The Fraud Triangle - BodyShop Business
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The Fraud Triangle

Anticipating possibly getting something for nothing – and convincing themselves they’re entitled to it – repairers, insurers and consumers commit fraud on a daily basis, assuming that if they don’t get caught, no one gets hurt. But nothing comes without a cost.

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Fraud. It’s a spine-tingling word that describes activities generally considered to be things done by others.

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Fraud’s roots extend to the Garden of Eden where the serpent subtly misrepresented to the original couple the only thing God had forbidden them. Since then, we’ve all been party to fraud to some extent – willingly or unwillingly, knowingly or not.

The Insurance Institute for Highway Safety’s 1997 figures indicate “that 17-20 cents (of every insurance dollar) goes for the fraudulent portion of the claim. Auto insurance fraud is an $18-20-billion-a-year business, including medical.”

Compared to the total yearly U.S. collision repair business, presently at $24 billion, fraud is a big-ticket item – and a tragic blight on us all.

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Tom Slear, in an article written for Beyond Parts and Equipment (BP&E) titled “Insurance Fraud: Time to Change Claims Practices,” described the enigma and prevalence of industry fraud like this: “In truth, fraud is both isolated and systemic, localized and universal. It goes on at body shops, insurance companies and everywhere in between. It’s both obvious and subtle. Easy to talk about, yet hard to explain. Fraud is a conundrum in full flower.”

He then posed the penetrating question, “Has fraud become a stigma the autobody industry can’t shake because insurers aren’t exposing their share?”

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Hopefully not. And yet the fact that many shops continue to promote and prosper from fraudulent activities makes the collision industry just as responsible as those insurers who initiate it through their cost-cutting efforts.

Heightened consumer expectations have strained insurer-repairer business relationships, fostering a new breed of creative and often unethical alternatives. And lawyers, blowing the dust from heretofore unprofitable laws, will further expose fraud’s tentacles, ensnaring some.

No one would deny we’re entering an era of exacting legal responsibilities in which businessmen will become more astute or be legally embroiled in another industry’s stew. Let me state here that I’m a shop owner, not an attorney. This article is my interpretation of what I see as a very serious problem that must be dealt with openly, honestly and expediently.

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What Is Fraud?
In the “must-read” May 1999 BodyShop Business article, “Are You Guilty of Fraud?” attorney Susan Martin stated, “Fraud can be a violation of state or federal criminal laws, for which a guilty party can be imprisoned or fined – or both. It can also be the basis for a civil action where a suit is brought by one party against another for monetary damages. Generally, fraud includes four major elements:

1. The making of a false statement concerning a material fact;

2. Knowledge by the person making the statement that it is false;

3. An intention that the (false) representation induce another (person) to act on it; and

4. Consequent injury to the party acting in reliance on (what was represented to them as true).”

The fact that virtually every industry periodical has devoted much print to inter-industry fraud attests to its troubling presence. The Collision Industry Conference (CIC) Anti-Fraud committee has published a brochure, Guide to Fraud Awareness, with the stated purpose, “to bring an awareness of the problem of fraud and fraudulent behavior in the auto physical damage process.” Defining fraud in layman terms, this guide is yours for free by calling (877) 841-0660.

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If you think you’re squeaky clean, look at Black’s Law Dictionary, (6th ed. 1990) definition of fraud: “An intentional misrepresentation of a past or present fact made to cause someone to rely on it to give up some legal right or thing of value. The misrepresentation of a fact can be made by words (including innuendo [insinuation]), by conduct or by concealing a fact that the person has a duty to disclose. The conduct can occur through looks or gestures, (or) as a single act or statement or as a combination of circumstances. It includes surprise, trick, cunning, design, deception or any unfair way by which another is cheated.”

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The Fraud Triangle: Repairers, Insurers and Consumers
Insurers don’t owe repairers and consumers one penny more than the full cost of restoring the injured person and his property to pre-loss value and condition, or other reasonable compensation should pre-loss condition be unattainable, in accordance with the stipulations outlined in the insured’s policy. Neither do insurers owe repairers and consumers one penny less.

To better understand how fraud affects our related industries, consider the following:

Human nature is a strong impetus to fraudulent behavior, i.e. there’s some degree of gambler in every human being – insurers, repairers and consumers included. Mesmerized by the anticipation of possibly getting something for little or nothing, human nature dictates seeking ways to beat the odds. But, in the final analysis, nothing comes without a cost, and for our constituency, this cost could include fines and imprisonment.

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Insurance is a calculated risk – a legal gamble – that revenue income will exceed expenditures. Though insurers’ structures differ, basically insurers collect and pool premiums from insureds, which they then lend out to other businesses for the interest those loans generate. As the kitty grows, consumers occasionally reduce it when money is withdrawn to pay off accident-related debts. In a perfect world, insurer payouts would be expended from accrued interest. But overall, if insurers levy sufficient premiums, wisely invest them and monitor their payouts, they’ll maintain a reasonable profitability, keep shareholders happy and gain enough interest to reinvest and grow. Consumers’ well-being and shops’ profitability are dependent upon insurers – who hold all the money – to uphold their end of the bargain.

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Similarly, collision repairers gamble that payment for services will reasonably exceed expenses. The fly in our ointment, though, is that we’re forever forced to look to insurers for payment for services rendered, rather than directly to the consumer. But considering that few vehicles would be repaired if the total cost were to come directly from consumers’ pockets, the insurance industry does benefit us.

Consumers, aware that statistically they’ll be involved in five to seven accidents in their lifetimes and that huge injury settlements could easily wipe them out financially, gamble that the incremental premiums they pay insurers will be wisely invested so that if and when they become involved in an accident, insurance will cover all the costs of making them “whole.”

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Consumers also depend on their insurer, desiring to pay out the least possible settlement, to legally defend them should the need arise. Additionally, consumers gamble that the repair shop will actually perform pre-loss repairs.

In a perfect world, there are great advantages in the services that insurance dollars provide. These include employment for insurance personnel, an incentive for consumers to have their vehicles repaired and have readily available cash for repair services rendered. But, by its very nature, this whole system is a delicate balance based on trust and past performance, and it’s easily upset when one or more entities doesn’t fully uphold its end of the bargain.

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Therefore, the insurer who doesn’t fully pay for everything needed to completely restore the consumer defrauds the repairer, who must find a way to make ends meet or go bankrupt. Through under-pay, insurers can easily involve shops in defrauding the consumer, who receives a less than pre-loss repair.

The repairer who doesn’t perform pre-loss repairs, either because of insurer under-pay or from personal greed when he was fully paid for pre-loss repairs, defrauds both the consumer and the insurer.

Consumers who insist on better-than-pre-loss repairs defraud the insurer and the repairer – who often ends up caught in the middle, taking a loss to placate the “going to get what’s due to me” consumer.

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Where We’re At Today …
When each entity upholds its responsibility, it’s a win-win-win situation for everyone. But, more often than not, one or more reneges, and dysfunction, chaos and, sometimes, disaster, result. Like the valve-defective heart of a young family friend, no matter how hard her heart pumped, the blood Danielle’s body needed to sustain life and grow just sloshed around aimlessly – so every function of her body suffered throughout her short life.

The BP&E article cited earlier continues, “Fraud will always be a percentage of autobody repair [because] three-party transactions inherently accommodate fraud. [Shops, insurers and consumers] all feel entitled, so all three tend to help themselves.

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“Even if fraud can’t be eliminated, it certainly can be lowered, but only if all three parties make concessions. The autobody industry must have barriers to entry, which means tough licensing standards. And shops will have to subject themselves to post-repair inspections.”

(I’d suggest standards be established and post-repair inspections be maintained by an entity completely independent of the insurance industry, though I’m confident insurers would eventually gain controlling influence of such an entity.)

The article continues, “If a car doesn’t pass, the owner will know precisely whether the shop did shoddy work or the insurer didn’t pay for a full repair. Car owners will have to take more responsibility for choosing good shops. No longer can they simply shrug and say, ‘That’s where my insurance company suggested I take the car.’ If they make a bad choice, they’ll have to live with it. And the 500-pound gorilla, the insurance industry, has to return to collecting premiums and paying claims and get out of the business of repairing cars. More importantly, [insurers] have to end the ‘fairy tale’ that has policyholders believing their insurers will do whatever it takes to restore cars to pre-accident condition. That’s the Big Lie and the genesis of much of the fraud that plagues the auto body industry.”

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As mentioned earlier, the roots of inter-industry fraud run deep. John Yoswick, of Image Output, recently reported on the advice Gene Anderson, considered by many to be the nation’s leading consumer attorney in insurer bad-faith lawsuits, gave concerning ways insurers influence court decisions. Anderson said, “Chief among them is influencing the training and information attorneys and judges receive.”

He said insurers influence the content of law school textbooks, that insurer-leaning trainers teach many of the continuing education credit courses attended by those in the legal profession and that judges often rely on insurance texts written or influenced by those with ties to the insurance industry. “It isn’t difficult to see the insurer dominance of state legislatures,” Anderson said.

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In his own state (New York), there are 94 paid lobbyists for the insurance industry at the state capitol, compared to one unpaid lobbyist working on behalf of insurance consumers. Even the arbitration system is weighed in insurers’ favor. “Most consumers don’t know whom to choose in those rare occasions when they need to select from a list of arbitrators. But insurers track arbitrators’ findings, and an arbitrator who sides too often with consumers risks never being chosen [again] by insurers, a primary customer of their services.”

As pointed out in Susan Martin’s BodyShop Business article, “The core element of fraud, then, is knowing something is false and doing it anyway, a deliberate attempt to deceive. While fraud usually requires a false statement to exist, knowingly withholding a fact can also be fraud. But active concealment is required (as in painting a used door to hide the fact it wasn’t new), and usually involving a pattern of behavior.”

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Honest mistakes won’t likely be viewed as fraudulent in court, whereas habitual and systematic occurrences will. And this is where many shops find themselves entangled. Shop owners with years of experience will remember a time when both insurers and repairers routinely did things that might be considered fraudulent today. Years ago, a shop owner with a large, well-established business openly admitted he had a “make it up on the next one” agreement with most of his insurance representatives. Though this and many such business practices were common enough years ago and generally accepted by both industries before the days of computerized accounting and drop-of-the-hat lawsuits, today we’d label such activity as fraudulent cost-shifting.

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In March 1999 Movin’ Parts, Lori Tansey Martens, president of the International Business Ethics Institute, stated that financial pressures and the win-at-all-costs attitude of many businessmen can create a downward spiral of ethical standards. “People will look around, believe their competitors are engaged in improper practices and think, ‘I’ll have to lower my standards to compete,’ which becomes a self-fulfilling prophesy.”

But businessmen who think they can’t afford to pay attention to ethics are badly mistaken. “Especially for a small business,” wrote Martens, “the most important thing you have is your reputation. Once word gets out in the business community that you’ve cheated someone or didn’t deal fairly, you can lose a substantial amount of business.”

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But like the dog that dropped the bone from his mouth to go after the bigger bone he saw reflected in the pool, many shops are depending more on insurer-repairer partnerships to supply them with an inflated flow of jobs, and neglecting to build a loyal clientele through providing quality service and repairs. In many shops, the trend today is toward quantity rather than quality – establishing a love-em’-and-leave-em’ affair with consumers rather than a long-term, solid customer base. It’s this philosophy – prompted by certain insurers that, through short-pay tactics, promote greed among shops – that’s financially stringing out an increasing number of shops, leaving them ever more open to do-or-die control by insurers. For this reason, industry fraud has risen to new heights.

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Repairing the Fraud Situation
Is there hope for cleaning house on insurer-repairer-consumer fraud? I, optimistically, believe there is. My first suggestion is that insurers get out of the collision repair business … totally out of it. However, since that’s probably never going to happen, my opinion, then, is that they should provide complete and truthful pre-loss collision repair information and honest instruction for their adjusters/appraisers (i.e. no more “five-day wonders”). Further, their supervisors should mandate that their adjusters/appraisers write full and accurate estimates, which completely reflect actual costs, plus reasonable profit for the repairer, plus true pre-loss restoration for the consumer.

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Insurers should also actively seek out, prosecute and legally put out of business those shop owners and adjusters/appraisers who take fraudulent shortcuts. Because insurers hold the moneybag, they have the power to stop all the shenanigans.

What can shop owners do on a daily basis to help rid the industry of fraud? Sell honesty. Do things that promote honest dealings with consumers, insurers and other shops. I believe that if we aren’t true to ourselves, we haven’t a chance of being true to others. It’s taken time, but we’ve established a fairly good relationship with virtually every insurer we deal with. They all know that if we say we need compensation for a certain operation/part, it’s a necessary operation/part that will be done/installed. And if it later turns out, for whatever reason, that it wasn’t needed, they’ll be reimbursed for it.

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Though I don’t know what neighboring shops think or say about us, I try not to concern myself with them and instead concentrate on us. Honest dealings in the past have kept us in good standing, and our return and repeat customer rate is very high (though lately it’s been taking a hit to insurers that are steering work to my DRP neighbors).

When put in a potentially fraudulent situation, stick with honesty. When insurers leave off certain items, expecting us to cost-shift to make it up, some shops say we should turn out the job without the part/labor operation – but usually this backfires to the shop’s discredit. I believe we have to do our best to deal honestly for what we need to do a proper repair and then work with what we’ve been given to complete it. Sounds simplistic, but it’s usually much more difficult than it sounds.

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Unfortunately, a certain degree of cost shifting will always be a part of this industry, as with every other industry. For instance, I’ve never been paid enough by an insurer to tape off a car to prevent overspray damage. The $5 (with no labor included for the operation) or even the $5 + .3 time units some insurers allow doesn’t begin to cover the materials or labor involved in producing an undetectable repair (which involves masking and re-masking at least once – initial masking and then again after sealing the area just before final painting). Some of these things we just have to eat until someone in the insurer ivory towers has an epiphany.

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“Eating” an operation (doing it though not paid for it) isn’t cost shifting (it’s also not good business practice, though often we have no choice). But cost-shifting is fraudulent and is ruining our reputation. It’s been very common in the past and is even more so today.

On the other hand, vehicle owners asking us to bury a deductible doesn’t seem to be as big a problem as it once was. When we’re asked or it’s insinuated, we point to the sign on our office wall and point out that the customer would also be dragged into a mess should we be caught burying their deductible. Then we sell honesty again. In a nice way, we mention to the customer that if we do something dishonest to the insurer, like burying a deductible, how could they (our customers) trust us not to cheat them?

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There’s some honesty code in every human being (though admittedly well-buried in some), and customers will see your point if it’s presented to them this way. Finish by honestly telling them that you respect them too much to cheat them and that everything you do will be done honestly and to the best of your ability. Tell them about your lifetime warranty, etc. (overload them with positive things about you).

My personal belief, backed up by my state’s insurance commissioner, is that the money is theirs to do whatever they desire if the only name on the insurance check is that of the vehicle owner. (Vehicles with a lien holder are two-name checks and must be repaired to meet the satisfaction of the lien holder). But if the only name on the check is that of the owner and he has a $200 deductible and can live with the scratches on the bumper or whatever, which amount to around $200, I have no problem with meeting his desires.

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Where deductibles are a problem is when enough extra money is padded into the estimate to cover the cost of the deductible, and the insurer subsequently pays the extra. If a shop figures it can swallow the cost of the deductible and the final bill isn’t padded to cover that deductible, that’s his business decision – albeit a poor one.

The problem with this occupation is that there are so many variables involved – and so many temptations constantly before us. And we aren’t getting much encouragement from insurers to clean up our act. Ironically, with all the modern tracking conveniences – estimating systems, etc. – some insurers are leaning toward going back to the lump-it-all-together-and-cost-shift-it system.

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But that’s no excuse to be a part of something fraudulent. It’s my belief that if we don’t make a clean sweep of fraud in our industry now, the legal profession will do it for us. Lawyers have discovered there are some incredibly deep pockets, as well as some not so deep, open to being legally harvested. Don’t let yours be one of them.

Writer Dick Strom and wife Bobbi own and operate a 10,000-square-foot shop in Bainbridge Island, Wash.

Fast Fraud Fact: At least 10 percent of all property-casualty insurance claims are inflated or outright fraudulent, according to the National Insurance Crime Bureau.

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Fast Fraud Fact: The Insurance Research Council’s 1997 Public Attitude Monitor survey showed that 40 percent of Americans think it’s OK to inflate a claim to cover a collision deductible.

Fast Fraud Fact: A Pittsburgh shop owner pleaded guilty in 1999 to 10 counts of insurance fraud and theft by deception. The investigation began in 1995 when USAA investigators suspected the repair shop of overcharging for new replacement parts that weren’t replaced and for charging for repairs and replacement of parts that weren’t damaged. USAA’s investigation of 10 cars showed deviations between the actual repairs and the damage appraisal conducted by the shop. In all 10 cases, USAA’s policyholders weren’t notified of the deviation nor did they authorize the shop to deviate from the repair agreement.

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Fast Fraud Fact: The Los Angeles Times recently reported that a collision repair shop owner had been sentenced to 60 days in jail or 30 days labor for falsely billing insurers. He was discovered after an investigation by the state Bureau of Automotive Repair, which was initiated by a customer complaint. The agents took two cars to the shop and determined that about $3,000 was billed to an insurance company for work never performed.

Fast Fraud Fact: The Coalition Against Insurance Fraud did a 1997 study that categorized respondents according to their attitudes toward insurance fraud. It showed that 21.2 percent of those interviewed have a high tolerance for fraud, tend to blame insurers for people’s behavior and want little or no punishment for those who commit fraud. Another 26.4 percent are fairly tolerant of fraud, mainly because they think so many people engage in it, and favor moderate forms of punishment.

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Fast Fraud Fact: According to the National Insurance Crime Bureau (NICB), “Property/casualty fraud is the second most costly white collar crime in America.” (Tax evasion is first.) “[Property/casualty] fraud costs American insurers and their policyholders an estimated $30 billion annually, which translates into about $300 in extra insurance premiums per household.”

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