Paint and material payments have typically been tied to the number of paint-related labor units allotted for repair of a vehicle at half the body labor rate.
This method has come under criticism of late – with good reason. No one has ever demonstrated what relationship the number of work units has to do with the amount of paint and materials necessary to complete a repair. Likewise, no one has ever demonstrated how a value reflecting half the body rate multiplied by the number of refinish units is an appropriate measure of the goods incorporated into the customer’s vehicle or consumed during the repair. This method is simply a one-size-fits-all multiplication task that fails to account for any distinctions in the unique nature of each repair or other variables like differences in paint product price. Instead, this payment method is based solely on a “rule of thumb.”
Rule of Thumb
Check out some definitions of rules of thumb I found on the Internet:
“A rule of thumb is a homemade recipe for making a guess.”
“A hundred years ago, people used rules of thumb to make up for a lack of facts.”
“Rules of thumb are used as a handy guess mechanism when there is no way to determine something specifically, or when precision isn’t important.”
“A means of estimation made according to a rough-and-ready practical rule, not based on science or exact measurement.”
Rules of thumb, then, are an unscientific method of attempting to arrive at a result. With the advent of paint and materials calculators, however, using an antiquated method to determine how much to charge – or more precisely, how much an insurer should be reimbursing the consumer – is unwarranted.
Now that the collision industry has an accurate method of determining the amount, and therefore, cost of paint and materials used in a repair, we would expect it to be embraced and used everywhere – including by insurers. But many repairers are not being reimbursed according to this method, largely because they report that insurers simply reject paint and material invoices and insist on compensating via the rule of thumb method of multiplying refinish hours by half the body labor rate.
In every industry, businesses strive to be equipped and capable of producing products and services that are “state of the art.” The term “state of the art” refers to the “highest level of general development, as of a device, technique or scientific field, achieved at a particular time.”
Progress, especially technical progress, is expected. Therefore, we have to ask ourselves why this fake formula for paint and material calculation based on an unscientific rule of thumb is continuing to be touted by insurers as the “industry standard” for determining these costs.
Repair documentation has evolved to the point where everyone expects repair blueprints to be generated from a computer estimating and management system rather than paper and pencil. Now that the repair industry has a more accurate method of determining the true cost of paint and materials used in any given repair, it’s inappropriate for insurers to insist on making payment based on the antiquated rule of thumb.
Insurers Love Invoices
One of the most interesting questions on this issue is why insurers reject invoices generated by paint and material calculators designed to identify the actual costs associated with using those products.
Insurers love invoices. How many times has an insurer demanded that a repairer hand over the towing or parts invoices (internal and proprietary business documents) before it reimburses on behalf of a consumer? So why are insurers suddenly dismissive of a bona fide invoice generated by a computer program expressly created to capture the true cost of paint and materials used in a repair?
The answer is clear. Paint and material calculators typically demonstrate that the true value of the products used in the repair is higher than those values being reimbursed using the rule of thumb formula. The rule of thumb is also directly tied to the influence insurers exert in keeping the “average” body labor rate payable to shops artificially low.
There’s no doubt that if the paint and materials programs produced a lower dollar value than the rule of thumb, insurers would have immediately switched to those programs and dropped the old method like a hot potato. The fact that insurers haven’t moved on to a modern and more accurate method of identifying true costs, as the collision repair industry has, demonstrates their refusal to properly and fairly compensate consumers for the losses they suffer in exchange for those premium dollars we all pay for auto insurance.
By insisting on using the old rule of thumb method, insurers can disguise deliberate underpayments to consumers who file legitimate insurance claims and continue to justify those underpayments as “industry standard” to the state departments of insurance.
The rule of thumb formula is the industry standard. Or is it?
We repeatedly hear that the rule of thumb formula is still the industry standard for determining paint and materials costs. The question that should be asked is, “The ‘industry standard’ as determined by whom?”
As discovery produced by State Farm in one of the lawsuits brought by Gunder’s Auto Center Inc., against the insurer indicates, State Farm personnel changed the repair shop’s answer to the survey question about how the shop charged for paint and materials from the use of a paint and material calculator to the rule of thumb formula. (See “Gunder’s Claims State Farm Altered Prevailing Rate Survey").
Similarly, other repairers have reported they were warned by an insurer that if they answered a survey question stating the use of a paint and material calculator rather than a rule of thumb approach, all of their responses would be automatically excluded from the survey results. Accordingly, we should be deeply suspicious of any claim that the rule of thumb formula is the current repair industry standard.
Breaking the Law?
Perhaps most interesting is an analysis of the reimbursement amounts produced using the rule of thumb method versus the paint and material calculators. In many instances, the rule of thumb approach actually compensates repairers at below-cost levels. This is troubling as federal and state laws take a dim view of the practice of selling goods at a price below the acquisition cost. Selling products at a below-cost price – especially doing so on a routine basis without the benefit of legitimate reasons like minimizing losses on perishable goods or reducing unsuccessful inventory – is presumptively predatory and can be a violation of the Robinson-Patman Act, 15 U.S.C. § 13(a) and many states’ laws.
Oklahoma’s Unfair Sales Act, for example, states:
“It is hereby declared that any advertising, offer to sell or sale of any merchandise, either by retailers or wholesalers, at less than cost as defined in this act with the intent and purpose of inducing the purchase of other merchandise or of unfairly diverting trade from a competitor or otherwise injuring a competitor, impair and prevent fair competition, injure public welfare, are unfair competition and contrary to public policy and the policy of this act, where the result of such advertising, offer or sale is to tend to deceive any purchaser or prospective purchaser, or to substantially lessen competition, or to unreasonably restrain trade, or to tend to create a monopoly in any line of commerce.” (15 Okl. St. § 598.3)
Enforcement under the state unfair sales laws can be easier to obtain as these state laws, unlike federal law, typically do not require a demonstration of the market share of the below-cost seller and its power to hurt competition. Instead, the state’s inquiry is whether the below-cost selling occurs for a wrongful purpose that’s actionable – often as a crime – under the state’s laws. As the Tenth Circuit Court of Appeals found when reviewing a below-cost sale case under the Oklahoma Unfair Sales Act, “The purpose of [the Act] is simply to prevent loss leader selling and to protect small business.” Star Fuel Marts, LLC v. Sam’s East, Inc., 362 F.3d 639, 648 (10th Cir. 2004) (applying Oklahoma law).
The question we must ask ourselves is, “What effect does below-cost selling of paint and materials have on the collision industry?” It’s simple to argue that insurers demand that their DRP shops sell paint and materials calculated via the rule of thumb method, resulting in below-cost rates, because they can then use that activity to try to impose below-cost selling across the board on all collision repair facilities. Successful, forced below-cost selling of paint and materials throughout the industry enables insurers to decrease their claims payouts and increase their profits.
It’s also apparent that – whether the DRP shops are overtly aware or not that their acceptance of the insurer’s required rule of thumb paint and materials reimbursement method often results in the sale of these goods at less than their cost – the DRP shops are willing to go along with the below-cost selling of paint and materials because their volume work arrangement with insurers coupled with below-cost selling allows them to capture more repair work for themselves and helps drive independent shops out of business. Therefore, criminal and civil inquiries should investigate whether insurers and their DRP shops are engaged in a conspiracy to sell (and purchase) paint and materials at below-cost prices with the desire to reduce the insurer’s overall claim payment and capture more customers and work for the DRP shops at the expense of independents.
It seems that the time to address the forced below-cost selling of paint and materials in the collision repair business is at hand. Such activity is not only improper but is typically illegal. Any repair shop, whether a DRP shop or non-DRP shop, needs to immediately look at its method of determining paint and material costs to ensure it’s not using a method that results in sales of these goods below the shop’s acquisition cost. Otherwise, shops may find themselves the subject of a criminal or civil investigation into improper selling activities.
States Against Low-Cost Selling
A number of states besides Oklahoma condemn below-cost selling as a matter of state public policy:
Arkansas — A.C.A. § 4-75-209
California — Bus & Prof Code § 17043
Hawaii — HRS § 481-3
Idaho — § 48-404
Louisiana — R.S. 51:422
Maine — 10 M.R.S. § 1207
Massachusetts — ALM GL ch. 64C, § 14
Minnesota — Stat. § 325D.04
Montana — Code Anno., § 30-14-209
North Dakota — Cent. Code, § 51-10-03
Pennsylvania — 73 P.S. § 213
Rhode Island — Gen. Laws § 6-13-3
Tennessee — Code Ann. § 47-25-203
West Virginia — Code § 47-11A-1
Wisconsin — Stat. § 100.30
E. L. Eversman is the chief counsel for Vehicle Information Services Inc., and the author of the Forbes.com “Best of the Web” award-winning blog, AutoMuse. She has served as the chair of the Cleveland Bar Association’s Unauthorized Practice of Law Committee, vice chair of that association’s International Law Section and is listed in the National Registry of Who’s Who. Eversman is a frequent speaker and author on automotive legal topics and has been quoted in such publications as The Wall Street Journal Online, USA Today, Kiplinger’s Personal Finance, Cars.com, Yahoo! News and numerous trade magazines. She was also honored as the 2006 All Auto Appraisal Industry Conference hall of fame inductee. She is recognized nationally as an authority on diminished value and collision repair issues, and she served as an industry resource for the National Conference of Commissioners on Uniform State Laws’ Uniform Certificate of Title Act drafting committee. Prior to launching the AutoMuse blog addressing automotive legal and consumer issues, Eversman wrote the legal column for the Web directory, AutoGuide.net.