered at all. A fire loss would probably have been a relatively
insignificant portion of a larger loss.
That, of course, was before consumers could
enhance the value of their electronics by loading information onto
them that is more valuable than the equipment itself.
Today, thanks to the new ability of consumers
to download software, music, videos, and libraries onto portable
devices, the value of those devices can grow exponentially, and
the resulting claims for losses can grow as well.
“These developments will definitely have an
impact in transforming the value of household personal property,”
says Rob Olson, senior research analyst for the International Risk
Management Institute. “I don’t think that insurers are
currently addressing the issue, either through loss control or
pricing, because the technology is so new.
“But as these types of claims become more
common, they will.”
The trend is already raising new issues for
writers of extended product warranties on consumer electronics.
“We are definitely watching it,” says Paul
Swenson, president and CEO of Aon Innovative Solutions, Glenview,
Ill., a subsidiary of Aon Warranty Group.
“The paradigm is changing,” says Swenson,
meaning that warranty writers are exploring whether to expand
their coverage, which has traditionally been limited to internal
malfunctioning or breakdown of the insured item, to cover loss to
intangible property that results from a malfunction or breakdown.
“The typical extended service contract does
not cover data,” Swenson says, but some are starting to add
coverage for it. Within the past year, Aon started offering a “platinum”
extended service plan that includes service for backing up
computer data.
This follows a trend in the warranty business
to extend coverage of traditional service contracts to certain
types of physical damage, such as a cracked computer screen. Such
coverage is typically offered for a fee in addition to the
warranty premium.
Even if warranty writers expand into coverage
of intangible property, it is unlikely they will expand into
covering losses
from standard property perils, says Steve
Williams, president of the consumer products division of
Warrantech, Bedford, Tex., an extended warranty writer.
“The minute we go into P&C, we have to
be licensed,” he says.
Given the regulatory barriers preventing
warranty writers from expanding easily into insuring losses from
standard property perils, homeowners carriers may find themselves
the recipients of a growing number of claims for enhanced value
electronics.
According to Olson, an “iPod” and similar
portable devices would not fall under the “property not covered
section” of an HO-3 developed by the Insurance Services Office,
Jersey City, N.J., or the equivalent Homeowners Form 3 maintained
by AAIS.
“Since there is no exclusionary language in
the contract for this type of intangible personal property, there
would be coverage,” he opines. “Insurance bureaus and insures
alike will probably need to put some type of limits on downloaded
songs in the future.”
If that is the case, it is no easy matter to
implement such limits, says Susan Luecke, AAIS assistant vice
president for personal lines.
“If it was clear there was no coverage [in a
homeowners policy] for intangible property downloaded to a
portable electronic device, it would be relatively straightforward
to develop an endorsement to provide the coverage,” she says.
“But, if courts hold that downloaded
intangible property is already covered,” Luecke adds, “it
could prove more difficult to introduce a limitation.”
According to Luecke, regulators frequently
require that the introduction of a limitation on an existing
coverage demonstrate why the potential losses cannot be sustained
under the existing form and rating plan.
Furthermore, regulators often require some
sort of rate reduction or broadening of other coverage to reflect
a coverage that has been “taken away.”
The question of coverage for downloaded
property may be a moot point if the consumer has no records of
what was downloaded to a device and how much it cost.
“Obtaining proof of the number of songs on
an iPod would be a real challenge for an adjustor,” says Olson.
“If the insured could provide some sort of documentation on this
that would make the job easier.’
It may be easier to produce that documentation
than some insurers realize. If an individual has been legitimately
downloading information using a credit card for payment, the
credit card services can probably produce a record of
transactions.
What companies don’t know yet is how much
value on portable electronics is legitimately acquired, and hence
insurable.
If the stereotypes are true, and young people
are loading their electronic devices with music and videos that
are pirated and casually shared, there may be no appreciable
exposure. Also, iPods currently require data to be downloaded to a
personal computer before being loaded onto the portable devise. In
many cases, the data may not be lost.
Still, the ability of consumers to add value
to portable electronic devices changes the dynamics insuring them,
says Sheila Morris, AAIS senior product development specialist for
inland marine and a former underwriter of extended consumer
product warranties.
In the past, consumer products of all kinds
depreciated rapidly, she notes, making it manageable for insurers
to cover them on an actual cash value basis. The ability of
individuals to add value to property at will is uncharted
territory for carriers.
“We know that [the value of downloaded
information] is only going to increase,” Swenson says.
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Small items; big values
