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Blind Claims Auditors: A Deal’s a Deal?

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Writer Charlie Barone has been working in and around the body shop business for the last 35 years, having owned and managed several collision repair shops. He's an ASE Master Certified technician, a licensed damage appraiser and has been writing technical, management and opinion pieces since 1993.

In one of my favorite films, Fargo, the general sales manager of a new car dealership is on the phone with the slime balls he conspired with to kidnap his own wife. Upon learning the circumstances had changed and the villains wanted more of the ransom, the sales manager/husband played by William Macy exclaims: "Hey, a deal’s a deal!" But when is a deal not a deal?

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One of the most annoying and universally resented aspects of the world of collision repair is the surge in blind claims audits. In these so-called desk reviews, a person contracted or employed by an insurance company claims department calls a body shop to discuss proposed charges by that shop.

In some cases, the insurer has already sent someone to the shop to examine the damaged car, secured an agreed price for the repairs and led the shop management to believe the price was fixed.

Not so, in the case of the blind claims auditor, who will attempt to renegotiate the bid for the repair work without laying eyes on the car in question. Hence the term "blind" audits.

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The Price Is Right?

In a lot of these scenarios, the auditor is working on the premise that there’s some aspect to the charges that’s either incorrect or outside the guidelines of the third-party payer (the insurance company) settling the collision claim. What’s significant about this is the presumption that there is, in fact, a correct price or a true cost of repair.

But how can that be? Given the fact that each collision-damaged car is unique in terms of its damage, offset, severity and nature, virtually every damaged car is different, as are the repair costs. If there was a fixed price for repairs to, let’s say, a right front offset hit on a 2003 Accord, then there would be no need for field adjusters, appraisers or user-generated damage reports. All you’d need is a digital camera, some snazzy software and presto!

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While a customer’s expectations are pretty much the same in every case – a repair to pre-loss condition as far as function and form – the various procedures and operations are the purview of the provider and payer. Judgment times, section sites, parts usage, blend areas and the manner in which a car is straightened out after an accident make the repair price a matter of subjectivity.

So how can there be a right or a wrong price, as the term "audit" would imply?

In many cases, the repair shop estimates fall into an arrangement between an insurer and one of their preferred shops operating within a DRP. In these situations, what you have is a willing seller and a willing buyer, in which the provider agrees to pricing parameters, alternative parts usage and limits on charges.

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In these cases, the electronic files generated by estimating systems are uploaded to an insurer’s servers and processed through various audit systems. ADP, for example, provides software for third-party claims processors who run the estimates through the programs and comb the estimates for pre-selected items that trigger the audit process.

Says Wayne Smolda, CEO of CEI Group, a firm in the business of claims audits: "We renegotiate a material damage estimate by running the shop estimate through the systems."

Smolda hastened to add that his work is usually the primary negotiation with the repair provider and that he charges the payer for the handling of the transaction.

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"All these desk review companies deliver value by reducing the estimates. … ," he says. "Why else would you be in business?

"The assumption is that the shop’s estimate is an asking price, not a final price. If I go into a store to buy a pair of shoes, the asking price is clearly marked. If I go back and the shoes are on sale, that doesn’t mean [the store] is screwing me."

Legally Blind?

What’s getting the hackles of the body shop operators up is that they’re no longer reviewing the cost of repairs with an insurance professional who’s working within state regulations. Most state regulations require that an insurance adjuster actually perform a physical inspection of the damaged vehicle and write his bid in offer for settlement on that basis. Regulations often forbid writing estimates based on telephone calls or photos, which would seem to outlaw blind claims audits.

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Not so, says Smolda.

"If the shop goes before the insurance commissioner and complains, one has to ask if the desk auditor violated regulations. He did not. All that [the] desk review firm did was provide the adjuster with a tool to audit. The claims department gets my estimate. … I did not adjust the loss. The inside adjuster is actually adjusting the loss."

What we have in the case of the CEI model presents real value to a claims office in that the loss-adjustment expense is significantly reduced – no field adjuster, no company car, no mileage and no additional employee benefits to pay.

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In fact, with DRPs and third-party claims auditors assuming the traditional roles of the insurance adjuster on the street, staffs in claims departments are shrinking – a trend that can make that insurer more competitive in the market for auto insurance. And lower loss-adjustment expense could arguably make insurance premiums more affordable. Evidence of this, of course, is scarce.

Weird Science

While attending the annual ADP Claims Conference at Lake Las Vegas in early April, I met with John Junk, director of corporate services for SCA Appraisals. His company is in the business of providing blind claims audits for his insurance company clients.

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Junk uses an ADP Audit system, in which the electronic files are run through the program looking for charges that appear to be "extreme flags," such as what Junk referred to as "excessive frame time." While an operator of the software may or may not actually see the condition of a frame on a damaged SUV, the audit tool uses some sophisticated deductive reasoning.

For example, based on historical loss data, the program knows that a 1999 Ford Explorer damaged in a right front offset collision will sustain certain sheet metal damage associated with that impact. If the bumper assembly, hood, rad support, grille, right fender and attaching parts need replacement, one can conclude the right rail may have suffered X in distortion off its original configuration. If the same hit ran the fender into the door’s leading edge, the impact was that much more severe, hence more frame time.

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If this sounds like so much bad science, it is. But it works well enough for the practice to catch on.

The same kinds of deductive reasoning are used by some consumer-based collision claims specialists, too. Patrick Yurek of Collision Consulting offers blind appraisals to his customers in an attempt to gauge the loss in market value (diminished value) attributable to collision damage.

"While consumers are better served through a qualified inspection of their automobile after the repairs have been completed, this isn’t always feasible," says Yurek. "Some consumers live in areas that don’t have post-repair inspectors close enough. In these cases, the consumer nonetheless has a right to recovery for the diminished value sustained to their vehicle as a result of the damage history.

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"In order to determine the approximate loss, many factors have to be taken into consideration. The aspects considered need to include the amount of damage (as a percentage of the value), the overall extent of the damage (as a percentage of the whole vehicle), the type of damage (cosmetic, sheet metal, frame/unibody), the severity of the damage (on a panel-by-panel basis), the warranty loss (if any), and the age and mileage of the vehicle."

Scrubbing the Estimate

There’s an important distinction between the type of claims audit SCA Appraisal does for its primary insurance clients and the type of desk audits it does of independent shops’ repair bids. That is, most of the work SCA does is made up of blind claims audits of DRP shop estimates, in which the electronic estimate files are uploaded to their desktops.

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In these instances, the DRP shops are willing participants of the programs and have agreed to various labor concessions, alternative parts usage and caps. However, one might assume that these sheets were written within pricing guidelines prior to the "scrubbing" they get when run through the audit process.

In fact, Junk says that his firm’s "scrubbing" is "almost capitation" of charges. He says, however, that the focus is typically on parts usage and sourcing.

Through an agreement with LKQ Corporation, SCA is able to locate guaranteed used parts to be used in the repair as an alternative to new OE replacement parts. While the aftermarket parts issue is still a hot topic, Junk’s focus seems to be more in terms of salvage parts. And their involvement in the shop’s parts purchases can get, shall we say, rather intimate.

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"First we determine if the new OEM parts have been ordered by the shop," says Junk. "Then we ask for dealer information and say to the shop manager on the phone, ‘Can we have the name of the dealer?’"

Junk didn’t indicate how often shops refuse to share parts vendors’ information. That’s none of a third-party payer’s business, much less the business of the claims auditors. Yet, based on their success and the growth of blind audit business, I would imagine some shops reveal that information.

Junk also indicated that he prefers to work on estimates that are relatively fresh. "We won’t scrub after 48 hours," he says.

Don’t Renegotiate

When an independent shop is approached by a blind claims auditor, it’s important to realize that no duty exists for the shop to renegotiate the claim settlement in terms of prices. Junk even acknowledges that "the guy is not legally bound to me."

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More importantly, the courts have ruled that no duty to negotiate with a third-party payer (or one’s agent) exists. What this means is that if you simply refuse to renegotiate after the fact and hang up on the auditor, you’re not in any kind of trouble. If you do this, however, expect their next call to go to your customer – claiming that you refused to have your estimate audited.

In such a call, it’s vital to understand what’s said to the customer. For example, the term "audit" has certain connotations to the average person. One might assume that changes in the pricing were the result of identifying illegitimate charges or overcharges based on what’s reasonable and customary in the local collision repair market. However, juxtaposing an independent shop’s charges for the repair of a uniquely damaged specific vehicle over similar historical charges by a preferred shop or shops is quite a stretch.

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Statements to customers, however, are nonetheless devastating based only on the term "audit" being used as the basis for the call. The assumption made by the consumer is that someone has been caught doing something wrong or, at the very least, is guilty of overcharging for collision repair work.

Perhaps it would be a good idea to make a preemptive call to your customer, print a general warning on your estimates and give a cautionary piece of advice to the claims auditors calling your shop.

In any event, a deal is a deal, and that deal was made with your customer. If you’d like to conference in your customer when the claims auditor calls to discuss the repair of a car he’s never seen, you might even reveal the validity of the process to your customer.

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Price Controls

What’s at issue here is pricing, or more exactly, price controls. In listening to various individuals in the business of claims audits, terms like "correct" or "accurate" prices are bandied about. If such a thing were possible, no estimates, subjective judgment times or the considered experience of the appraiser would be necessary.

There is no such thing as a correct price when you’re dealing with a willing seller and a willing provider of goods and services. It’s only a matter of what the parties agree to that forms a settlement of an insurance claim.

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All this appears strangely familiar in that the insurance industry is involved in an attempt to horizontally fix collision repair prices. That is, exert influence on the repair market to bring some uniformity to pricing for parts and service.

The same kind of plan was put into place almost 50 years ago and was revealed for what it was by Robert F. Kennedy in the famed 1963 Consent Decree. The Plan, as it was called by the insurance industry, placed price controls on appraisers settling claims for insurance companies and was an actual written conspiracy to fix prices. While the Plan was instituted long before the digital age, the effects are identical: There’s pressure to make prices for collision repair the same.

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"If there is an area we can affect for best practices and industry standards, [then] that is what we do," says Junk.

While Junk’s statement sounds innocuous enough and upholding industry standards is a good thing, there are no standards in terms of pricing. Practices and standards only apply to the repair process, such as the Uniform Procedures for Collision Repair (UPCR) and to general procedures such as welding and refinishing.

There is, however, no price authority or standard for what a shop may or may not charge for collision repair. Yet the process of straining the estimates, be they from a DRP shop or independent, appears as a clear attempt to fix prices in the repair industry.

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The process of crunching the numbers through an audit tool is greatly facilitated by the electronic nature of the estimate file and the CEICA standards, i.e. estimate in here, scrubbed version out there. And using these tools within a claims department as a means to audit the staff appraisers’ work is an insurance company’s right.

However, using the same means to try to create uniformity in their DRP network repair shops’ estimates could be an entirely different matter, although the willing seller nature-of-the-deal exists. (Willing participants to DRP contracts can always opt out if the pressure to keep prices low becomes burdensome, so the effects of the blind audits are part and parcel of the deal.)

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Still, the effects of this process are clear in that the job of masking a car to prevent overspray damage could ultimately sell for the same figure regardless of where the shop buys its plastic car covers, how much the painter’s helper is paid or where the task is done.

A Deal’s a Deal

There’s a general assumption made in these negotiations that a shop must be overcharging on every bid for the repair of a collision-damaged vehicle, which might have some basis in fact. If this weren’t true to some extent, the old "bid, bluff and adjust" scenario wouldn’t have become as institutionalized as it has in the industry today.

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In other words, conceding to a third-party payer in terms of price lends credibility to the notion. If you really needed 6 hours to repair cowl damage on a Crown Vic nailed in the side, you wouldn’t make a concession to 4.5 hours in your negotiations with an insurance adjuster.

The point being, the blind claims process is only as valid as the participants wish to allow. If an insurance company wants to pay a DV claim on the basis of a blind appraisal and considers itself lucky to be getting out so cheaply, they might settle.

Same for a body shop. If you’re willing to make price concessions, there’s nothing stopping you. By the same token, there’s nothing stopping you from refusing to renegotiate with a blind claims auditor. After all, a deal’s a deal.

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Writer Charlie Barone has been working in and around the body shop business for the last 27 years, having owned and managed several collision repair shops. He’s an ASE Master Certified technician, a licensed damage appraiser and has been writing technical, management and opinion pieces since 1993. Barone can be reached via e-mail at
[email protected]

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