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Insurers steering vehicles to their preferred shops has gotten out of control. But there are some action steps shops can take to counter its effect.
It seems that every body shop owner has his or her own feeling toward direct-repair programs, ranging from an emotionally charged opposition to tacit approval to enthusiastic acceptance of them as the centerpiece of his or her business model. At any rate, according to a recent survey commissioned by the Society of Collision Repair Specialists (SCRS), insurance company steering ranks as shop owners’ second highest concern behind suppression of labor rates which, in a roundabout way, is supported and perpetuated by the networks of preferred body shops.
While the directing of work is contrary to an open market and has corrosive effects on a non-DRP business’s customer base, it also has a good deal of value to those whose business is dependent on the flow of customers derived from DRPs and their referrals.
For a look at the attitude of mainstream shop operators, I asked Rollie Benjamin, founder, president and CEO of ABRA Auto Body & Glass, what benefits steering can bring to his shops that are on DRPs.
“We participate in many DRPs, but not all ABRA repair centers are on all DRP networks,” Benjamin said. “The short answer is that we benefit when ABRA is on the network and the job ends up at an ABRA center.
Conversely, it is to ABRA’s detriment when the center is not on a network and the customer is steered away from the ABRA center.
“We have done no study on who’s legitimately referring and who’s steering, but the latter is probably happening with some of the insurers. I couldn’t tell you if ABRA has a net gain or loss from the steering that exists in the industry; we have no way of measuring. ABRA’s position is that the insurance company ought to have the right to refer when the insured has not made a choice of repairer, but not interfere when the insured has made a choice of repairer.”
While all that sounds fair and pays due respect to customers and their choices, the reality is that but for the steering associated with DRPs, many businesses would suffer. To be honest, suffer is an understatement, as there are large-scale consolidator operations that have DRPs and their ability to steer work is the centerpiece of their operations. The overwhelming view in the industry, however, is that steering is a bad thing.
What the Laws Say
In many states with laws addressing the issue, the legislation is pretty clear in terms of what can be said by claims personnel and when it can be said.
Ed Kizenberger, the executive director of the New York State Auto Collision Technician’s Association and the Long Island Auto Body Repairmen’s Association, said, “[New York law says] an insurance company cannot require that repairs be made to a motor vehicle in a particular place or repair shop. You have the right to have your vehicle repaired in the shop of your choice.”
Kizenberger added, “Having said that, insurers are trampling all over [state law] with their heavy-handed tactics designed to confuse the consumer. Illegal steering hurts the auto collision industry in many ways. Ultimately, it also can damage the consumers as shops are forced to do repairs as per the insurance company demands that consider cost first and quality second.”
The California legislature passed Senate Bill 551, which was signed into law on Oct. 10, 2003, by outgoing Governor Gray Davis. The bill, which became a regulation in the state, makes it illegal for an insurer to require that an automobile be repaired at a specific repair shop and establishes strict rules for referring customers to network shops.
Former state Senator Jackie Speier, a noted consumer advocate and member of the Senate Banking, Finance and Insurance Committee, says that certain insurer practices that are legal under existing regulations – such as emphasizing the benefits of using a specific DRP shop – result in steering by implying that the non-program shop is inferior. In passing this law, California is attempting to limit such “steering by implication.”
A noteworthy feature of the California law is that if the policyholder chooses to have the car repaired at the shop of his or her choice, the insurer cannot limit the repair costs to that which would have been incurred had the vehicle been repaired by the recommended shop. What is also of interest is that the bill provides legal redress for those parties injured by steering and allows recovery of legal costs in bringing those actions if they prevail in court.
While all this sounds good for the non-network shops, word has it that the California Department of Insurance (DOI) is a toothless entity and the insurers in that state routinely thumb their noses at the laws and regulations. For example, in May 2007, the DOI fined GEICO $60,000 for violating the California Insurance Codes and issued a cease and desist order to the insurance company for claims practices ranging from steering to suppression of labor rates.
While the DOI made a big deal of the fact it fined GEICO, the amount of the fine is probably less than the savings the company realizes on parts discounts taken in one week by the DRP shops in the state.
Gene Crozat, owner of G&C AutoBody in Santa Rosa, Calif., and two other locations, has been playing hardball with the insurers and their steering of his customers and has reportedly filed hundreds of complaints with the Bureau of Automotive Repair and his state’s insurance department. Despite his complaints, he says the insurers in his state routinely flaunt the laws.
“Quit bitching to the DOI…they don’t care,” Crozat says. “The California DOI is one neutered animal.” Despite the successes of the G&C operations, evidenced by the luxurious appearance of his body shops, Crozat remains rather pessimistic about the business in general. Asked about his take on the steering issue, Crozat replied, “The industry is dying and what I think is going to happen is that you’re going to see more big horsepower shops having 90 percent of the work. But then the insurance companies are going to have to deal with those shops or they’re going to pay the tariff there. I think between the competition from the big shops and the pressure from the insurance industry to steer heavy – which it does – I see a real bleak future for the body shop industry in the next 15 years. It’s going to go the way of the glass business.”
Crozat commented on the motivation for the large operations to contract with insurers as their preferred providers. “The only reason you would make a deal with these companies is to stop your customers from being steered away – not because it’s a good deal. How can shops exist when consumers see a GEICO ad every 30 minutes on TV?”
While Crozat deplores the steering practices used by DRPs, he admits to having about 15 direct-repair arrangements as a matter of self-defense. He said, “Do I agree with DRPs? No. Did the idea originally sound as though it would work? Yes. But I think the pendulum has swung way too far; they want too much.” As for the elected insurance commissioners in his state, Crozat said, “In California you had [Chuck] Quackenbush, you had [John] Garamendi and now [Steve] Poizner. None of them have held up any of the regulations because they all want to be governor…That’s why insurance companies can basically do whatever they want.”
Crozat says he’s 63 years old now and the body shop business is his life. But he says he’d never advise anyone to enter the industry.
“Don’t even dream of it. There are too many rivers to cross,” he said.
For a take on the insurers’ viewpoint on steering and their rights to direct-repair work, I spoke with Bob Passmore of the Property Casualty Insurers Association of America (PCIAA). Passmore said the insurance industry’s research and surveys conducted by J.D. Power and Associates revealed that customers are holding insurers accountable for the repair experience. He also indicated the highly competitive nature of the auto insurance market as a driving factor in the development and marketing of its preferred provider network of body shops. According to Passmore, one in five customers with a damage claim shops for insurance, which as anyone knows today is easier than ever given Web-based insurance sales.
Passmore said, “[Insurers] have a legitimate interest in, number one, the cost and, number two, customers holding them accountable for the repair quality and the experience.”
Passmore said the customers see the claim and the repair process as one event, the outcome of which is a reflection on the insurance carrier. He also sees the various state laws that prevent insurers from marketing their programs as unfair.
“Some of these laws that are coming into play are preventing an insurer from offering or even discussing the matter,” he said. “We don’t think that’s fair. They should be allowed to discuss the options [the policyholders] have.”
The presentation of the options, however, is the major bone of contention. Many body shop owners, as well as their customers, claim they were either coerced or threatened with bad consequences if they strayed from the insurance company’s preferred body shop.
Passmore responded to those allegations and said, “I can’t say we could support [coercion or threats], but…our position is being able to lay the cards on the table and say, ‘This is an option for you.’” Joseph Annotti, senior vice president of public affairs of PCIAA, added to Passmore’s remarks and said, “Of course, those practices and threats are illegal and we don’t condone them. But putting a gag order on companies that say you can’t even talk to your own policyholder about options that can guarantee their repair experience…and do it at a lower cost – keeping the repair cost down and the insurance cost down – that’s blatantly anti-consumer. And we’ll fight those wherever they come up.”
When asked if those types of prohibitions stemmed from past abuses, Passmore responded, “I think a lot of these laws came from the body shop groups and their frustration. The mere existence of any kind of relationship between insurers and body shops would obviously leave some shops on the outside looking in. One of the things that has confounded me in my years in claims is that so many shops, as well as some insurers, don’t always understand that their interests are the same.”
While consumers may want as good a repair experience with as little hassle as possible, the two parties (insurers and repairers) are clearly at odds in terms of their bottom lines. That is, the seesaw effect is at work, being that the greater one’s share of the dollars is, the less the other’s is.
Asked if a customer from a network DRP shop may have received a lesser quality repair, however marginally, than that of a non-preferred shop, Passmore responded, “What interest would it serve the insurer for its customer to have a poor quality repair?”
While an insurer clearly would want its customer to have as good an outcome of the claim and repair experience, the financial aspects of discount repairs are certainly one interest. And in many cases, the use of non-OEM parts, salvage suspension components, remanufactured wheels or the omission of necessary procedures from the job will have a significantly lesser result than one that doesn’t require these concessions. And what makes these sometimes subtle differences hard to discern is that some aspects of the repairs are hidden from the customers’ eyes.
Passmore concluded, “The recent J.D. Power and Associates survey taken from auto insurance customers said that having a collision claim means that some of those people will shop for other insurance – whether they were happy or not. So think about how high the stakes are for insurers. The claim is the moment of truth.”
The Leader of the Pack
State Farm Insurance Company, the 800-pound gorilla in the center of the room, has long been an industry leader in terms of claims practices, although it shunned DRPs for many years. It was in the mid-1990s when its Service First program debuted, after many years of observing its competitors deal with the inherent liabilities of the programs, but at the same time lower their loss adjustment expenses and severity.
Service First was generally regarded as the best DRP in the business, as it required no concessions and existed for the sole purpose of expediting claims and repairs. In fact, Service First was what most of the insurers claim their DRPs are: a pure benefit to the shops’ and the insurers’ mutual customer, with emphasis on efficiency and convenience. And the best part of Service First was that any shop that met the criteria set forth by State Farm was in.
Service First evolved, however, into Select Service, which has changed substantially with its most favored nation pricing matrix for repair work. What’s more, it’s no longer what could be described as open to any willing provider. As the name implies, the shops in the program are limited to select shops in the various markets.
Asked about its steering activities, State Farm’s spokesperson Dick Luedke said, “The customer has the freedom to choose the repair facility that will repair his or her vehicle.”
When asked for a sample of the word track used to market its program to its policyholders, Luedke responded, “We don’t have a set word track that’s used. We do want our customers to have all of the information they need to have to make an informed choice. And so we tell them about our Select Service program and then ask them where they would like to have their car repaired.
“All of the information we provide each customer is designed to meet the regulatory requirements in the state where the customer lives.”
It’s significant to note that the pitch for Select Service comes before the claim rep asks where the customer wants his or her car repaired. After hearing that, perhaps only the most devoted body shop customers would forego the referral and take their cars to a shop with which they had experience and an established relationship.
With respect to which shops make it onto the program, Luedke said, “Our selection of repair facilities is guided by State Farm’s repair capacity needs in the market area and repair facility performance in the areas of quality, efficiency and competitive price. As our capacity needs change, we look to the market area for high performing repair facilities that are efficient, competitive and produce quality repairs.” A Northern California body shop owner I spoke with said his shop lost $500,000 worth of business when State Farm arbitrarily pulled him from the Select Service program. He said the move was not precipitated by wrongdoing or the lack of a high Customer Satisfaction Index with the State Farm insureds and claimants.
What frustrates him is that the shops that were put on the program to fill the void left by his operation were what he called “low-quality” body shops with none of the credentials he proudly maintains, such as his I-CAR Gold Class standing. He said that he has had to let some people go as a result of the loss of the work, but was careful not to burn any bridges by being openly critical of the company in this article.
DRPs Here Forever?
Given the nature and track record of the collision repair industry, the DRPs will be here for what seems like the rest of our days. There’s always someone hungrier than you and is thus willing to accept less for his or her work product. And the insurance industry, which is infinitely better organized and funded than body shops could ever hope to be, will always be there to take advantage of this fact.
The insurers have the attention of the consumer market, which anyone with a television on for more than 30 minutes can see. In the past five years, nationwide spending on the ads has zoomed from 26th to 10th among business categories. Risk Information, Inc.’s Brian Sullivan said, “The volume of advertising has shot through the roof. The main reason is that GEICO has proved they can make it work.”
With companies like Progressive spending $224 million, Allstate $219 million and GEICO $149 million on TV advertising, those players, which also happen to steer the most, have enormous control over what your customers think about car accidents and the repairs afterward. All it takes, it would seem, is a gentle nudge to get their policyholders to spend their claim settlements at their preferred shops.
Perhaps Gene Crozat’s predictions may come to pass. That is, a major thinning of the herd of body shops, which will tend to have a good effect on the market in terms of prices and supply of customers for the survivors. Unfortunately, that outcome will cause some bleeding, as do most major lifesaving surgical procedures.
Writer Charlie Barone has been working in and around the body shop business for the past 35 years, having owned and managed several collision repair shops. He’s an ASE Master Certified technician and 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].
Three Solutions for Non-DRP Shops?
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Whether you agree with Sullivan, the insurance company executives trust
Asked for his take on the steering problem, he said, “I think that
Sullivan offered three solutions to the dilemma facing shops outside the circle of DRP shops:
Vermont Body Shop Association: Success Against Steering
bright spot on the insurance claims landscape involves a group of body
shops in Vermont that has effectively eliminated steering in its
market. Just by refusing to join insurance referral networks, the
insurers in Vermont are at a loss to find any quality body shops
willing to get involved in their directing of work to body shops.
Mike Parker is the president of the Vermont Auto Body Association, a
Parker explained, “The process started with educating the other
“I also led by example by dropping DRPs myself. This got around
“While this was all going on, I took attorney Erica Eversman’s advice
“Eventually, all but two shops in the area dropped all their DRPs.
“We continue to grow more and more independent. Most of the shops in
“Ironically, the insurance industry helps us a lot, too. With the