News: Collision Industry Icon Jeff Silver Passes Away
“To every thing – there is a season – and a time – for every purpose – under heaven.”
Those lyrics have been repeating in my head since I began outlining this article examining direct-repair agreements. Why? Because to examine DRP agreements without examining their history and evolution would – in my opinion – be a failure on my part.
Why am I writing this article, you ask? Because I’ve been around a while and seen a lot. I started in the insurance/claims industry back in the mid ’60s in Cleveland, Ohio, when body labor rates were $6 an hour, mechanical rates were $5.50 and paint and materials (P&M) were $2.50. I know what you must be thinking, but keep in mind, I started very young!
Insurance Fraud: A Historical Perspective
A fair and objective examination of DRP agreements has to begin with an acknowledgment that, in those days, insurance fraud – as practiced by many collision repair shops (in concert with claims reps) – was a serious problem. Among the most widely practiced techniques for “picking” the insurance company’s pockets was the practice of “conversion.” The shop would fight for full panel replacement (parts and labor) and then “convert” those dollars to labor by straightening the panel.
A close second was the use of the “supplement locker.” Inside that locker would be a stash of damaged A/C compressors, condensers, radiators, fan blades, fan clutches, water pumps, motor mounts, chain covers, p/s pumps, pressure and return-side lines, alternators, etc. When a shop owner wanted to “pad” his profit margin and he knew he could get away with it with a particular adjuster, he’d call in a supplement for hidden damage. The adjuster, being buried with work, would say, “Take a picture and send me the supplement.” At that point, the shop owner would go to the supplement locker, pull out a damaged part, take a picture of it, throw the part back in the locker, attach the photo to the supplement and send it in for payment.
At that time, there was a symbiotic relationship between some shops and certain adjusters. This was most commonly true with independent adjusters/appraisers. When a potential customer came into a shop for an estimate, the shop would first try to determine which insurance company was involved. Based on that answer, the shop would know who most likely would be coming out to inspect the damage. When the opportunity was appropriate, the shop would pad the estimate by 20 percent so the adjuster could come out and pull 10 percent back off. The shop got some premium money, the adjuster/appraiser looked good to his superiors, the customer got a quality repair and everybody was happy.
Well, almost everybody.
Undoubtedly, some of you will be offended by what appears to be an indictment of the collision repair industry in those days. But if you’ll notice, I used qualifying terms such as “many” and “some.” That’s because there were also some stand-up shops that took pride in their craftsmanship and their professional reputation. Sad to say, however, using the unethical techniques I described here were so widespread as to be described as pervasive.
Clearly, from the insurance industry point of view, something needed to be done to gain control of their loss severity.
Along Came Preferred Shops …
Despite the 1963 Consent Decree, the auto insurance industry made a considered decision to re-institute some of the forbidden practices and programs. Without memorializing any specific terms and conditions, auto insurance companies began identifying the more ethical, reliable shops and approaching them with an “informal understanding.”
The insurers would “refer” their claimants to the “preferred” shop in exchange for some negotiated concessions. The shops would typically give a 10 percent discount on domestic, write the repair estimates (free teardown as necessary), absorb any re-tow costs, waive any storage on vehicles that became totals and hold the line against labor rate increases.
Notoriously unethical shops would not make the preferred list.
The early stages of these casual agreements were beneficial to all parties concerned. Better shops got more work, adjusters became more efficient, insurers began reducing their loss severity, repair quality increased and vehicle owners got their properly repaired cars back faster. It seemed that a win-win-win situation had been developed.
|Early Fraud Techniques
The Sears Syndrome
A number of years ago, I took a business management course that described what was then referred to as the “Sears Syndrome.”
In a nutshell, it goes like this: Sears would find a target manufacturer and negotiate a contract with them to produce x number of widgets. Typically, this would be about 50 percent higher than the manufacturer could then supply. The manufacturer, with their signed contract in hand, would go to their bank and secure a loan for necessary modernization and expansion of their facility.
When that contract was due to expire, Sears would offer a new contract requiring three to five times the number of widgets called for in the previous contract. The manufacturer would then go back to their bank and go into serious debt to cover even more necessary expansion costs.
Then, when that contract came up for renewal – with the manufacturer seriously in debt and wholly dependent upon Sears – Sears would make the manufacturer an offer it couldn’t afford to refuse. Or, if the manufacturer did refuse the offer, Sears would spread the contract out over several other manufacturers for a year or two and then buy their “target” manufacturer’s business out of foreclosure or bankruptcy court.
Is there a reason I’m telling you about the Sears Syndrome? Absolutely. Trust me. It’ll make sense momentarily.
DRP Agreements: the Early Versions
In the early days of preferred shop programs, the only unibody cars were either European, Ramblers or the much-looked-down-upon Japanese. HSLA steel was all but unheard of and MIG welders were limited to non-vehicle manufacturing uses.
Then came the gas shortages of the mid-70s.
The government mandated higher minimum MPG requirements, OEMs went to lighter-weight HSLA steel, passenger safety was enhanced via unibody construction, compression ratios and cubic inches were reduced, thereby lowering horsepower, and product appeal was enhanced via the use of “glamour” finishes.
That’s when insurer bean counters (who presumably took the same Business Management 101 course) saw opportunity in these developments. With the casual preferred shop programs having been in place for a few years – and the Justice Department not objecting – it was time to formally memorialize some new terms and conditions in what now was being generically referred to as “DRP agreements.”
Shops that wanted to continue their workflow benefit now had to formally agree to update their facility to meet the demands of evolving technology. DRP agreements required extensive expenditures that shops typically had to leverage. Such increased overhead made shops that much more dependent on their insurer “partners” for survival.
That’s when the first of several major changes showed up in the new DRP agreements. “Partner” shops no longer wrote their own estimates. Instead, staff appraisers began writing more and more of their own estimates, consistent with ever-increasingly conservative guidelines as dictated by the insurers.
But “partner” or “DRP” shops were just beginning to feel the squeeze.
Aftermarket Body Parts Get Their Start
Prior to the early 1980s, aftermarket parts (as they relate to vehicles) meant Die Hard batteries and NAPA water pumps. Then came the introduction of A/M body parts. Insurer bean counters crunched their numbers, saw their projected savings, began dancing in their cubicles and determined such parts were “good.”
Since the new formalized DRP agreements committed their partner shops to assume repair-related liability, insurers were free to mandate the use of A/M body parts by their dependent and vulnerable partner shops. This is when the insurers’ grip on their partner shops began to hurt.
But insurers weren’t done yet.
Insurers then broadened their net. They told non-DRP shops something to the effect: “That’s all it will cost at any of our preferred shops, so that’s all we’re going to pay you.”
In fact, this phrase (or variations of it) became a part of the word-track mantra directed at any vehicle owner who had the audacity to consider having his car repaired anywhere other than at a subservient DRP facility.
Whether this constitutes price fixing is for others to determine. And based upon what I’m hearing, such a determination won’t be long in coming.
New DRP Agreements: a Vicious, More Virulent Strain
Insurers were well on their way to achieving their agenda of total control when they encountered a problem: a $1.2 billion problem. Some pesky consumer attorneys read State Farm’s policy contract and felt State Farm had no contractual right to mandate the use of aftermarket body parts. Those attorneys felt State Farm had breached their own contract and, by virtue of their conduct, had also committed criminal fraud. An Illinois Court (and subsequently the Illinois Court of Appeals) agreed.
The Illinois Supreme Court has accepted this case for review. The legal point upon which the Illinois Supreme Court accepted certerari is the question as to whether the Illinois State Court has authority to define criminal conduct for acts committed in other states and impose fines related thereto. The court’s decision is expected before its summer break.
By way of opinion, I’d caution State Farm to be careful what they ask for – they just might get it. It’s possible the Illinois Supreme Court could agree on the authority point of law – exclude all states other than Illinois from participating in the award – but let the amount of the award stand. That could leave the way open for all other state attorneys general to bring criminal fraud actions against State Farm and to seek their own criminal fines. State budgets being what they are, such a contingency could well happen. An extra $500 million could go a long way to easing the strain on many state budgets.
It’s also worth mentioning that something significant happened during trial testimony. Robert Shultz, State Farm’s lead attorney, went on record as taking the position that: “State Farm does not fix cars. State Farm pays to fix cars.”
While that official position didn’t have the desired effect on the trial outcome, it has the potential of being the catalyst that will liberate shops from insurer control. (More on this later.)
Looking at the bigger picture, the State Farm case brought insurers to the realization they need to pay more attention to consumers’ rights and state criminal fraud statutes. Insurers expect this case will lead to a flood of other similar cases. Whether other such cases have merit or not, insurers will have a cost-of-defense factor to consider. Hence, the new strain of DRP agreements.
Many new DRP agreements include an “Indemnification Clause” – a poison pill for shops and a golden parachute for insurers.
Let’s suppose, for the sake of this discussion, your shop repaired Mr. Kabibble’s car. You repaired the car in accordance with the guidelines as set down by the controlling DRP agreement and as dictated by the insurer.
Mr. Kabibble takes his repaired car for a post-repair inspection, which discloses a series of indiscretions. Mr. Kabibble then retains an attorney who sues you and your insurer partner. What happens now?
- Your shop is obligated to reimburse (indemnify) your partner insurer for their defense expense and/or a portion of any settlement they tender.
- You have to pay your own defense costs and potentially your own separate settlement.
- Your Garage Keepers Legal Liability and/or Umbrella Insurance will not pay for your defense or your settlement. “Liability assumed under the terms of a contract” or “Intentional Acts” are not covered by these policies.
- If criminal activity is alleged (such as consumer fraud), you could be found guilty and subject to sizable fines that could break you and which aren’t dischargeable in bankruptcy. You could lose everything, including half your salary for years to come (assuming you find another job when you get out).
Don’t take my word for it. Dig out your most recent DRP agreement, including any seemingly innocent addendums you’ve been asked to sign or initial. Take everything to your attorney and ask him to review and explain it to you.
While some shop owners understand what they’ve signed, are comfortable assuming this liability and know their numbers well enough to know the agreement can still benefit them, other shop owners are signing on the dotted line for the wrong reasons – they’re trying to guarantee their shop’s future, but aren’t fully understanding the legal repercussions and if what they’ve agreed to will actually be profitable.
Preferred shop programs began as an effort to address insurance fraud because some body shops and some consumers were picking insurer pockets. It now almost appears as though some insurers have decided to accept fraud as a way of doing business, and they intend to control that action to their advantage. I know that sounds extreme. But after 37-plus years of observing and participating in the process, it becomes increasingly difficult to reject this hypothesis.
Let’s look at what I mean by insurer fraud (as it relates to the repair process):
- Artificially suppressing insurance claim settlements without contractual authority to do so falls within the commonly accepted definition of fraud.
- Intentional failure to properly address all accident-related damage falls within the commonly accepted definition of fraud.
- Failure to notify a vehicle owner of a relevant factor of repair to his vehicle (A/M parts usage, employment of other-than-approved repair techniques, the impact repairs have on factory warranty, the impact repairs have on vehicle’s resale value, etc.) falls within the commonly accepted definition of fraud.
- Failure to fully disclose potential negative consequences a vehicle owner could encounter if he chooses to have his vehicle repaired under the terms of a DRP agreement falls within the commonly accepted definition of fraud.
- Failure to strictly adhere to the terms and conditions of the insurance contract would be “Breach of Contract” and, if demonstrated as being a standard business practice, could fall within the commonly accepted definition of fraud.
You know as well as I do that at least one (if not more) of the these examples happens thousands of times each and every day. Now consider the fact that so many states are experiencing budget shortfalls. Do you think state attorneys general might be more inclined to pursue these slam-dunk criminal fraud actions as a way to increase revenues?
And don’t expect the “I was just doing as I was told” defense to be of any help. It won’t work. In fact, because shops are expected to be the repair professionals, they could well be held to a higher level of accountability than the insurer.
Claims Settlement Options Available to Insurers
First insurers turned 90 degrees from informal preferred shop programs to formal DRP agreements. Then insurers turned another 90 degrees from early DRP agreements to more predatory versions. As we speak, some insurers are turning yet another 90 degrees away from DRP agreements toward consolidators, claims administrators and insurer-owned repair facilities. But this isn’t over. We see yet another turn on the horizon.
All Property and Casualty (P&C) insurance contracts are based upon what used to be known as the New York Standard 165 Line Contract. That founding document is more than 200 years old and is more currently referred to as the ISO 165 Line Contract. The document clearly sets out three very separate and distinct options available to insurers for settlement of claims:
1. REPLACE the damaged property;
- 2. REPAIR the damaged property;
- 3. PAY for the loss in MONEY.
It’s important to note the policy contract doesn’t allow the insurer to select part of one option and blend it with part of another option. These are separate options distinct and inclusive unto themselves.
- REPLACE the damaged property. This means the insurer has the option under the terms of the insurance contract to literally take the damaged property and replace it with another item of like, kind and quality. Though rarely selected by insurers, this option is occasionally exercised when dealing with commercial policy losses or in the event of theft of jewelry or collectibles covered by a homeowner policy. In the event the insurer selects this option, the insured pays his deductible directly to the insurer and receives the replacement item. In my entire career, I’ve never seen an insurer exercise this option in the settlement of an auto damage claim – but they could.
It’s not uncommon for insurers to elect this option when dealing with damaged jewelry covered by an Inland Marine Floater (all-physical-loss endorsement). If a diamond ring were to lose one of its diamonds, the insurer would elect this settlement option, have a jeweler pick up the ring and a copy of the appraisal describing the lost stone, replace the lost stone and return the repaired ring to the insured.
It should be noted here that it would not be permissible for an insurer to replace a lost diamond with a cubic zirconium imitation diamond.
We rarely see insurers exercise this option in auto damage claims because courts have clearly held that in such cases, the insured has a direct and exclusive right of recourse against the insurer for any down-line consequences, including liability. That is why State Farm so publicly took the position that “State Farm does not fix cars. State Farms pays to fix cars.” State Farm was trying escape the liability inherent in the “repair” settlement option. It didn’t work.
In terms of practical application, once the insured has defined the damage or loss in terms of money, the insured would then document the loss, define the amount of loss in terms of money on a Proof-of-Loss form. He’d then submit the signed and completed Proof-of-Loss form (together with supporting documentation) to the insurer as demand for payment in money.
Having received the insured’s Proof-of-Loss in a timely fashion, the insurer then has to review the Proof-of-Loss and supporting documentation for the sole purpose of determining appropriate coverage and the extent thereof. Absent any coverage exclusions or limitations and absent any indications of fraud on the part of the insured, it’s then the duty of the insurer to “accept” the “Proof-of-Loss” and pay money to the insured.
The benefit to the insurer in this scenario is the absence of any downline liability. The insured has proven his loss in money, the insurer has paid the money and the insurer now stands clear of any consequential damages or post-claim liabilities. Do you now see why State Farm took the position they did in open court?
But State Farm’s attempt to deflect their liability didn’t work because they attempted to co-mingle the settlement options available to them. They involved themselves in the “Repair” process in an attempt to minimize what they’d have to “Pay in Money” in an attempt to avert any liability. Insurers cannot co-mingle the benefits without assuming the corresponding liabilities.
Turn – Turn – Turn
I’ve gone to all the trouble to review these options to lay the foundation as to why I see yet another 90-degree turn on the horizon.
Consumer attorneys aren’t going to overlook the potential consequences of insurers co-mingling settlement options. Litigation will be filed. And insurers and their DRP partners will feel the effects of that litigation. Insurers will be paying a high price, and some DRP shops will be paying the highest price of all.
Based on this, I feel it’s only logical that we’ll see a return to informal preferred shop programs. Shops will be called upon to define the scope and cost of repairs. Shops will assume responsibility for all downline liability and consequential damages. And shops will once again enjoy the benefits of their Garage Keepers Legal Liability and Umbrella policies as was intended. Good collision repair facilities will regain control of their own businesses, tempered by a desire to preserve relations with good insurers.
Benefits to the insurer will be of a collateral (expense) nature, not impacting the damage settlement due the policyholder. Insurers will experience a moderate increase in loss severity (relative to current levels), which would be more than offset by the savings of not having to defend multiple lawsuits and paying out multiple eight- or nine-figure settlements.
Consumers will once again receive quality repairs in a timely fashion. And with less stress over the physical damage claim, consumers will be less likely to seek legal assistance on their minor personal injury claims.
I honestly believe that “for every thing, there is a season,” and the season of common sense will be returning. Only then will the issue of insurance and insurer fraud be appropriately addressed. With the passage of a Policyholders’ Bill of Rights, insurance premiums and insurability will be stabilized. (A proposed Policyholders’ Bill of Rights is published online at www.iCan2000.com.)
But getting from here to there will involve a lot of work by a lot of people – including a lot of attorneys extracting a lot of money from a lot of unethical insurers and their DRP partners.
Sooo … What Do I Do Now?
Perhaps nothing! After all, what are the odds that your shop will be named in a civil lawsuit or be charged with criminal fraud? Only you can assess that probability. But, if you’re thinking, “With my luck …” then perhaps some changes would be in order …
- Gather up all your DRP agreements and sit down with your local legal eagle. Do a worst-case-scenario assessment of your potential civil and criminal exposure. Be candid with your attorney about the details of how your business operates.
- Extricate yourself from the more dangerous of the “Poison Pill” DRP agreements. Choosing which DRP agreements to revoke should be based upon the risk-benefit analysis that you and your attorney will have done.
- Consider modifying the less dangerous agreements. Where insurers are calling for the use of A/M parts, consider offering a discount on OEM parts. Such an approach would improve your reputation with consumers and should improve the flow of the repair process. Other compromises may also come to mind. Be flexible, and consider them all. The point here is to minimize the potential for fraud charges.
- Begin a marketing campaign focused directly on consumers. Pretend there are no DRP agreements or partner shops. Pretend you’re competing directly against the other shops in your market area.
- Consider cultivating referrals from other sources.
- Consider expanding the utilization of your facility and expertise into areas other than strictly collision repair.
- Get involved in interactive discussions with other like-minded shop owners/managers who are dealing with the same issues you face. Go online to participate. There are both DRP and non-DRP shop owners of note there who would be happy to share with you the benefit of their experiences.
For some of you, the information, opinions and suggestions I’ve shared here will provide an insight into the collision repair industry not previously considered. If this includes you, then I’ve done my job!
The collision repair industry will be going through some serious changes over the next few years. Some of those changes have already begun. I sincerely hope your shop will be among the “good” ones still standing when the dust settles.
Writer Dennis Howard is a retired adjuster continuing his consumer advocacy efforts from a wheelchair in his home in Branson, Mo. He received his paralegal certification in 1974 after having spent two years as Defense Litigation Supervisor for TransAmerica Insurance Group (now TIG). Howard founded the Insurance Consumer Advocate Network in 1994 and took his efforts online in 1997. The iCan Web site can be accessed at www.iCan2000.com. Howard also owns and administers an industry-friendly discussion board at www.ProDiscussions.com.