Warranty Wi$e Solutions - Automated Dealer Claim Validations and Audits

"It is September, 2005 and J. D. Coolcat, Director of Customer Support - Krystal Kool Krane Kompany, takes a brief break from practicing his presentation to the 2005 National Association of Service Managers (NASM) Educational Congress to reflect on the past hectic, exhilarating year.

Since the November 2003 NASM/AEM Customer Support Education Congress in Scottsdale, his Krystal Kool Customer Support team has:

• Reduced by greater than 50% claim processing and warranty registration personnel through automation allowing them to do more value added efforts including warranty auditing, supplier warranty recovery, and extended warranty program development.
• Reduced by over half his company's multi-million dollar claims costs by automating effective validations and audits, providing immediate engineering accessibility to improved failure data resulting in dramatic product reliability improvement; implementing campaign (i.e., recalls/product improvement) development cycle time reduction, warranty platform changes, and simply greater cost control focus.
• Increased supplier warranty recovery tenfold while driving supplier component reliability improvement, which brought even greater warranty cost reduction in his products.
• Implemented a purchased warranty quote and contract program without adding personnel. Dealer service work and profitability along with dealer and Krystal Kool Krane's part sales and profit have rapidly increased.

At that 2003 Educational Congress, J.D. had listened intently to peers he quizzed on their warranty programs and took in every word of the Congress' warranty seminar. He learned:

• That all believed the initial step had to be automating claim submission, validation and payment.
• They had already implemented web-based claim submission or believed that they absolutely had to in order to provide greater satisfaction to their dealers and customers by providing them Web application tools that allowed them to submit claims right the first time, provide claims status and faster turnaround on claim approval and payment. Furthermore, it would eliminate duplicate claim data entry and dramatically improve claim data integrity - improved failure descriptions - for Krystal Kool Krane.
• There were differing opinions on the needed amount of totally automated claims processing. Some felt that it was in their best interest to manually review every claim and others felt that approaching 100% automation was best.

From the networking discussions and warranty education seminars, he had become convinced that he wanted to explore 100% automation to free up resources for more value added efforts. But he wanted to find a webbased warranty claim processing product that would allow him the flexibility to adjust the automated/manual review of claims to any extent he felt the economic times demanded - instantly when he wanted. He was convinced that he could truly reduce warranty registration and processing resources and provide cost reductions that would illustrate to Krystal Kool management that they should invest in other warranty lifecycle solutions which would reduce costs and drive profitability in dealer and Krystal Kool's service and part sales.

Within 30 days of the NASM Congress, he had found an excellent web-based warranty lifecycle management solutions product and he had fully implemented that claims submission, validation and payment solution within 90 days to include automatically processing 90% of the claims.

His NASM presentation at this 2005 Congress would identify just a few key validations (of the hundreds available) he implemented and the logic behind his choices. He would limit his comments to those key claim validations.

He would remind participants that the achievement of claim processing automation was only the first step to obtaining improved claim data integrity and releasing resources to conduct claim audits and analysis, as well as communication with Engineering to drive product improvement. Communication with suppliers gained warranty cost recovery and drove supplier component improvement. His team had gone on to develop a purchased warranty program to drive greater dealer service revenue and dealer/Krystal Kool Krane parts sales and profitability."

Dealer Claim Validations

The purpose of this article is to share key automated claim validations, the manner in which they might be used and the logic for using them. We will address three areas in a priority order perceived to provide the most long-term effective cost reduction value. Those areas are:

1. Warranty Claim Data Integrity Validations
2. Validations to Reduce Corrective Action Cycle Time
3. Validations to Assure Cost Control and to Prevent Warranty Abuse or Fraud

Warranty Claim Data Integrity Validations

As noted in previous articles, good credible claim data is the key to effective reliability/warranty analysis, supplier corrective action and warranty $ recovery and overall product improvement. Gaining good failure data from your customers and dealers/distributors will enable you to improve your product quality and recover a greater percentage of warranty dollars from your suppliers - fairly, while providing financial incentive to improve your shared product quality.

Key validations and audits include:

1. Check to assure the causal part field is filled in.
   • The causal part, sometimes called key or prime, is the part that was the root cause failure. It is the part that failed leading to the customer complaint or failure of other parts and/or assemblies.
2. Assure that the causal part listed is a valid part number in the parts table.
   • This assures the dealer submitted a valid causal part number before the claim is placed in the claim history file for warranty, reliability and engineering personnel to access and analyze.
3. Check to assure a minimum number of characters is filled in for:
   1. Complaint (operating condition report or symptom)
   2. Cause (root cause or physical description)
   3. Corrective action (work accomplished)
      • Some studies have shown that when a dealer/customer is required to enter 11 - 15 characters, this leads to them providing an appropriate description and assists in avoiding such descriptions as "won't work." Typically, if someone is prompted to put in a minimum number of characters, they will simply attempt to provide a good description the first time - saving both time and effort for everyone.

Examples of other similar validations that might be used are checks to assure that "failure code" and "reason for repair code" fields are filled in and valid codes have been used. There are an infinite number of validations that could be implemented.

Validations to Reduce CorrectiveAction Cycle Time

Besides getting good credible claim failure data, a primary objective is to shorten the corrective action cycle, avoiding continuing development of defective component or machine population and the associated costs plus customer dissatisfaction.

Key claim validation and audits include:

1. Check to see that failure date is filled in.
   • Failure date is critical for tracking the time it takes to correct a customer problem and to assure that a customer is not continuing to operate the machine, potentially leading to further damage.
2. Check to see that repair date is filled in.
   • Repair date is critical for later analysis of claims per warranty period and for tracking claims submittal performance to shorten the corrective action cycle.
3. Auditing the allowable time between the date the product failed (the date the dealer opened a work order based on customer call or visit) and the repair completion date (work order close date) versus the time allowed by warranty policy.
   • OEMs may require their customers to provide their dealers the opportunity to repair product defects reported within 10 - 30 days of reporting the defect to the dealer in order to have valid warranty coverage.
   • Some OEMs automatically deny claims that exceed the time allowed by warranty policy while sending a user friendly message to the dealer explaining the policy and providing the dealer an opportunity to seek cost recovery through good will if an OEM representative approves it. That makes the dealer more aware of an internal process problem and provides the OEM representative the option to reaffirm the value that prompt claim submittal brings that dealer - improving the product or assembly for future customers.
   • Others may choose to simply hold these claims for manual review and have their claims analyst educate the dealer on prompt repair of reported defects.
4. Auditing the allowable time between the repair completion date (work order close date) and the date the claim was submitted to the OEM versus the time allowed by warranty policy.
   • OEMs may require claims to be submitted within five days of the repair completion date and if the claim is not submitted within a maximum (generally 10 - 60 days but preferably 30 days or less) period of time from the repair completion date, they refuse to honor the warranty claim.
   • Some OEMs automatically deny claims that exceed the claim submittal time required for standard warranty again providing the dealer an opportunity to seek cost recovery through good will if an OEM representative approves it. That makes the dealer more aware of an internal process problem and provides the OEM representative the option to reaffirm the value that prompt claim submittal brings that dealer - improving the product or assembly for future customers.
   • Others may choose to hold claims for manual review and have their claims analyst educate the dealer on prompt claim submittal of warranty failures.

Validations to Assure Cost Control and to Prevent Warranty Abuse or Fraud

All companies want to treat their dealers and customers fairly and consistent with normal business practices within the market place. At the same time, they want to assure their stockholders they are doing due diligence in assuring proper cost controls and preventing warranty abuse or fraud.

Key claim validation and audits include:

1. Check to assure the Product Serial Number field has been filled in.
   • The serial number or vehicle identification number is generally used to track warranty when the product is assigned such a number. This provides a basis for tracking the life of the product including the claims registered against it.
2. Check to assure the Product Serial Number entered exists in the Product Table.
   • This assures the serial number is a valid number as assigned by the manufacturer.
3. If the claim is for service parts warranty instead of standard warranty coverage, check to see that the repair date has occurred within the allowable warranty period based on the invoice date of purchase (e.g., 90 days).
   • When the product is out of standard warranty, the only warranty that will apply is the parts warranty and that typically takes effect from the invoiced date of the purchased component.
4. Check the replacement part number filed on the claim assuring it is a valid part number in the parts table.
   • This obviously assures the part number exists and is reasonable to be claimed.
   • Some companies automatically keep the dealer from successfully submitting the claim until these are corrected and others may hold the claim for manual review before a claim is approved. The OEM claims analyst may make a correction, at this point, or the claim might be rejected back to the dealer for correction.
5. Check for duplicate part numbers on the same claim.
   • A part number must not be a duplicate of another part on this claim. If it is, it is highly likely the dealers inadvertently entered the same part for payment twice.
   • Again, that validation rule may not allow the dealer to submit this claim until it is corrected or submission might be allowed with the claim being held for manual review.
6. If the claim type is a campaign (product improvement program), check that the part number is valid for this campaign (listed in the campaign parts table).
   • This will prevent a claim with an invalid campaign part number to be submitted, or allowed to be submitted, but held for manual review by the OEM claim analyst - depending on how the OEM sets up the business validation rules.
7. If the claim type is a campaign (product improvement program), check that the quantity is not greater than the allowed parts quantity for this campaign (as listed in the campaign parts table).
   • Some OEMs simply allow payment of the campaign claim, but automatically adjust/limit the quantity to that listed in the campaign parts table. Others do not allow the claim to be submitted by the dealer until corrected, while still others may choose to accept the claim but hold it for manual review by their claims analyst, who may have discussions with the dealer prior to determining the disposition of the claim.
8. Check to see if labor hours claimed are more than standard time (flat rate or labor operation) allowed.
   • This is a key audit that will drive excellent cost control while assuring consistent fairness for the dealer.
   • One effective means of administering this is to simply pay all claims based on the labor hours submitted except if the hours exceed the standard time. Simply adjust those downward to the maximum allowed by the standard time and provide dealer feedback as to action taken. Obviously other ways to administer this would be to allow claims to be submitted and held for manual review, or simply not allow the claim to be submitted until the labor hours are correctly listed.
   • Labor hours claimed at less than standard time could be paid at the level the dealer requested. Typically when this occurs, the dealer has not had to perform all the tasks covered by a specific standard time.
9. Standard time (flat-rate or labor operation) code not valid.
   • The code used for the standard time must be a valid code in the standard time table.
   • This validation assures the dealer the standard time code was correctly listed on the claim so proper payment is made.
10. Campaign labor hours more than campaign time allowed.
    • The same approach and logic applies here as was discussed in "labor hours" - item # 8 above).
11. Duplicate claim/potential duplicate claim.
    • A check for exact duplicates is easy to identify and prevent submission.
    • Claims that appear to be near duplicates can be accepted and held for manual review and comparison to previous similar claims.
12. Check to determine if the product is covered by warranty.
    • The product may be out of warranty:
      • by time (fail date is past the warranty expiration date) or
      • by usage (miles, hours, etc., exceed the miles, hours, etc., allowed by warranty policy).
    • Typically, claims can be checked for these validations and claim submission is prevented.
13. Invalid amount of use:
    • Claims that list hours or miles at less than a previous claim with an earlier failure date are a sure sign of inadvertent error in miles or hours; else a potential for warranty fraud or abuse. These claims can be prevented from being submitted, or they can be accepted and held for manual review and investigation.
14. Check other expense types and limits:
    • Other expenses can include a varied number/kind of expenses such as travel, packages, third party supplier costs, etc.
    • Maximum dollar limits can be set for requiring manual review and they could vary by the various types of expenses.
15. Check claim total amounts and hold claims exceeding a high dollar limit for manual review.
    • Depending on the product, this high dollar limit may range anywhere between $100 and $10,000. Furthermore, you may choose to vary that threshold depending on the economic times and warranty abuse you are experiencing.
    • It simply is good practice to review select higher dollar claims for awareness and cost control.

Generally, validations of campaign claims and pre-approved claims (goodwill, standard) should be automatically processed without review.

Claim validations can be set based on criteria including , but not limited to, product family, model, application, dealer, supplier, warranty policy, claim type and pre-approval.The key is to obtain a web-based warranty solution that has the flexibility to accommodate your needs. A small select group of IT suppliers provides that capability today.

Equally as important is the ease of implementing and adjusting these business validation rules. Good systems have already integrated claim validations and audits in their claims processing system with the capability of switching them on and off. In addition, they have a validation development tool that provides for easy addition of more validations tailored to your product. They also provide for immediate adjustment and implementation the same day. Plus they allow for rapid implementation of warranty policy changes in the marketplace and integration of newly acquired business partners

Companies with highly automated claims processing, experience more consistent cost control and can concentrate on the 5% to 20% of the exception claims that require manual review. With the much lower volume of claims to review, they can attain claim disposition rates of 99% within the first day and virtually no need to hold disposition of a claim longer than three days unless parts return is required before disposition.

Dealers view this web-based claim processing solution as an enhancement because it helps submit claims properly the first time, gain faster disposition of claims, and get prompt notification of claim status. As a result of this, dealers perceive immediate payment of approved claims. They know a claim is approved and hence the $ will show up on the monthly statement - just like $ in the bank.

Implementing a highly successful web-based claim processing automation project is often the first step to getting improved claim data integrity and freeing up resources to conduct claim audits and analysis, communication with Engineering to drive product improvement, communication with suppliers to gain warranty cost recovery and drive supplier component improvement and to develop a purchased warranty program to drive greater dealer service revenue and dealer/OEM parts sales and profitability. Not only can it help release personnel resources, that success can lead your management to approve investment in web-based tools to help your freed up resources, leverage their results in supplier warranty, extended warranty and other aftermarket applications to further drive cost reduction and profitability.

Gene A. Weber/4CS © copyright 2003

If you have any questions or would like to discuss this topic, please contact:

Gene A.Weber, LCSE, CPM
608-348-8693
genew@4CS.com