Whether to be involved in an insurer’s direct-repair program (DRP) is a topic that elicits strong emotional responses from both sides of the issue – and that’s putting it mildly. For every supporter of a particular DRP, there’s an opponent who argues vehemently against it.
Should your shop participate, assuming it can meet and maintain the criteria for inclusion proposed by the insurance company, or should you go it alone? That’s the question every shop owner has to answer these days.
But that’s not the only question. There’s also the question of liability.
Just Whose Fault Is It?
At the heart of each of these programs is an agreement between the insurance company and the repair shop. Every program is different, so it’s important for shop owners to examine the DRP agreement they sign in order to participate in the program.
One insurance company representative who believes in the value of DRPs suggests that the “agreement” between the shop and the insurance company isn’t a “contract.” Regardless of what the document is called, by virtue of the fact that it involves two parties who are agreeing to a set of circumstances for mutual benefit, it certainly has all the attributes of a contract, at least in a legal sense, and the accompanying responsibilities.
But who’s assuming those responsibilities? Recent concern has developed in the aftermath of Avery v. State Farm – the case that assessed liability to the insurance company for the use of aftermarket parts in repairs – that the DRP agreement somehow attempts to shift liability from the insurance company to the shop in the event of a lawsuit by an unsatisfied consumer – or, worse yet, an entire class of unsatisfied consumers.
According to Mark Cobb, president of the Coalition for Collision Repair Excellence (CCRE), “Many shops enter into these contracts based upon desperation to survive. This in itself will do nothing to save their liability in the future. … It’s just a matter of time that the DRP will be used as a ‘shield’ between the law and the insurer. The first line of defense for insurers will be the DRPs. My personal experience has been that the insurer will first blame the shop, and it’s up to a good attorney to prove the insurer is as guilty of any fraud to the consumer as the shop.”
An insurance company representative urges that statements like this are made in an attempt to eliminate DRPs and that the only way a shop can be assessed liability is if the quality of its work is deficient. For example, says the representative, if a body shop leaves the lugs off a vehicle and someone has a wreck, clearly the body shop is on the hook if its work failed to meet accepted industry standards and was the proximate cause of the accident.
An Excerpt from USAA’s DRP Agreement
Alan Bush, USAA quality assurance specialist, provided a copy of the agreement and manual for STARS (Streamlined Appraisal Restoration Service) utilized by USAA. Bush explained that the agreement went through numerous revisions for clarity and content because “we wanted everyone to know: What is your [the shop’s] responsibility and what is our [the insurance company’s] responsibility.”
Probably the most important section in terms of potential shifts of liability is the indemnity section, which reads as follows:
“By referring persons associated with a loss or for any reason to the STARS Facility under this Agreement, USAA is not exercising its option to repair under applicable policy provisions. Therefore, USAA will not incur or assume any liability for inadequate inspection, negligent repair, failure to adequately repair, failure to disclose information, any misrepresentations, or any other injury related independent acts or omission of the STARS Facility. Although USAA specifically disclaims any liability as stated herein, such disclaimer does not create any additional duty to the STARS Facility not set forth elsewhere in this agreement. USAA will indemnify the STARS Facility for any claims, demands, costs or judgments made against the STARS facility as a result solely of the policies and procedures of USAA.
“In the event claims, demands, costs or judgments of any nature are made against USAA, its affiliates or subsidiaries or their respective directors, officers, employees or agents arising out of the performance of the services by the STARS Facility pursuant to this agreement, the STARS Facility agrees to indemnify and hold harmless USAA, its affiliates or subsidiaries and their respective directors, officers, employees and agents against any and all liability, loss, damage or cost whether incurred in the investigation or defense of the same arising out of or resulting from the willful misconduct or negligent acts or omissions of the STARS Facility, its subcontractors or anyone directly or indirectly employed by any of them. The foregoing indemnity does not apply if caused in whole (i.e. solely) by USAA or other party indemnified hereunder. Such obligation shall not be construed to negate, abridge or otherwise reduce any other right or obligation or indemnity which would otherwise exist as to any party or person described in this paragraph.
“Should USAA incur any expenses, or become obligated to pay any attorneys’ fees or costs for purposes of resisting, adjusting or compromising any claims or demands for which indemnity is rightfully due USAA under this Agreement, the STARS Facility agrees to reimburse USAA for such expenses, attorneys’ fees or costs within a reasonable time, in no event to exceed thirty (30) days, after receiving written notice from USAA of the incurring of such expenses, attorneys’ fees, costs or obligations.”
What the Heck Did All That Mean?
The first section of the agreement seems to clearly – and arguably, rightfully – place liability on the shop if repairs are sub-standard. This is essentially the same for DRP shops as it is for non-DRP shops: You may be held liable in a lawsuit if you produce shoddy repairs. If your shop doesn’t follow industry-recognized techniques for repairs, omits or improperly completes a procedure, or fails to warn a consumer of a potential danger, your shop can be found liable to the aggrieved party in the event of damage or injury.
“Heck. I’ll take the liability for the repairs,” says Bob Moore – owner of Auto Body, USA, with three repair facilities in the Springfield, Mo., area – about this provision. “We make the repairs, and the agreements aren’t shifting anything with regard to the repairs.”
Moore’s also not particularly concerned about being brought in as a defendant in an aftermarket parts case. Because his state law requires that the type of part be disclosed on the estimate, he feels this requirement serves as a shield in the face of a potential lawsuit.
Other state laws may offer similar protections.
Ray Hagerman – production manager for Matthews Collision Center, a large body shop in Vestal, N.Y., that participates in several DRPs – also emphasizes that liability shifting shouldn’t be a concern if the work is done in a professional manner. “It would have to be a very big lawsuit to trickle down to the body shop,” says Hagerman. “If you do the job right, you shouldn’t have any problem.”
Bush highlights the USAA provision that states the company will indemnify shops if they’re held liable based on the fact that they followed USAA’s policies and procedures. Although Bush reports that the assistance of USAA under this provision hasn’t been requested by a shop in connection with a class-action aftermarket parts lawsuit, USAA has, in fact, assisted a shop with its defense regarding an assertion by one state that an independent appraisal is required before the direct-repair facility can begin repairs on a vehicle.
While Cobb asserts that some of the liability is being shifted through the DRP agreement itself, he also points out that “there’s a horizontal responsibility by both parties, and the agreement between these two parties in itself binds the insurer and the repairer to the consumer.”
Can I Get Sued?
The most basic question that might be asked by a body shop owner participating in a DRP is, “Can I get sued under my DRP agreement?”
The answer is certainly in the affirmative. In our very litigious society, anybody can get sued for anything. Says Moore, “If anything is litigated, everyone can be named [as a defendant] – the body shop, the towing company, the insurance company and anybody else having to do with the repair.”
This is further pointed out in the I-CAR Executive Summary on “The Liability Issue and Collision Repair,” which is reprinted in the USAA STARS manual: Virtually every participant in the chain of collision repair has liability exposure. Those with the most are shops and insurance companies, but liability can extend to the manufacturers of automobiles, the instrument systems used by technicians and the suppliers of parts. A plaintiff may not prevail in a lawsuit, but just the cost to a shop to defend itself may be significant.
One feature of DRP agreements that seeks to offset this cost is the requirement that participating shops carry appropriate millions of dollars of insurance coverage before they can attain DRP status. This coverage isn’t only important for paying any adverse judgment that might occur, but also because these insurance policies provide legal defense in the event of a lawsuit.
What are the chances of an individual body shop being named as a defendant in a class-action aftermarket parts case like Avery v. State Farm? Apparently not too likely, from all indications so far.
The first principle of lawsuits is to target the defendant with the deepest pockets. And this is usually the insurance company as opposed to the body shop. No individual body shop was a defendant in Avery, for example.
Additionally, plaintiffs’ attorneys seem to prefer casting the insurance company in the role of bad guy instead of the body shop. Colleen Auer is an attorney with the Phoenix law firm of Bonnett, Fairbourn, Friedman & Balint, P.C., which represents consumers in class-action cases against auto insurance companies for alleged “fraudulent estimating practices including the use of inferior imitation parts, the omission of necessary repairs and the failure to pay first-party diminished value.” The firm has sued insurance companies with DRPs, and the auto cases are in the pre-certification discovery stages.
According to Auer: “We understand that shops are in a tough position when it comes to DRP agreements. If a shop doesn’t enter into DRP agreements, insurers steer customers elsewhere and many shops simply cannot afford to lose that referral business. … We see the [DRP] agreements as a tool the insurance companies use to exact cost-cutting measures.”
Auer explains that her firm hasn’t made individual body shops defendants in these cases. “Our class-action cases are strictly against the insurance companies. We haven’t filed suit against any body shop nor do we intend to.”
Auer does, however, express the view that insurance companies will attempt to shift blame as a result of the agreement if forced to defend a lawsuit brought against them.
Before You Sign on the Dotted Line
If you’re considering signing a DRP agreement, the first fairly obvious, but often overlooked, step is to read it carefully. As Hagerman points out, “Some people probably read [the agreements] closer than others.”
“A lot of it goes back to being a good businessman,” says Moore. “If you don’t know something, get good, prudent advice.”
And remember that the agreement isn’t written in stone before you sign it. Moore participates in several DRPs; he’s rejected others. It’s worth noting that he found a provision in one agreement that didn’t seem appropriate to him and referred it to his own attorney. The matter was clarified, and the agreement was subsequently changed.
Secondly, remember to carry adequate business insurance in the event of a lawsuit. “We carry insurance to protect us against frivolous litigation,” says Moore, who outlines several steps to take when you’re considering whether or not to participate in a DRP:
1. Read the agreement carefully.
2. Know the people behind the agreement before you sign anything.
3. Determine how this agreement fits into your overall business plan.
4. Be adamant about what you stand for. If meeting the highest industry standards aren’t part of the agreement, reject it.
Hagerman adds a final key ingredient for avoiding lawsuits: “Have qualified and trained technicians to repair the vehicle properly, and make sure the customer is completely satisfied.”
Whether or not your shop participates in DRPs, this is excellent advice. At the heart of most lawsuits against businesses is the unsatisfied customer.
Writer Susan Martin has her own law practice in Miami and is licensed to practice in the state and federal courts of Texas, Florida, Hawaii and Nevada. She’s also married to a body shop owner.
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The Shop Should Be Liable — A short interview with DRP shop owner Bob Moore
BSB: Shouldn’t the customer go to his insurer first to be made whole?
BSB: On the issue of DRPs, are substandard repairs the fault of a particular shop or the DRP system? “There tends to be this tremendous misconception that DRPs are a covert operation by the insurance industry to control the collision repair industry. I’ve been called a whore, a prostitute and everything else, but the fact remains, if you drive into my shop and you’re with one of the five insurers that I represent, I write the estimate the way I want to write it, using the parts I want to use with no concessions. … “A funny thing happens: I get an audit from an insurance company two weeks ago that we’re a DRP for. Our average repair is $2,578 per vehicle. Their average in the program is a solid thousand dollars less, so we’re repairing more severe damages. Our cost per rental average is $258. And the average in their program is $140 more. So our cycle time is awful damn good. Cycle time breeds cash flow. Full rate, no parts discount, no discounts anywhere. “No one ever talks about that side of DRPs. It’s always shabby repairs, and I take that as a cop-out by the industry so it can hang onto its laziness or thievery of the insurance industry. And I’m not pro-insurance either. I was in corporate business for 20 years. I’ve owned a collision repair shop for seven years. Collision repair is a service industry, driven primarily by referral. Would you move to a city where you didn’t know one human being, open a shop and expect to be successful? We moved here, and I knew a realtor. That was all. We ended last year at $1 million sales, and 70 percent is DRP.”
BSB: Why do shops complain then about DRPs? “Why would I move to a city where I don’t know anyone and open a shop? In my position with the company I was with, I had the opportunity to be in thousands of shops over the years. And one thing always amazed me about the collision repair industry: These people made money in spite of themselves. And I thought that if you attach basic business principles to this, I don’t see how you can lose. “Dick Cossette was by far one of the most successful operators in the country. About 15 years ago, he told me, ‘If you ever get in this industry, remember one thing: Let all these other guys lay back and cry about how the insurance company is a bitch. I negotiate with insurers, I’m honest to a fault, and in the end, I get what I want and they’re making me a very wealthy man.’ That’s always stuck with me. “When we opened and were still struggling, one of the first comments I had was from a senior supervisor with State Farm who was supposed to be a hit man, according to other shop owners. He stopped by and told me, ‘Whatever you do, don’t change the way you’re doing business. People are noticing.’ And he was talking about Business 101: morals, ethics, communication. “There are as many bad DRPs as there are bad shops. … It always comes down to a business decision. Do I want to align myself with this company. Do I want my name to be associated with that?” |
