Vertical integration refers to the extent to which a company enters into agreements with its upstream suppliers and downstream buyers. To illustrate, a systems integrator, or value added reseller, may elect to contract for the use of proprietary technology and then incorporate that technology into a solution which is then resold to various distribution channels at a lower level. This is common where companies supply “turn key” solutions to sectors such as medicine, printing, CAD, dental practice management, imaging, data storage, etc.

Horizontal integration refers to the involvement with multiple distributors at the same level. A software publisher might, for example, seek to distribute licensed software to end users through a variety of outlets such as online downloads, retail stores, special promotions, bundling with other products, etc. The goal is economy of scale for what is essentially the same product.

The first step in dealing with a claim such as this is to unpack the services being provided (e.g., software licenses, hardware, training, service contracts, maintenance agreements, disaster recovery, etc.) and determine the extent to which the policy will respond to the separated costs. Once separate costs have been clarified, the adjuster is in the position to determine whether they require the vertical supplier or can be satisfied by a horizontal market source at the same level.