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Insurer-Owned Shops: Anomaly or Trend

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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.

er relationships?”– Johnny Reyes, operations specialist, Pacific Collision Center, Inc., Placentia, Calif.

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Question answered by: Charlie Barone

Among the greatest concerns of body shop owners in the United States is the possibility of a developing trend toward insurance company ownership of body shops.

While the advancement of the Sterling/Allstate venture appears to be rapid in terms of growth – 54 locations in 11 states to date – the good news is, Sterling Auto Body may be an anomaly in the industry. Duplicating its model would require a number of critical factors to converge on selected markets with respect to the numbers. For this reason, it appears that the identical arrangement is unlikely to be repeated by most of their competitors.

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Despite speculation regarding what other insurers will – or won’t – do, the Sterling venture is said to be an unqualified success. So what’s that mean, exactly, for independent collision repairers?

Associations Take a Stand
The independent collision repair businesses’ response to the growing peril of insurance ownership of body shops is predictable. It presents such a compelling scenario to their customers with respect to market interference that the conclusions are obvious. In fact, every autobody trade association has issued a position statement in opposition to the concept on the grounds that insurance company ownership of body shops is noncompetitive and not consumer-friendly.

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For example, the Society of Collision Repair Specialists (SCRS) issued the following position: SCRS does not support insurance company ownership of, nor [their] investment in, collision repair facilities. These actions raise serious concerns regarding the consumer’s right to freely select a collision repair facility, as well as the independent collision repairers’ ability to compete in a free and open marketplace.

The Automotive Service Association’s (ASA’s) position is this: ASA opposes insurance companies having a financial interest in automotive repair facilities and views such interest as being in direct conflict with the consumers’ right to choose. ASA has historically supported the consumers’ absolute, unequivocal right to choose a repair facility for a collision or mechanical repair.

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While what the trade associations say is true about consumers’ rights to choose being impinged by a Sterling/Allstate combo, by and large, the industry has come to depend to a large extent on referrals from insurers – better known as steering. The association leaders, who’ve traditionally been friendly to the idea of DRP arrangements and the business it generates for them, seem to be getting a little of that old “be careful what you wish for because you just might get it”payback. DRPs essentially tested customer bases of the insurance companies and proved that customers will follow their leads – blindly.

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Using Legislation to Halt Insurer Progress
In terms of formal opposition to shop ownership by insurers, legislative hurdles have been introduced – the first of which was created by California State Senator Jackie Spiers. Allstate/Sterling, however, effectively crushed her Senate Bill 1648 in the California Assembly. In hearings on the subject, Allstate made a frontal assault on independent body shops and cited the high rate of fraud in the industry. The logic they used was why would they defraud themselves?

In what appears to be a self-serving study paid for and commissioned by Allstate, their polling said that among the people questioned, their concerns were poor quality work, cheating and inflated pricing in autobody repair. The poll was conducted by COMsciences, Inc., a public relations and advertising firm based in California.

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The COMsciences poll claimed that 87 percent believe the insurance industry should play a leadership role in combating industry fraud. “Senate Bill 1648 will deny California consumers the option of an additional, reliable, less expensive and superior repair option,”said Hank Barge, field vice president for California Allstate Insurance Company. “The bill is anti-consumer, anti-business and perpetuates the existing fraud in the state’s auto repair industry. California consumers should stand strong and voice their opposition to this measure.”

As if that study weren’t bad enough for independent shops in California, in a surprising move, the Board of Directors of The Latino Coalition (TLC) and the Hispanic Business Roundtable (HBR) joined the California Chamber of Commerce in its opposition of Spiers’ S.B. 1648.

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“Proponents of this legislation say they are protecting small autobody businesses with this initiative,”said HBR President Mario Rodriguez. “However, a quick analysis of Allstate’s Sterling Auto Body Centers in other states shows that not a single existing autobody company closed its doors due to this competition – a competition which will directly benefit consumers with a reduction in cost and fraud.”

But the failure of S.B. 1648 didn’t stop Texas Senator John Carona from introducing very similar legislation, which is still pending. Carona’s office issued the following statement:

“The proposed legislation that Senator Carona is contemplating focuses on insurer-owned repair facilities rather than direct-repair agreements. Under current law, insurer interest in repair facilities is not regulated. A possible conflict of interest could arise if an insurer paid for a consumer’s repair work completed at an auto repair facility owned by the insurer. This conflict of interest could diminish protections afforded to the consumer. Specifically, if an insurer was made aware that a repair facility currently participating in a direct-repair agreement was delivering dissatisfactory service or involved in fraudulent activities, it could stop sending customers to the shop. But, what recourse would be available if the repair facility was owned, either in whole or in part, by the insurer?

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“It may appear to be more cost effective/less expensive for the consumer to bring his vehicle to a repair facility that an insurer has an ownership interest in. However, the use of below-standard parts and other cost-cutting practices may end up costing the consumer more in the end, both monetarily and safety wise.

“This issue dealing with insurer-owned repair facilities was brought to the attention of the Senator by a small-business owner/constituent. This proposed legislation protects the consumer and both enables and fosters open and evenhanded competition within the auto repair industry.”

Can We Stop It?
If anything, the proliferation of the insurance-owned body shop has taught the collision repair industry a real lesson. Its willingness to allow insurers to steer their customers to them is coming at a cost. Now the property and casualty business knows what it can do.

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Because there hasn’t been the kind of backlash among their customers that detractors had hoped for, Allstate can march a parade of policyholders before legislators to testify about their wonderful experiences. The challenge for the independent shops remains to prove them wrong.

Whether a coalition of body shop trade associations, their lawyers and a handful of post-repair inspectors can accumulate enough evidence of harm done to consumers remains to be seen. In my interviews with a number of industry activists in which I sought evidence of malfeasance by insurer-owned shops, I was given a lot of hearsay but little in the way of solid evidence of wrongdoing. While it’s clear that any repair organization has its good and bad days and that no shop is perfect, a compelling case against the insurance shops has yet to be made on the grounds that they deliberately hack up policyholders’ cars.

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It just might be that the best hope of slowing the trend will be on legal grounds, which was something several persons implied in interviews for this story. On what grounds remains to be seen since few gave specifics. However, there’s certainly enough meat on the bone with respect to unfair competition, antitrust and violations of state regulations regarding referrals to make something stick. The sad part is that it appears not enough of the right people care. 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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Insurer-Owned Shops: Fact vs. Fiction

Insurance industry analyst Brian Sullivan discusses the odds of other insurers buying shops, whether legislation to stop the trend can pass and allegations that Sterling purposely doesn’t fix cars right.

by Charlie Barone

In an effort to gain a more in-depth feel for how the insurer-owned and operated body shop concept is viewed by decision-makers in the insurance industry, I spoke with Brian Sullivan, a well-regarded analyst in the property and casualty business. Here’s what he had to say:

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On Insurer/Shop Involvement:
“Insurance company involvement [in owning body shops] is going to grow. … But the only company that could logically make the same move [as Allstate] would be State Farm. I’m just talking about numbers, not any specific knowledge I have.

“I don’t think that Progressive or GEICO have the kind of concentration in marketplaces where they can do it. They could in selected markets where they have 25 percent of the cars, like in South Florida. Others could, like the Auto Club of Michigan – the largest insurer in that state.

“There’s another angle on this – investments like this are really just a way for them to buy access to capacity, which describes the Southern California Auto Club investment in Caliber. They use Caliber a lot, and they like what they get.

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“You might see insurers invest in companies like them. If say, an ABRA or a Fix Auto or a Caliber is providing them with solutions in a certain market, you might see insurers fund expansions in other markets like Texas, which is really what Caliber’s using the [Auto Club] money for. If an insurer isn’t comfortable with the capacity, [it might say], ‘We need some help in Chicago. If we give you money, will you expand your network into Chicago?’

“That’s a more logical next step to me than the extension of the Sterling idea to a company like State Farm or Progressive. … I haven’t heard a peep from companies like Nationwide, but I can tell you that they’re all watching Sterling. I think everyone is surprised by their success – including Allstate.”

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On Happy Customers:
Regarding the contrast between the Sterling philosophies and the traditional no-holds-barred-type of claims-settlement practices Allstate has become known for, Sullivan says: “I think someone there woke up – actually several executives – and they all came to the same conclusion: We can’t fix the car for a whole lot less than anybody else.

“The initial approach was to reduce repair costs, [but] it’s a broadly held theory now that you can’t save a whole lot more on repair costs. So the solutions we’re seeing now are reducing friction costs and reducing cycle time. At the same time, they increase customer satisfaction. I think shops don’t fully appreciate just how important that is to the insurers. Happy customers make them money.

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“The only way they make money in the insurance business is if they keep customers for a long time.”

It’s commonly held that an insurance policyholder becomes profitable for a company after three years – with no claims. If one has a $3,500 claim in year six, the payoff is naturally that much longer. The question you might ask, then, is whether an insurer still wants that customer. Says Sullivan: “They want that customer . An accident definitely makes you less desirable, but most of us have had an accident at some point. Because there are only so many of those customers with premium underwriting criteria – like the 45-year-old-male-with-two-kids-in-a-Volvo-wagon kinda guy.

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“But a lot of claims are small – glass claims and the like. What’s interesting is that data shows that the happiest customers are those with claims. The happiest auto insurance customer is someone who had a small claim that was settled quickly and easily. That person is much happier than someone who never made a claim.”

On Legislation Preventing Insurer-Owned Shops:
“So far,” says Sullivan, “none of the things that people feared [about the Allstate-Sterling venture] have come to pass. All the worst problems have not happened. Allstate has not proven itself incapable of managing a business. Consumers have not been concerned that Allstate had a potential conflict of interest. The legal attempts to stop them have all failed, such as the California bill.”

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But what about the other various pending state legislation, such as the Corona bill in Texas?

“The problem is they are anti-consumer,” says Sullivan. “The collision repair industry isn’t held in high regard. But journalists are at the very bottom of the pile, so I’m allowed to say these kinds of things. It’s not like the collision repair industry is considered a bastion of virtue. People generally think that the people who fix their cars will rip them off. The industry, if guilty of anything, is [guilty] for looking the other way when they knew their brethren weren’t doing the right thing. If the industry had done a better job of policing its own, they’d have a better case to make.

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“When an insurer comes in and says they’re going to guarantee the repair, who does one trust – an insurer or Joe’s Fender and Wheel? Frankly, you’re going to believe in a company like Allstate. At the end of the day, consumers and legislators realize that shop owners are trying to hold back the tide.”

On Work Quality at Insurer-Owned Shops:
There have been allegations that Sterling (as well as DRP shops) purposely don’t fix cars right. The rhetoric we’re hearing is that “your insurance company doesn’t want your car fixed properly.” Sullivan touched on this commonly held misconception regarding an insurer-owned repair organization’s work product being inherently of lesser quality.

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“One thing shop owners don’t understand is that Allstate [is not guilty of] systematically fixing cars improperly. [For example,] not blending for color match. Say [Joe’s Fender and Wheel] decided [they’re] going to cut corners and wanted to make it a matter of corporate policy, i.e. send a memo that they didn’t want to blend paint. If [they did] that, there’s no lawsuit there because it’s just one guy. But if Allstate makes a corporate policy to not do something [properly] and someone can prove it’s detrimental to the customer, that’s a class-action lawsuit waiting to happen. Based on this, there are actually more constraints on Allstate than there are on an independent shop.”

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On Market Realignment:
Sullivan, like many others, predicts a realignment of the market. ‘There’s going to be lots of shop owners,” says Sullivan. “There’s just going to be a lot fewer than there are today. You know who’s going to go first? The guys who aren’t very good.” Background on Sullivan: Brian P. Sullivan is a financial journalist by trade, beginning as an insurance reporter and editor at the Journal of Commerce and the Philadelphia Inquirer, editor-in-chief of the Philadelphia Business Journal and managing editor of the American Banker, before being named president of American Banker¥Bond Buyer Newsletters.

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In 1993, Sullivan formed Risk Information Inc. to produce specialized publications for the insurance industry. Also in 1993, he launched the weekly Auto Insurance Report and in 1994, the bi-weekly Property Insurance Report. A speaker’s bureau was added in 1997, and the Auto Insurance Report National Conference began in 1998.

How “Sterling” Is a Sterling Repair?

Many assume the worst about work coming out of insurer-owned shops. In this case, however, the repair wasn’t so horrible.

by Charlie Barone

Crucial to the success of an insurance-subsidized collision repair organization is the quality of the work product. And because these shops present such large targets in terms of negligence claims, they’re more vulnerable as such.

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Given the almost unanimous outcry from the collision repair industry at large regarding insurance companies competing in their business, there’s quite a bit of speculation as to the output of insurance-subsidized shops – with many assuming the worst.

The question is, what’s the work really like?

While critics of insurance-owned shops tend to apply the same shrill rhetoric directed at the DRPs to describe the likely outcomes from Sterling shops, the situations aren’t quite identical. Detractors say the potential for consumer abuse is very real and inherent to the setup in which the payer does the actual repair work. But the two situations – DRP and insurer-owned shop – are distinctive in that there’s nowhere near the temptation for the types of shenanigans in an insurance-owned facility as there are in a DRP shop.

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Sterling Customer Has Concerns
In May of last year, a man contacted me, desiring an evaluation of a collision repair job done on his 2-year-old Chevy work truck. It’d been heavily damaged in a rear-end collision by an Allstate insured, and the company convinced him to take it to a Sterling shop in Bucks County, Pa. Unfortunately, that Sterling location was one of several that reverted to its original owner in a nasty contractual dispute, so the man’s truck was then shipped to another Sterling facility in the Lehigh Valley of Pennsylvania. The truck’s owner, who’s a contractor and small-businessman himself, was naturally suspicious of Allstate’s motives in settlement of his property damage claim, so he assumed the worst. What set him off were the dissimilar tag lamps on the new rear bumper. His old ones had a chrome finish, and the ones on the replacement bumper were black in color. What else lurked beneath this shiny repair job, he wondered?

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As it turned out, the difference in the tag lamps wasn’t a major issue, but what he was concerned with was the frame damage and how well the rest of the job had been done. He was so wary of an Allstate-owned shop that he was willing to pay an expert to find out.




Putting Sterling to the Test

Sterling has always tried to claim the high ground in cycle-time competition. In this job, however, their throughput time was nothing to brag about. The truck was damaged in mid-March of that year and wasn’t back in the hands of its owner until May, which is excessive for a job that costs under $7,000. To be fair, though, the switch in body shops caused the majority of the delay. In that sense, it’d be unreasonable to put a stop watch on a repair process under these circumstances.

What was remarkable about the work was the way the repair was approached. Instead of trying to rebuild the pickup truck bed with new components, Sterling knew there was an abundance of new take-off beds available and purchased one at a cost of $750, plus $220 in shipping. A new box assembly would cost $3,950 without a tailgate or attaching parts. The truck bed Sterling found was the identical color and had no signs of having seen use prior to this installation, which is infinitely better than either the average salvage bed or the rebuilt-from-new parts alternative. They got an LKQ rear step bumper thrown in for another $125.

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All the R&I work on the cab was well-executed, as was the finish work. The paint matched very well, and the topcoat was free of contamination and surface defects. Alignment of assemblies was also good, and the rear frame repair section was well-executed, too. Once again, this was an efficient approach to the repair as opposed to trying to straighten the damaged frame or replace the entire assembly. But someone dropped the ball in the paint department, and left the welds unfinished. At the very least, some epoxy primer should’ve been applied to the welds on the frame section – although leaving the welds exposed made the evaluation easier.

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The frame section cost $474.30 and paid 10 hours to install. While there was no charge listed for priming or restoring corrosion protective coatings on the frame, the shop’s failure to do this was nonetheless incomplete. While this is a full-perimeter frame assembly and not as susceptible as a unitized body to corrosion, the oversight was particularly glaring in light of the fact that the rest of the job was so well done.

My Verdict
The use of the LKQ bed assembly was the best possible way to repair this truck. Not only will the bed be as durable as the one originally on the man’s truck, but it won’t be as prone to deterioration as it would if it had been replaced with one of a different color or even a new OEM assembly. The outer panels were all color-coated and cleared along with the cab to make a uniform, first-class job. Outside of the raw welds left exposed on the frame section, the job was as good as it gets, which is of great significance in that both the owner and I were expecting the worst.

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The question you might ask is whether this job – while truly a random sampling from this shop – is indicative of what customers can expect from Sterling Auto Body. Given the role fate and circumstances play in outcomes in this business, the answer is anyone’s guess.

However, a number of things are clear, based on this job. For one, the company has the resources it needs to be very competitive in terms of both cost and results. This is how I’d want my truck repaired. The point is that not all shops would approach this job in such an enlightened way. In fact, I once heard about a Chevy dealer’s body shop that had virtually the same job and jigsawed together a pickup bed from OEM replacement parts. Not only did the shop lose money doing it that way, it made no sense from the perspective of the technician, the truck’s owner or the truck’s value retention.

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For an article on insurance company ownership of body shops in England and what it’s done to the collision repair market, search past issues of BSB using key word, “Mann.” Click on the article titled, “Examining Insurer-Owned Shops in the UK.”

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