Unanimous Collision News

FIX YOUR SHOP LABOR RATES

Tue, 03 Mar 2009 09:10 GMT

At your current shop labor rate, you can not repair enough cars in your market to pay all of our overhead, parts/materials, employee wages, loan payments, and achieve your profit goal! That fact alone is a crisis! In this article we will explore why and how you might change that sobering and perhaps frightening fact.

COMPARED TO ALL OTHER COSTS:

In spite of all of the rising costs of business and the declining margins, shops are unable to raise their rates through insurance controls and have fallen far behind the rising costs. According to Bureau of Labor Statistics for the last 3 years, the cost of living for common goods and services went up 18%, with the Consumer price index increasing 11.1%. During that time the cost of electricity went up 27%, natural gas went up 24% and gasoline 146%. Producer prices increased 15%. More close to home, according to the I-CAR Ed Foundation Snapshot (2004 – 2007), technician compensation has risen 14.5%. And during this same time, the cost of refinish materials has risen 23%. In spite of this, collision industry studies show their shop labor rates have only increased by 7 to 8% and materials rates increased by only 5.5%. In many markets they have not gone up at all!

For the most part, shop owners know they need to raise their shop rates, but the controls insurers have with their prevailing competitive rates and DRP concessions have obstructed them from raising their rates so their profits continue to fall to record low margins and forcing many out of business.

THE BIG LIE:

The biggest lie might not be that the check is in the mail or that the dog ate my homework. It might be the body shop rate. Everyone seems to know it is a lie, and that it is inaccurate, misleading and misconstrued by everyone. Regardless, nothing to date has changed nor has any association or assembled body made any suggestions on what to do about it.

Consider these real-world facts of the disparage between the rates between comparable markets in the same state, California. A shop in southern California might charge $42 per hour. There is no way a shop could profit if they charged only $42 per hour when they pay their technicians around $36.00 – $46.00/hour with benefits. The labor cost usually does not exceed 42% of the cost of the repair. If that were the case, the shop rate should be around $110/hour!

Meanwhile the shop labor rate is closer to $85/hour in northern California markets. Consider that the cost of living is nearly equal between northern California and southern California yet the posted labor rates are nearly twice as high in the bay area as they are in Los Angeles and Orange county. However, in spite of this overwhelming difference, the bottom line total of the estimate to repair the same damaged vehicle is not significantly different. How can that possibly be unless it is a manipulation of the other factors used in the calculation of the estimate? This is an indictment of the current system and is yet another bit of evidence in the lawsuit consumers could bring against a shop or all shops for fraud.

Instead of an accurate shop labor rate, the technicians are paid a “flat rate” and must produce 200 – 225% efficiency over the “estimated” hour versus real hours. This is what the industry has come to refer to as funny time. What that really means is that the estimate hours are not real because the shop labor rate is not real, but neither are funny! The technician must do the repair and replace, or remove and install functions called for on the repair in less than half of the time called for on the estimate.

CPI or competitive price indexing, or PCP Prevailing competitive Price, or prevailing rate are terms insurers have used for years to describe the practice of setting the market labor rate. In the past, once insurers surveyed the shops, they would only agree to pay the prevailing rate. With under direct repair programs, the shops are required to comply to that rate. Outside of the program, shops are pressured by insurers that refuse to pay more than the fair market rate.

The obvious cycle is that the shop cannot comply and raise their rate so the rate can never increase so the shop can never increase their rates or they would be outside of the prevailing rate and blackballed by insurers. It would almost be funny if it were not so criminally manipulative.

Insurers have been smart in how they play the game. The result of this illogical pricing and payment policy was that the door rates differed from market to market, but the general cost of a repair remained the same and artificially suppressed. Before the controls provide by DRP concessions and insurers forcing their own repair practices on shops, the balancing factor shops used was cost shifting and funny times. They would artificially over-inflate the cost of some other aspect of the overall repair to make up for the suppressed labor rate. Of course, few have ever realized that they exposed themselves to fraud charges by following this practice.

The worst part of the set door rates is that the rates apply to all shops in a market area, regardless of the shops compliance to the default standards within the industry. The rates that are forcibly set do not reflect differences for better services, faster processing, additional equipment, higher standards of repair, additional training, equipment or even higher customer satisfaction. In fact, a shop would be far better off financially by saving their money, offering none of the superior services, never reinvesting in their business, avoid any of the costly business practices and higher standards, while receiving the same hourly rate! Can you imagine our capitalist system followed this illogic? Lower skilled or unskilled labor jobs would be paid as much as the doctors, lawyers, accountants, scientists and engineers!

PRICE FIXING:

One of the clear definitions of price fixing is when there are concerted efforts to set a price or any component of the price charge to a consumer. The ironic facts are that these efforts by insurers and now by some states to survey and set door rates are an exact definition of what is supposed to be illegal.

INSURERS PERSPECITVE:

Lets view the existing shop labor rate from the insurers perception. After all, they are the ones that enforce the use of labor rates and the compliance to the artificial rate. The posted shop labor rate is reflective of nearly nothing but a starting point to negotiate. In many ways it is one of the components they have the ability to control and suppress to keep their costs as low as possible. However, they may be overpaying by forcing all shops to follow a common shop rate system.

Are insurers really getting the same thing for the same dollar rate? The answer is clearly no. George Avery for State Farm and Roger Wright from AIG both acknowledge as much in 2007 at a collision industry conference in Atlanta, Georgia. When asked if about the lack of truth in the itemized estimates and shop labor rates, they both acknowledged they were not getting “apples for apples.” Without a clearly defined repair blueprint that would be followed by all shops in a market area, the labor rate is based upon fiction. Further, depending upon which database and how the estimate was written will completely change the estimate total cost. Both insurance executives suggested a simplified billing system might be a far better way, but offered no solutions.

Shops are able to fix a car in many different ways with many different tools, expertise, materials, training and more, yet they are paid the same – at least the same shop rate in their market area. Why? Nowhere else in any industry does a consumer pay the same price regardless of the quality, workmanship, technical complexity, or value. One might think that insurers would not be willing to pay everyone the same, but they have distorted the system into an ability to pay the shops that have invested the most into their business and provide the highest quality the same price as those who having and don’t! Therefore, if a shop has invested the most into better service, staff, equipment, facilities and more, they are effectively paid less that the hack shop who invest little to nothing! Further, just because someone else is charging that price, why should your shop use that rate if you are not providing the same quality or following the same process?

BOGUS AND MISLEADING

The most perfect example of how illogical door rates are is how they are used to determine paint and material charges. Both body shops and insurers have accepted a method whereby an hourly rate is the basis of calculating the cost of the materials to be used on a vehicle in the repair and refinish process. I have often used this joke to illustrate the point, “I was painting my house once and went to the paint store to by paint for the project. The clerk asked how much paint I needed. Having been around the industry, too long, I told him I would be painting Saturday afternoon and Sunday morning so I need about 8.3 hours worth! Looking totally puzzled, he responded with an equally bizarre logic and asked if I would be painting with one arm or two?”

How can the consumption and application of a physical product be accurately calculated in random hours and an arbitrarily determined hourly rate?!

GROUNDS FOR A LAWSUIT:

If a consumer wanted to challenge the costs of a repair and demanded the hourly records, it would clearly show that the shop did not really spend the hours they put on the estimate or the repair order. In response to fraud charges, a shop would declare they use flat rate database times to calculate and that they have to make up for the fact the labor rates are artificially low, etc! GULITY! Even lawyers have been convicted for this pricing practice. Regardless, the industry continues to knowing use this funny time, funny door rate practice for nearly 100% of the estimates and repairs performed.

CALCULATING YOUR LABOR RATE:

If every shop had to calculate their real door rates today, most would not even know where to start. Most suggest they are charging what they can so the discussion stops. However, it might be valuable to see what your rate should be. There are many different ways you might calculate your door rate, lets examine a few:

Your real labor rate can be calculated by dividing your labor sales dollars over any period of time by the total estimated hours over the same period. So if you had labor sales of $200,000 over a period of time and the bid hours sold during the same duration was 5,000 hours you would have an average labor rate of $40 per hour (labor sales divided by estimate hours).

Another more thorough, but more complex way to determine the hourly rates is to turn the profit and loss statement upside down and divide accordingly. The shop would start with their projected net profit margin and add their total cost of overhead, plus the total cost of sales. That number is what the total projected annual sales. To get what percentage is labor multiple that by the percentage of revenue labor represents. Now, multiply your total technicians by 2080 or the total number of work hours in a year based upon 12 months, 52 weeks, 40 hour weeks. This second calculation will give you your “total real labor hours.” Finally, divide your total projected annual sales by the total real labor hours. This does not take into consideration productive hours either. Therefore, a shop might also need to add in an inefficiency factor since not every hour of the day is productive to make sure the retail price is high enough to be profitable and stay in business.

Perform these calculations may be very surprising as they will show you a rates that will be far different than what you have posted. Regardless, the exercise might be futile.

WHY AREN’T RATES REAL?

Remember that the labor rate surveys establish what the lowest common rate is in a market, not the highest or those charged for a better level of service and repair. If your shop is not offering the lowest common service, why are you pricing your services as such? On the other hand, why should insurers expect to pay the lowest price or the same price if you are offering something different? The problem may well be that repairers across America and done little to nothing to separate themselves and the work they perform from every other shop in the market. You have been lumped into one big ugly bag and so too have your service and posted shop rate.

The ridiculous estimating and door rate surveying practice has added time, complexity and enormous costs to the estimating process, but has not resulted in accurate estimates or a lower or higher overall estimate on the same repair! In fact, many industry experts have suggested that the estimating process is the single largest cause of the inefficiencies and extraneous costs related to the repair and claims process. It is also seen as the single biggest obstacle to change.

From a consumers perspective, what do the rate mean anyway? They have no preconceived notion of how that fictitious shop rate posted on your wall equates to the total repair cost since they have no idea of how long anything should take. Even if they had a labor rate database or manual in their possession, it would not be right. Therefore, what is the point of having it on your wall? It only confuses and misleads. It may even be evidence if someone wanted to prove you did not actually spend that much time on each step of the repair you itemized. Can you imagine having to try to explain how our industry prices and bills to a jury of common consumers?

Any simple suggestion will be far to simplistic for the complex mess we have created in this industry. However, the first step may well be to establish a retail list price and figure out your real shop cost of repair. Again, the most accurate way may be to audit a few of your estimate, take estimate total and divide it by the real hours it took to repair and make sure you have a factor for overhead and reasonable profit.

RETAIL LSIT PRICE:

If shops were not held in check by insurers tactics to suppress their costs, what would they charge and how would they set the price? Isn’t the shop labor rate you charge to insurers already negotiated and discounted rate? If so, why should you be posting the discounted labor rate that you charge insures? Why not post the rate you would charge before negotiations start with an insurer or consumer?

To begin to establish a foundation of fairness and logic, shops should establish a retail list price as their baseline. The retail list price should be set according to what they would charge a consumer for 1 hour of work with no discounts, special volume considerations and that reflect the total cost of business operation for that single hour. The retail list price is not necessarily what a shop would charge and insurer or to all consumers, but before the negotiations start and before they offer a weekly special, this would be the hourly rate.

To calculate the retail list price, a shops could use a complex process and add up all of the elements, number of hours, overhead cost, etc and divide by the total available hours in a given work year. Extended hours and fluctuating business costs would change this actual number, but they could determine the correct price generally speaking. It would probably be similar to what mechanical repair and auto service businesses charge or the labor rate in northern California.

Imagine if every shop in America posted a retail list price hourly rate tomorrow. Starting tomorrow, when they wrote an estimate they would see how much it should be before they discount it to an insurer or their favorite consumer customer. They would have a starting spot to illustrate how much they are discounting and giving up to compete and play in the game as it is today. Insurers might appreciate the facts of life, too. At least they would know how much they are beating out of the shop through their effective cost containment practices.

RETAIL LIST PRICING

If a store or dealership does not establish a retail list price, then how can the consumer negotiate? How can they offer appealing specials, discounts and incentives when they need to sell more? How can they profit according to supply and demand and become more efficient when they have to if an unrealistic and arbitrary list price is established following the current use of posted shop labor rates? Even employee compensation is distorted and misleading with the prevailing flat rate and commission based pay plans.

The current system is founded on the most illogical and misleading component in the mechanism to establish a charge for a repair. The whole system is a Ponzi scheme with a series of cost shifting and the use of “funny times” to make it work. Perhaps with a retail list price, shops could begin to unravel the spaghetti that serves as the foundation for their business even if they never actually charge anyone that full price. This retails list price would establish the foundation for a variety of consumer oriented strategies and a more accurate picture of just how big of a discount repairers are really giving insurers.

A retail list price also allows a migration to more consistent and realistic estimating and even compensation plans. And, if for no other reason, the establishment and use of a retail list price that accurately reflects the true cost of doing business, repairer, insurers and the entire industry would be one giant step closer to more legitimate business practices and an industry of excellence.

SPECIALS & SPECIAL PRODUCTS:

With a retail list price, consumers would see the discount they’re receiving as they get an estimate. It would show that it is discounted for them. If they wanted to pay for the repairs themselves as nearly 36% of the entire market does, using a retail list price will create a far better starting point to begin to negotiate or discount a special price services for those consumers. Until now, we had no realistic way of offering pricing specials. Remember, everyone likes a deal and to be treated specially. A retail list price allows shops to have a margin they can use to negotiate and provide “specials!”

Insurance companies have different policies at different costs. Mechanical service, auto detailing and every retail store in the world has different products at different prices to sell to the consumer –all but collision repair businesses. What if you wanted to offer a certified collision repair versus the normal one. Would it cost more? How would you price it differently? How would you communicate to the consumer and insurers that you offer a different level of repair? If you used only the best techs, and best materials, should that not be a higher priced service? If you buy a hi-line car, it cost more than the economy model.

In Australia and Europe, they have offered different levels of service and repair for decades and they price accordingly. Shops would be well advised to have different rates posted instead of waiting to fight it out with an adjustor after the fact. It works for them and it works for nearly every other industry.

Perhaps you may even establish a few different pricing structures depending upon what you are doing, for whom and at what quality level or if it is certified or not, etc.

CONCLUSION:

Trying to change the posted door rate that insurers control through surveys and other methods might be as silly as wishing for wings to fly or thinking you can get rich playing the lottery. The reality changing these without reprisal or far reaching ramifications might be somewhere between impossible and extremely improbable. Perhaps the best idea is avoid wasting too much time trying to change the insurance labor rate is to instead focus on creating a new reality and baseline by establishing a retail list price. The retail list price might never be charged to any one at any time, but it sets a reality that has been missing in our industry.

A retail list price can be used in many positive ways in the years ahead. It may even be a catalyst to help unraveling the mess this industry operates within. Setting real prices, accurate prices that are reflective of what it takes to operate a successful collision repair business may begin to slowly change the foundation of nearly every aspects of this industry and how shops can operate. It may even open doors for shops to begin to do business in far different and far better ways. We can only hope so.

responses to the accusation thrown out by CCRE

Tue, 03 Mar 2009 09:05 GMT

I wrote at least 3 responses to the accusation thrown out by CCRE. Here they are for you to read and consider:

———————————-

I recently read your comments to Jeannie Silver about the DRP reform panel we conducted at CIC. I understand yours and others initial response to this as some sort of endorsement of DRP. You may even suspect that we are trying to institutionalize insurance direct repair programs in some way. You said “it looks like someone is trying to set parameters for an illegal agreement between a body shop and an insurance company.” Nothing could be further from the truth. However, lets keep in mind that when an ostrich buries it’s head in the sand, what it leaves exposed to be judged by. Furthermore, the buried head does not change what is really happening to nearly 70% of all insurance paid claims. Continued denial of the fact that illegal, unethical and immoral business practices exist will not make them go away or be any less abusive.

If we are to discuss this emotional issue in an adult and mature manner, we must acknowledge that an insurance company does have the right to assist their insureds and claimants alike to receive a proper repair, pick a shop and negotiate their bill. It is called customer service! The way they position DRP is providing that customer service.

However, as we all know, they have gone much further than that. In some of our opinions, DRP programs as they are conducted today by most insurers are blatant violations of numerous consumer rights, fair trade practices, and other laws. Regardless, not one has been taken to court as a civil, or criminal matter. You and the thousands of other shop owners afflicted by these trade practices have yet to make one significant move towards a class action suit or anything more than complaining in emails, in online bulletin boards, and gritching in meetings like CCRE. Meanwhile the practices continue to evolve into more and more egregious behavior and business practices.

Until our panel took on the task and made the move, no one even framed the discussion into a legal issue, consumer rights issue, or a matter of fair trade practices as regulated by the FTC. What we have accomplished is getting everyone to start talking about a topic that was not even allowed to be discussed during CIC for the last 10 years! What the panel has finally accomplished is getting all sides to openly look at what is really happening in the real world.

Instead of sitting on our hands or wasting our energy whining in the bars and meaningless association meetings, our panel took the bold steps to overcome the obstacles presented by the CIC mafia to force those in attendance and the media that was watching to opening discuss the 650 lbs gorilla in the room. We took the bold steps of exposing the various business practices that have resulted in DRP becoming the scourge it is today. We got the major insurers to openly talk about their business practices and even agree in principal to review and continue to discuss them.

Consider this significant but subtle nuance and fundamental tactic to our strategy. If insurers comply to each one of the points of DRP reform as outlined in the document I wrote and presented, you and other would not care about the business practice we refer to as DRP. The practices would be a toothless, meaningless program that might be a benefit to the insurance companies customer, but they would not be a threat to well-operating shops. All parties could conduct business fairly and in an open and level playing field. If insurers complied to the laws and the points raised in the DRP manifesto, DRP’s as we know them today would be gone and replaced with a real form of customer service they could provide legally, morally and ethically.

We really should have never used the terms DRP reform, but it got far more attention. What we are really calling for is the end to unfair trade practices. All we asked is if they are going to do business, they do it according to the fair trade practice laws and the consumer rights laws. After all, that is only fair and the only position we have any right to ask. In no way have we suggested that by reforming DRP into a legal practice that we are “trying to set parameters for an illegal agreement between a body shop and an insurance company.” Asking people to abide by the existing laws does not tell anyone how else they may live their lives. Asking insurers to follow fair trade practices and examining their current business practices is not telling them or any body shop to enter into an agreement. It does say if you are going to do business, do it legally!

I hope this email explains our position clearly. Thank you for taking the time to at least asked the question and open the dialog.

——- personal letter to one individual that wrote in to BodyShop Business Magazine

Dear Sir:

I feel your pain and agree with much of what you wrote and even more importantly, your feelings.

…

You are right about what we are trying to do with the 14 points. Our efforts are a last ditched effort that is highly likely to fail. We really are not tryi9ng to fix DRP. We are really trying to make insurers and shops operate legally, ethically, and morally. Our target and focus is the business practises surrounding DRP. The title we used is a misnomer and misleading. That is what got CCRE off on the wrong footing with what we were doing and no one talked off the record before it became a public debate. The good news is that it is getting the issue more exposure and interest. That is of course the real objective.

I love your suggested additions with the elimination of the “indemnification requirement” to the insurance partner was eliminated. Since our objective is to improve an unfair situation, the obligation for a proper repair should be equally shared between both partners in the program! Brilliant. Thank you for your valuable contribution. I agree that it will put everyone on notice and on the same side of the table when the liability of repair is equally distributed between both parties (I just cannot use the term partners anymore). I also concur that all insurance policy agreements should contain a mechanism for dispute resolution between the insurance company and the policyholder prior to any DRP contract agreement. This of course is to protect the interest of the consumer and would be in the form of the Policyholder’s Right to Appraisal.

———————-

Response to CCRE positioning statement:

It is easy to appreciate the emotional response that CCRE has taken based upon the devastating negative impact today’s insurance driven direct repair programs have on shops whether they are on the program or not. Unfortunately, employing a strategy of ignoring problem in hopes it will go away has been a total disaster. Their statements and tactical logic is flawed from top to bottom based upon these points:.

1) CCRE asserts that the 14 points are from CIC, but they are not. They were only presented at CIC as a basis for debate and discussion by a panel that equally represented both insurers and repairs. The panel that was assembled by the Fair trade practices committee represented all sides and view points. There were repairers on the panel that were as opposed to DRP as CCRE is as well as association representatives from both ASA, SCRS and WAMBA.

2) CCRE’s response suggests that to raise these points of DRP reform are an endorsement of DRP or a position of support for the program. They suggest in their press release that by calling for reforms that CIC or anyone else is trying to institutionalize insurance direct repair programs in some way. They said “It would therefore appear that the true goal of CIC’s latest proposed repair criteria is to continue to promote the personal interests of certain among CIC’s participants and administration.” Nothing could be further from the truth. Passive protests and burying one’s head in the sand does not change what is really happening to nearly 70% of all insurance paid claims. Continued denial of the fact that illegal, unethical and immoral business practices exist will not make them go away or be any less abusive. During the time Tony and CCRE has been opposed to the DRP, the claims management practices has grown from representing a small percentage in the later 1990’s to now approaching 70%. Obviously, something more needs to be done.

3) The fact is that an insurance company have just as much right to influence the consumer as does a body shop. Regardless, both must conduct business fairly, and according to the law. A survey conducted by Assured Performance in 2006 showed that both sides of the trading relationship regularly employ unfair trade practices that unduly influence consumers and take advantage of their lack of knowledge. However, the most qualified repair shops are not guilty, but nearly all insurance driven direct repair programs are. Understandably, CCRE wants to decry the business practices employed under DRP, but far too many unscrupulous body shops employ bad business practices, For instance, some shops “hook” the car or hold it hostage regardless of the consumer choice. Far too many shops will attempt to overcharge a consumer by taking advantage of their lack of knowledge of their rights and of the true cost of repair. Insurers often use these practices by unethical shops to justify many of their claims management practices employed under DRP. Both are wrong and appear to violate unfair trade practices and consumer protection laws on a regular basis.

Insurance companies do have the right to assist their insureds and claimants alike to receive a proper repair, pick a shop and negotiate their bill. It is called customer service! The way they position DRP is to provide a customer with better service and protection from the evil body shop that will take advantage of the poor incredulous consumer. However, as we all know, they have gone much further than that. Most DRPs have evolved into “cost mitigation systems.” In some people’s opinion, DRP programs as they are conducted today by most insurers are blatant violations of numerous consumer rights, fair trade practices, and other laws. Regardless, not one has been taken to court as a civil, or criminal matter. CCRE and the thousands of other shop owners afflicted by these trade practices have yet to make one significant move towards a class action suit or anything more than complaining in emails, in online bulletin boards, and association meetings. Meanwhile the practices continue to evolve into more and more egregious behavior and business practices.
Until these 14 points were put into writing and presented to the industry, no one even framed the discussion into a legal issue, consumer rights issue, or a matter of fair trade practices as regulated by the FTC. What the fair trade practices committee accomplished with the panel discussions is getting everyone to start talking about a topic that was not even allowed to be discussed during CIC for the last 10 years! What the panel has finally accomplished is getting all sides to openly look at what is really happening in the real world. The panel had to go to extreme measures to overcome opposition by CIC to even get the topic on the agenda.

Instead of sitting on our hands or wasting our energy whining in the bars and meaningless association meetings, the fair trade practice committee took the bold steps to force those in attendance and the media that was watching to opening discuss the 650 lbs gorilla in the room. The committee and the discussion exposed the various business practices that have resulted in DRP becoming the scourge it is today. The panel successfully engaged the major insurers in an open discussion of their business practices. All of those sitting on the panel even agreed in principal to review some of their practices, review and publish their word track and continue to discuss all of the issues.

4) Compliance to the reform points would make DRP legal and above reproach as Tony and CCRE assert. If insurers comply to each one of the points of DRP reform as outlined in the document, they would no longer be illegal or unethical and would not violate wht CCRE and Tony are protesting. The practices would be brought into line and limited to being only a benefit to the insurance companies customer and claimants, but they would not be a threat to well-operating shops. All parties could conduct business fairly and in an open and level playing field. If insurers complied to the laws and the points raised in the DRP reform manifesto, DRP’s as we know them today would be gone and replaced with a real form of customer service they could provide legally, morally and ethically.

5) The points of DRP reform were presented as a basis of discussion and debate and not as laws. The overall objective was to ensure that if repairers and insurers are going to do business, they do it according to the fair trade practice laws and the consumer rights laws. In no way has the committee or anyone else associated with the writing and presentation of the DRP reform document suggested that by reforming DRP into a legal practice that we are “trying to set parameters for an illegal agreement between a body shop and an insurance company.” After all, asking people to abide by the existing laws does not tell anyone how they may live their lives beyond the immediate prohibition stated in the law. This is the same as in this case. Asking insurers to follow fair trade practices and examining their current business practices is not telling them or any body shop to enter into an agreement. It does say if you are going to do business, do it legally!

In conclusion. it is understandable that CCRE and others might react to the DRP Reform Measures as support for the practice, but when one closely examines the various points, they are very specifically designed to force both insurers and repairers to operate fairly and legally and in compliance with consumer protection laws. At this point it is in doubt that they are. Consider the logic, if an insurer opposes nearly any of the points as proposed, why? If an insurer’s direct repair program is not operating according to and in compliance of the points as proposed, that fact alone makes it clear they are in violation of the law.

Hummmmmm! Something to consider, isn’t it?

DRP's Must Comply to Fair Trade Practices and Consumer Protection Laws, Too!

Fri, 06 Feb 2009 12:58 GMT

When is enough, enough? On a warm spring day in Atlanta, Georgia in April, several prominent collision repair notables barked out “Enough is enough” as a declaration that they could no longer standby and accept the distorted and seemingly arbitrary demands, concessions, and illegal steering insurers do each day all over the country. Perhaps that was the tipping point when many others, even those not in attendance, shared the sentiments that enough was enough. They and thousands of others finally reach their breaking point with the way insurer direct repair referral programs are being managed throughout the country. But nothing changed.

More outrage was expressed just 6 months later when key insurance managers at multiple insurance companies were exposed for extorting shops and taking payoffs in return for putting shops on their DRP programs. Once again, regardless of the boisterous bravado expressed by the frustrated and fed up collision business owners, nothing changed. Without significant changes to the current insurer direct repair programs, all parties involved are stuck with a system and process that has become fertile gardens for corruption, abuse, extortion, inefficiency and more –visible or hidden, proved or not!

What started off as a simple concept 20 years ago, DRP is now the principal claims process for over 60% of all insurer paid claims – nearly $14 billion annually. The practice has spread since the 1980’s, but the claims management and referral programs known as DRP’s have had little improvement, and no systemic reform. All sides are afflicted by cobbled processes and kluged systems used to direct consumers to repair businesses that have entered into a relationship with various insurers. Nearly all are based upon concessions given by the shop in return for the referrals. Some insurance companies have implemented a few changes to their programs after discovering key employees were extorting body shops. Other insurers fired the guilty parties, but have done nothing more to prevent the abuse from happening again. Several high-level insurance executives explained that their hands were tied to do much about the problems of abuse and distortion by field-level employees.

DRP programs contain many processes that are considered by many to be unethical, poor business practices, bad customer service, illegal, out of control, and a blatant violation of fair trade and consumer protection laws. In spite of the pervasive opinion, reform has not been a point of discussion at any industry conference or within any association, until now.

“What we have here is a failure to communicate.” It is a familiar quote from the Academy award winning movie, “Cool Hand Luke,” but it’s also a perfect description for the lack of dialog between insurers and repairers. For nearly 15 years, concerns have grown, but nobody talks about the issues surrounding possibly the most important of all subjects – DRP reform and improvement.

Even after a group of entities funded a study conducted by Beryl Carlew and his business in 2007, nothing changed. The results clarified numerous points of frustration and suggestions for improvement by leading shops surveyed across the entire US. The recommendations fell on deaf ears.

Expediency and short-term thinking may well have been the foundation for these programs as they were designed year ago. Today, command and control seem to be the driving factors in how insurance companies are conducting their direct repair programs and why repairs are so afflicted. Even numerous cases of abuse since that time, including key insurance representatives being arrested, and top management being fired for cause, have done nothing to compel insurers to make fundamental change.

Finally, after the outrage has reached a crescendo, insurers and repairers alike are starting to agree that a few fundamental reforms might make a huge positive difference for all concerned.

The news reports of insurance company staff abuses late in 2007 became the catalyst to support the first steps for change. The news flew across the country through email, blogs and the press when the manager of AAA’s IRP was fired from the Club for cause and many highly visible shops were investigated. In another high-profile case, an area Manager for Allstate was arrested on IRS tax evasion from kickbacks he was extorting from shops around the Chicago area. In both cases and numerous others, even insurance company executives expressed frustrations that their hands are tied in how to address the problem.

Insurers found that there were no specific laws that made the reprehensible and unethical conduct illegal. Legal experts explained that in cases of this kind of abuse, the insurance company is not an injured party so there was no grounds for a lawsuit or being a plaintiff. Further State laws rarely define the specific actions to a degree to allow for enforcement as the systems operate today. Even worse, insurers must be careful to even terminate an employee for fear of a wrongful discharge counter-claim.

Regardless, some of the practice may expose insurers to legal ramifications surrounding consumer protection and fair trade practices. Simple reason and management logic seemed to be missing in a system that directly affects over $14 billion in collision repair work and millions of customers. Even more outrageous, shops that blow the whistle or openly complain about the abuses have been known to suffer reprisals and be black-balled by both the insurance company in question as well as others. Years following the extortion practices of one manager in the Chicago area, shops targeted by the rogue employee remain damaged and afflicted.

DRP REFORM PROPOSED

Following years of evolution and growing dissension, the first drafts of proposed DRP reform was presented to the industry. After months of review and consideration, insurers and leading repair organizations began to examine and debate the merits of the initial points of DRP reform. The points address current practices that may not be in compliance with FTC, fair trade practices, and state and national consumer protection laws. The points also address loopholes that allow for corruption, abuse, fraud, conflicts of interest, and ethical breaches.

It should be noted that there are many that are opposed to DRP reform on the grounds that they feel DRP’s are illegal, and therefore should not exist at all. Further, some feel that shops should not be dealing with insurers at all. They are of the mindset that it may even be a violation of several laws and it is a foolish way to do business. That may well be, but from a purely practical standpoint, after 15 or more years of existence, DRP’s are not on the verge of vanishing or improving. In fact, each day more and more repair work is funneled through insurance driven, DRP-like programs and insurance company business practices seem to be getting more and more bold and audacious! So far all those that are suggesting to “just say no” are losing the battle. Perhaps a different approach is needed. Why not push for universally supported business practices that “de-fang” the monster. If and I mean IF and WHEN insurers ensure that their DRP’s are compliant to unfair trade practice and consumer protection laws, they will not be an overwhelming threat to well-run collision repair businesses. It is not a panacea, but it could be a grand step in the right direction.

The real or potential problem is a lack of controls, checks and balances, and monitoring without which leaves the DRP wide open for abuse and corruption. Consider that in most DRPs, a single insurance company employee can make or break any collision business regardless of how many locations it operates or if it is in total compliance with their unpublished criteria and unwritten rules! It certainly is a glaring indictment of the limitations and inequities of the current system that most insurers have crammed into place. These programs lack transparency, and the types of objectivity that might elevate them above reproach. The stories of extortion could have many more sequels if all stakeholders in this industry do not do something, and do it quickly. It might sound alarmist to some, or too little too late to others, but the direct repair programs as they are today are filled with bad business practices that expose shops, insurers, employees, and consumers to lawsuits and legal enforcement.

ABUSE OF SELECTION

While many shops on the existing programs are top-shelf and operate stellar businesses, those factors may not have been what got them on the DRP. There are certainly many cases where the best shops according to performance indicators, credit rating, years in business, tools, equipment, training, etc. are passed over for some business that does not compare. There are numerous examples across the US where shops are listed on any number of DRP programs where the owners are convicted felons, the shop is under investigation by at least one state agency, or they have a long and blatant history of poor repairs, consumer complaints and rumors of unethical business practices, but are on the program regardless. Why, and what was the criteria used for selection?

When one evaluates existing relationships between insurers and repairers in any market, there are many questionable situations and dubious bedfellows. Objectively, no one could support why a shop is put on the insurer referral network while consumers are steered away from others? Are the circumstances above board? Can an area manager objectively show why one shop was selected and another passed over? Can anyone show the existence of transparent set of criteria that is fair and equal to all potential players? Insurers will point to their hidden or secret criteria for selection as the foundation of who is or is not on their referral list. They may even suggest it is a matter of compliance to key performance indicator (KPI). But what are the KPI’s, how are they measured? Are the measurements arbitrary and only for the benefit of insurer cost savings? Are they equally enforced and objectively enforced by independent authorities? Are all shops allowed equal access and opportunity to participate? Why not? If not, how is that not a blatant violation of unfair trade practices? How is the process not a perpetuation of the good ole boy programs of the past?

Even in State Farm’s recent roll out of their new Select Service, shops were picked based upon who was willing to sign the agreement – an agreement that may be potentially fatal to their business! But even then, not all shops were given the chance to compete for the referral account. Secondly, State Farm can eliminate any shop they want through the enforcement of their KPI and criteria that is highly subject to interpretation.

Situations such as these, that exist in all DRP programs, raise the question as to whether the criteria really amounts to a legitimate form of “qualification” or simply the willingness to comply to concessions on pricing or repair standards. If selection is really only “concession based,” then how is that any different from other forms of grease, graft and payola! Is agreeing to a concession the same as bribery, but just in another form? It might appear that the only thing that has really changed from past decades of a few unethical shop owners “greasing” some insurance guy is the price they have to pay for the referral work today!

In decades past, a shop might fix a car for an adjuster’s family or even buy a round of golf. Perhaps it was the influence of the wild Christmas parties or a special favor a shop might give that won them consideration with the insurance guys on their local level. Big fun in the strip clubs was also a favorite way a shop owner might get close to an insurer. Whatever the method, a few hundred bucks invested in the right way might generate good relations with the right people at one insurance company or another. The clique and close-knit bonds that gave some shops a preferred position with insurers became known as “the good ole boy network!” The decade has changed, but the methodology seems to be alive and well, but more subversive and far more expensive – perhaps involving millions.

Payoffs and scams riddle the existing DRP programs as much today as in the old days, but the cost is far higher now! Everyone knows, there have become more and more “pay to play requirements,” to participate in insurance referral programs including products and services the shops must buy, even software and CSI they must use!

Of course, every insurer would deny these charges and suggest that their program is for the good of the consumer and that their program is far better than the good ole days. However, under a blind analysis there is little difference. Insurers gain a direct monetary benefit that is just as real in dollars and cents as a payoff of a new TV, a Rolex watch, Lakers tickets or a leather jacket! What is the difference? Perhaps it is only that an individual received the inurnment (gratuity) versus the insurance company itself! Isn’t agreeing to a concession that results in a lowering of costs to an insurer another form of pay off?

One might counter this argument that at least the concessions are above board, but they are not. There have been many who question whether corner cutting is a form of consumer fraud that jeopardizes vehicle safety. Few if any DRPs have any kind of true performance incentives and rewards so what is a shop really paying for when they agree to concessions on other insurer DRP’s? None are a reciprocating agreement with true obligation and consideration on both sides – insurer and repairer.

To truly make the selection process beyond reproach, it must be transparent. The criteria must be objective, available for public scrutiny, and open to evaluation by all shops. It should also be free from concessions or requirements that are not specific to the independent choice of the repair business. There must be independent selection, evaluation, and appeals process for being added, omitted, and suspended. Without these critical elements, all of the programs leave themselves open to suspicion and susceptible to fraud.

Another aspect of reform that all parties might agree to for the good of all is that all of the power and authority should not reside with any one individual and the circumstance of selection should be based upon meeting the objective criteria. However it is reformed, DRP managers should not be able to be arbitrary about suspensions and who gets kicked off the program. Allstate overhauled their direct repair program to address this area of potential abuse. Now, no specific person has total responsibility for any one shop and they are rotated randomly.

Secondly, all insurers should create a review board made up of industry professionals that will review their internal practices, and tell them the truth. They may even want to include a majority of advisors that have nothing to gain or lose from the answers and feedback they give. During a panel discussion of these issues, Michael Lloyd from 21 century stated, “You aren’t going to like this, but we are a private business and no one should tell us what to do.” It may be a true statement, but the logic should then be applied to both repairer and insurer alike and they would not have the ability to enforce their DRPs on shops as they do today.

Lastly, state laws need to be strengthened to make the activities conducted by these nefarious individuals obviously illegal, and any violation must carry heavy penalties. The laws must have a definition of the behavior and hold responsible any party that aids in the violation, even if it is by malfeasance, nonfeasance, or misfeasance of their duties! If such a law now existed, nearly every insurance company executive, staff and management would be guilty for having allowed a system to exist that is obviously filled with inequities, graft, corruption and fraud! They would not instantly retort that a whistle blower only has an axe to grind or a personal vendetta against the person they are reporting. Consider these points as a foundation and beginning of reform of DRP:

1. TRANSPARENT STANDARDS AND CRITERIA: All future DRPs should be based on transparent standards and criteria that are objective, and these requirements should pass public scrutiny. All criteria must be published and open to the public review.

2. DECENTRALIZE AUTHORITY: Insurers should remove shop selection and all decision-making power away from single individuals and place those decisions with an independent review board. The independent review board should be made up of consumer and industry professionals that can openly provide feedback. A majority of this board of advisers should be neutral, devoid of any conflict of interest with nothing to gain or lose from the answers and feedback they give. AAA had a board, but it is made up of only subordinate managers. This was part of the mechanism that was abused helping to create the perfect storm where payoffs and twisted deals became the norm until the greedy manager was fired.

3. STAFF ROTATION: Insurers should rotate area staff so that no single person has long-term authority over any one shop or group of shops.

4. CONSISTENT INTERPRETATION OF GUIDELINES: Program guidelines or agreement items should be published and audited so that field staff cannot arbitrarily modify them creating areas for misuse and/or regional policy interpretation.

5. PERFORMANCE BASED DISCOUNTING: If there is any price discounting between insurers and repairs, it should always be based upon fair trade practices and legal parameters, such as volume. If a discount is given, it should be based upon an objective measurable and auditable business agreement.

6. PERFORMANCE BASED REFERRALS: If there is any referral of a consumer by an insurer to repairs, it must be based upon fair trade practices and legal parameters such as consumer services and customer satisfaction ratings.

7. REFERRAL LANGUAGE AND WORD TRACK: Repairers and Insurers that use any kind of referral language and word track when communicating to the consumer must always inform the consumer first, before any discussion of other options, that they have the choice and right to have their vehicle repaired wherever they prefer. If a consumer does not have a choice or a repair business in mind, the insurance company representative may recommend shops that meets their published criteria and standards as outlined. If there are agreements to save the insurer money or repair following special corner cutting practices, that must be stated to the consumer as one of the selection criteria. Further, the insurer representative may not make comments about any other business that is not on their list as a means to encourage a consumer to select their referral choice or dissuade them from using a repairer of choice. They may not make comments that infer that there could be additional costs, lesser warrantees, delays or lesser quality. They are limited to only say they have no additional information related to any other repairer.

During discussions by the panel, it was also suggested that repairers should be obligated to inform the consumer that they have the same right in an effort to prevent some repairers from “hooking the cars” and holding them hostage when it was never the consumers choice to select them to repair their vehicle. Perhaps signs should be required in all shops that make that statement so all consumers are duly informed of their rights.

8. SHOP-PRODUCED DATA: Insurers should acknowledge that all shop-produced data is the property of the shop and that no data can be gathered without the specific authorization of the shop. Insurer should disclose every data item to be collected along with the intended use of that data. Further, sharing this data should be strictly voluntary and not a requirement, point of agreement, or criterion of participation in a referral program. One of the challenges with this point is defining what data. There is especially room for debate when multiple parties gather and process the same data. What seems to be universally agreeable is that the consumer’s information should always be kept confidential at all times.

9. UNIVERSAL ACCEPTANCE OF REPAIR STANDARDS: Insurers and repairers should cooperate in the creation and universal acceptance of repair standards, and mutually agreeable repair practices that will serve as the foundation of all estimating and repairs. As a starting point, the spirit of cooperation should focus on fundamental standards, such as agreeing that all repair practices written on an estimate and employed by a repair business must return the vehicle to safety standards as defined by the auto manufacturers. George Avery of State Farm also suggested that perhaps the focus should be on mutually defining standards surrounding those issues that create conflict, friction, delays and consumer inconvenience. This alone could save billions on both sides of the trading relationship.

10. REPAIR PRACTICES: At no time will an insurance company recommend, encourage or pressure any repair business into following repair practices or using parts, paint or material that are not in compliance with repair standards in accordance with OEM specifications or that may in any way lessen the value of the repaired vehicle or threaten the safety of the vehicle. All requested repairs will be in accordance to the repair standards as established in point 8.

11. RESTRICTIONS FROM FORCED CONSUMPTION OR CRAM–DOWN: Insurers should be restricted from requiring that a shop buy any product or use any service from a particular vendor or make the use of any specific product part of the agreement items or a pre-requisite criteria to participate in a DRP or for receiving a referral of any sort.

12. REFORM STATE LAWS ON FRAUD: Insurers and shop associations should work in concert to reform ALL state laws to ensure they prohibit payoffs and other “pay to play” programs, with enforcement and criminal penalties clearly defined. The laws must have a definition of the behavior and hold responsible any party that aids in the violation, even if it is by malfeasance, non-feasance, or misfeasance of their duties! There should be immunity and protection from reprisal for whistle-blowers as well.

13. TRANSFER OF OWNERSHIP: The transfer of ownership of a body shop should not automatically disqualify that shop from continued DRP participation. Continued participation when a shop is sold should be contingent upon a review and approval of the new ownership transfer and based on an objective application process commensurate to the criteria used for any and all shop participation as outlined in item #1.

The selection might also be approved by the independent review board. This issue has been of particular concern since it interferes with the buying and selling of repair business. It can have enormous implications on the value of the business, too. It is also not consistently enforced since consolidators regularly purchase shops and immediately continue the DRP relationships.

Consider the transaction surrounding Caliber Collision Centers in which a Canadian Capital company essentially paid $170 million for 65 shops and the operations. They were able to retain all their DRP’s and avoid this arbitrary DRP rule, but independently owned shops in the same markets continue to be penalized.

14. NUMBER FOR REPORTING ABUSE ANONYMOUSLY: Every insurance company should have a published, easy to find phone number so that shops and/or other individuals can call to report abuses, anonymously if necessary.

15. Insurers should eliminate the “indemnification requirement” to the insurance partner by shops participating in DP. The obligation for a proper repair should be equally shared between both partners in the program. It will put everyone on notice and on the same side of the table when the liability of repair is equally distributed between both parties.

16. All insurance policy agreements should contain a mechanism for dispute reso

Not Again! Corruption & Abuse Demands Reform!

Fri, 19 Oct 2007 07:30 GMT

Just 18 days following the termination of Gil Palmer from the Auto Club, allegations of accepting bribes and abusing shops have surfaced around two more upper management insurance representatives in charge of direct repair programs. The two have allegedly accepted bribes that include a large screen TV purchased by a body shop and loaded into her car, and the other for abusing shops and possibly accepting a 5-carat diamond ring and a lavish automobile! These allegations are separate from any actions by Palmer, but they involve some of the same cast of characters.

Are they guilty or innocent? Will we ever know and will they ever be brought up on charges? Who knows, and does it really matter? With all of the accusations flying and fingers pointing, even more insurance company staff have come under suspicion, and dozens of shops are now being interviewed by investigative authorities. Some may be guilty while most will be innocent, but who really knows which is which? Regardless, these two DRP managers remain in their positions of absolute power, reigning over shops even while the investigations in separate companies go on. Somehow that seems so ironic since internal investigators are expecting shops to tell all, yet the “hammer” is still able to pound shops!

While the industry and Gil, Rick, Marie, Elaine and others wait for the other shoe to drop, one has to ask the question, how far reaching is this behavior? Just how pervasive is the graft and corruption surrounding the direct repair programs throughout the country in general? The LA Times article on October 16, 2007 raised questions about other business practices surrounding direct repair programs of other insurers as well as AAA. According to Carol Thorpe, Public Relations for Auto Club, there is an official investigation ongoing and there will be more details as events unfold. There is certainly the expectation among shops that many others will be implicated, suggesting the matter is not isolated to one company. There is evidence of widespread wrongdoing that includes many other insurers.

Over the years, I have personally reported several situations to key management of several companies. Less than six months ago, I reported a similar incident directly to Farmer’s management. They elected to alleviate the problem by relocating the manager in question to another area. In yet another fairly high-profile incident just a few years ago, the FBI was involved with a DRP manager in the Midwest for Allstate. After over 2 years in the court system, Robert Groebner, was fined and sentenced to house arrest for extorting hundreds of thousands from at least 3 shops over at least a few years. They used the IRS and tax evasion to prosecute him.

Based upon these numerous situations and supporting facts alone, the problems exposed by this recent news is obviously not isolated to one area nor one insurance carrier. Graft and corruption in the DRP system could be pandemic!

The real or potential implications of this problem point to a lack of controls, checks and balances, and monitoring. It sheds light on the potential for abuse and corruption in any system wherein a single insurance company employee can make or break any collision business regardless of how many locations it operates! It certainly is a glaring indictment of the limitations and inequities of the current system that most insurers have crammed into place. These programs lack transparency, and the types of objectivity that might elevate them above reproach. This current smoking gun story could have many more sequels if all stakeholders in this industry do not do something, and do it quickly.

It might sound alarmist to some, or too little too late to others, but the direct repair programs as they are administered today have become fertile gardens for corruption and abuse – whether visible or hidden, proved or not! Some companies have implemented a variety of checks and balances, but they fall far short of adequate. Now, a few simple questions can throw suspicion and a shadow of guilt over everyone involved in direct repair programs no matter how innocent they are. Unfairly, it is a grand case of guilt by association!

ABUSE OF SELECTION

One of the prime areas of potential abuse is the selection of one shop versus another to be on a direct repair program in a system that lacks transparent rules. What is the basis for selection? What are the criteria and how does one actually become selected to be on the program? Is it a legitimate process? Is it legal from a consumer protection and fair trade practice viewpoint? While many shops on the existing programs are top-shelf and operate stellar businesses, those factors may not have been what got them on the DRP. There are certainly many cases where the best shops according to performance indicators, credit rating, years in business, tools, equipment, training, etc. are passed over for some business that does not compare. Why and what was the criteria used for selection?

When one evaluates existing relationships between insurers and repairers in any market, there are many questionable situations and dubious bedfellows. Objectively, no one could support why a shop is put on the insurer referral network while consumers are steered away from others? Are the circumstances above board? Can an area manager objectively show why one shop was selected and another passed over. Can anyone show the existence of transparent set of criteria that is fair and equal to all potential players? Insurers will point to their hidden or secret criteria for selection as the foundation of who is or is not on their referral list. They may even suggest it is a matter of compliance to key performance indicator (KPI). However, not all shops are allowed equal access and opportunity to participate. Why not? Even in State Farm’s recent rollout of their new Select Service, shops were picked based upon who was willing to sign the agreement – an agreement that may be potentially fatal to their business survival! But even then, not all shops were given the chance to compete for the referral account.

Of course, every insurer would say no. However, under a blind analysis there is little difference. Insurers gain a direct monetary benefit that is just as real in dollars and cents as Elaine’s new TV, or a Rolex watch or leather jacket that Gil might be sporting today! What is the difference? Perhaps it is only that an individual received the inurnment (gratuity) versus the corporation and the stockholders collectively! Isn’t agreeing to a concession that results in a lowering of costs to an insurer another form of pay off?

The exposure of these cases leads anyone to believe the questions has been altered from “who do I have to pay” to, “how much!” When one has to give a concession, isn’t that paying, too? In the old days, most shops gave some kind of gift, gratuity or incentive to an insurance agent, adjustor or someone in the system to win favor. Now, far fewer play in the game, but ultimately, the concessions amount to hundreds of thousands of dollars per year – far higher than the good ol’ days!

One might counter this argument that at least the concessions are above board, but they are not. There have been many who question whether corner cutting is a form of consumer fraud that jeopardizes vehicle safety. Other than Gieco’s direct repair program, few if any others have any kind of true performance incentives and rewards so what is a shop really paying for when they agree to concessions on other insurer DRP’s? They may or may not be above board. Regardless, these program may not make the grade legally, ethically, or morally.

To truly make the selection process beyond reproach, it must be transparent. The criteria must be objective, available for public scrutiny, and open to evaluation by all shops. There must be independent selection, evaluation, and an appeals process for being added, omitted, and suspended. Without these critical elements, all of the programs leave themselves open to suspicion and susceptible to fraud.

Another aspect to consider is that the DRP managers should not be able to be arbitrary about suspensions and who gets kicked off the program. This practice is at the foundation of another recent incident where a shop was being pressured, with the help of a DRP manager, to sell their business below value under threat of losing a major DRP program. While one case has become highly visible, how many have gone unreported? What gives anyone the right to lord over independently owned businesses and make decisions without clear and objective criteria and standards. Who reviews this and what is the appeals process?

As a result of the incident at Allstate, they overhauled their direct repair program. Now, no specific person has total responsibility for any one shop and they are rotated randomly. While those measures may help to avoid another kickback scheme in their program at one level, it does not elevate their program above scrutiny. Like all the rest, their criteria are not objective, open to all and based solely on standards and advanced performance issues.

From some perspectives, all of the programs boil down to cutting costs and the willingness to repair for less and comply to ridiculous requirements like arbitrary percentage use of non-OEM parts and caps on paint. Now, State Farm has pulled in the purchase of OE parts and the use of yet another system. Nearly all of the programs require the use of a certain estimating system, special CSI program or some other arbitrary requirement. Over the last several years, insurers aligned themselves with shop groups and networks, and allowed those organizations to use the promise of their referral work to recruit new members! All of the programs that follow any of these are nothing more or less than a way to funnel money back to the corporate pocket.

In the weeks following the breaking of this story, at least 75,000 people have read the article just from the hits on the website. Some have attempted to suggest that this is an isolated incident. A few others have even resorted to accusing me of being anti-insurer and having a hidden agenda. It is always convenient to shoot the messenger, but that will not make this potential crisis vanish. Many people outside of the collision and claims world may begin to ask questions as the LA Times and the other press outlets run with the story. As the California State Attorney General and the legislature consider this issue, consumers and policyholders may have questions, too. At that point, the industry had better have answers or everyone will once again be splashed with the mud from this dirty incident.

If insurers really want to fix this, they could start by making sure that every insurance company with a DRP should have a published, easy to find phone number that shops and others can call to report abuses. Make sure it is anonymous! Currently, the phone numbers are unlisted or do not exist. An abused shop has to ask their abuser for the correct phone number to register a complaint against them!

Secondly, all insurers should create a review board made up of industry professionals that will tell them the truth. They may even want to include a majority of advisers that have nothing to gain or lose from the answers and feedback they give. While insurers obviously use these DRP’s to reduce their costs, that objective does not have to be lost. The advisory group and consultants can look for other means to achieve the objective of reduced costs without having to use a system full of fraud and abuse. There are many new and improved methods that insurers are not considering because the current “good new boy” networks have allowed them to achieve financial gains while just turning a blind eye. Those days are hopefully over!

Thirdly, insurers should completely overhaul their DRP’s to be fair, based upon standards and a criteria that is transparent, objective and open to public scrutiny. The rule of thumb on this should be that the standards and criteria used should be able to be published in tomorrow’s paper and serve as a marketing benefit to all concerned and not an embarrassment! All insurers should adopt measures similar to Allstate- rotating area staff so that no one person has authority over any one shop. Insurers should also consider tying real benefits to performance, like GIECO has done. The basis is that if a discount is given, at least it is based upon a price for volume business approach. The compliance and concessions should be motivated by gains in efficiency and improved consumer treatment.

Most of all, the insurers should remove the DRP vendor selection and decision-making power away from a single individual toward a board of independent individuals. A board that can not have too close of a relationship or gain any inurnment /gratuity in any way shape or form. Lastly, state laws need to be strengthened to make the activities conducted by these nefarious individuals obviously illegal, and any violation must carry heavy penalties. The laws must have a definition of the behavior and hold responsible any party that aids in the violation, even if it is by malfeasance, nonfeasance, or misfeasance of their duties! If such a law now existed, nearly every insurance company executive, staff and management would be guilty for having allowed a system to exist that is obviously filled with inequities, graft, corruption and fraud! They would not instantly retort that a whistle-blower only has an axe to grind or a personal vendetta against the person they are reporting.

“And, that is all I have to say about that!” Forest Grump

‘cuse Me, Sir! Who Do I Need to Pay Off to Get On Your DRP? (revised)

Tue, 02 Oct 2007 22:43 GMT

by Scott Biggs

Even after 30 years of evolution, the only thing that has changed in the game of insurer bribes and body shop payoffs is apparently the price tag! One might think that with the invention of the DRP, all of the technology reporting, and the monitoring and measurement of key performance Indicators (KPIs), the good ole boy network would have been replaced with a legitimate system whereby shop earned their way onto a referral list. However, it would appear that the only thing that has really changed from past decades of a few unethical shop owners “greasing” some insurance guy is the price they have to pay for the referral work today!

Gil Palmer, a senior manager of Auto Club of Southern California and the principal in charge of their IRP, direct referral program was terminated following an investigation that could reach dozens or more shops in Southern California. Potentially implicated in the ongoing investigation are numerous shop owners, some with high profiles and numerous locations that dominate the southern California marketplace. Rumors allege that Palmer took payoffs in the form of consulting agreements through a sideline business he created. The rumors also suggest he received gifts in the form of cash, paint jobs on hot rod cars (you might see it on-line!), leather jackets, Rolex watches, lavish vacation accommodations, and much more. While official sources at Auto Club remain silent, the investigation continues today. Charges and lawsuits are pending and are expected to be filed within days and weeks.

In decades past, a shop might fix a car for an adjuster's family or even buy a round of golf. Perhaps it was the influence of the wild Christmas parties or a special favor a shop might give that won them consideration with the insurance guys on their local level. Big fun in the strip clubs was also a favorite way a shop owner might get close to an insurer. Whatever the method, a few hundred bucks invested in the right way might generate good relations with the right people at one insurance company or another. The clique and close-knit bonds that gave some shops a preferred position with insurers became known as “the good ole boy network!” The decade has changed, but as the stories emerge surrounding the Gil Palmer case, the methodology seems to be alive and well, but far more expensive – perhaps involving millions.

It would seem that payoffs and scams riddle the existing DRP programs as much today as in the old days, but the cost is far higher, now! Everyone knows, there have become more and more “pay to play requirements,” to participate on insurance referral programs including products and services the shops must buy, even software and CSI they must use, but in this story the money allegedly went right into the insurance managers pocket! While there are many stories around the country reported daily about a local area manager, this one seem to revolve around a insurance company employee that was high up the corporate ladder and wielded a great deal of power and influence.

This story could be right out of a movie following a plot where shop owners must pay the insurance manager or their shop is off the program, and his buddy's will be on instead!!! Or maybe it would follow the other plot line where a shop owner must pay off the insurance managers and in turn they are awarded the insurance DRP account! According to the most recent allegations and many behind the scene rumors, getting a DRP might cost a shop hundreds of thousands of dollars paid to fictitious consulting companies, free cars, and special paint jobs on the side, or even hidden partnerships, direct cash pay offs, Rolex watches, and much, much more. The scam in this most recent saga may even end up implicating employees of other insurance companies that are suspected of driving free cars and receiving big screen TVs.

For some time, complaints about abuses by Gil Palmer have been reported, but no one took it further than whining privately. Shop owners cried, but quietly hoping to avoid further abuse or retribution by Gil or others in the insurance community. Gil has been accused of arbitrarily turning shops on and off the Auto Club's IRP program according to his demands. Alleged abuses even went so far to include attempts to drive out shop owners, and even drive down the value of target shops that some of the “insider shop operators” wanted to buy. Key characters involved in the investigation even bragged that they would be exclusive providers in the territory and drive out all others. For years, multiple shop operators in the region (MSO) have been alleged to unfairly leverage their insurer relationships and used their special relationship to aggressively enter markets and force shops out of business or into compromising positions. Even the measurement of KPIs may have been abused and distorted since bonuses and participation is predicated on this. At this point, who knows otherwise?

A shop owner and manager at the center of the investigation and the catalyst that brought the whole issue to a head, bragged recently that all he had to do is snap his finger and he could get any shop on or off the DRP because he was that well connected with key insurance management! Until the abuse went too far for one shop owner, the complaints and corruption continued to go unchecked and unheard. Finally, a shop owner took matters into his own hands when he alleged his manager turned on him and threatended to use his tight relationship with Gil Palmer and the “Club” to get them kicked off! Allegedly, irregularities in the books, random comments, and extreme expenses tipped off the business owner who spent months preparing a case against the contracted shop manager. They feared the managers reaction and being turn off the DRP work-flow from the Auto Club's IRP. Unknown to the rouge shop manager, the owner prepared his case even bringing in legal counsel four months before action was taken. Finally he sprung the trap and suspended the rouge manager on September 10th.

True to their threat, within hours following his termination, Gil Palmer and his team at the club struck and turned off the body shop from any further referrals. Safeco did just hours later than that. What they didn't know was that the owner had gathered evidence, and got investigative officials involved. They exposed the scam and another Auto Club employee reported the situation up the ladder. An investigation started within days, and less than 20 days later, internal investigations at Auto Club took decisive action. Gil Palmer was escorted out of the building! After years of alleged abuse, finally something was done, but not before other shops were afflicted, too.

Allegedly, Palmer and the shop manager, along with a multi-shop owner were attempting to use their leverage to force another shop in the region to sell out and sell for less or else! According to the accusation, Palmer with help from his staff shut off the shop that was targeted for purchase by the shop manager and his partners. The shop instantly lost hundreds of thousands of dollars in DRP work each month driving down the shop's value. The shop nearly went out of business in their attempts at forcing the shop to sell out to them!

While no one has been arrested yet and no official charges filed, Palmer and numerous others are all now facing serious consequences for their actions – if the rumors and allegation are true. And, if the Department of Insurance actually takes action. Law enforcement authorities have been reluctant to take action until a lawsuit is filed and the internal investigation is complete. There are also now questions of jurisdiction and which and what laws have been broken. The internal investigation lacks the teeth of law enforcement, but law enforcement seems to have had little motivation to take action up to this point. Pressure from all sides is forcing action and not allowing the issue to be swept under the rug.

But the story is far from over and so too is the investigation into wrong doing by dozens of shops, several insurance companies, and numerous staff in the area. Within weeks charges and lawsuits are expected to be filed detailing the charges and implicating many on both the shop and insurer side. Between now and then, rumors will fly and many allegations will be levied at all insurers, DRP repair businesses and nearly everyone and everything else – rightfully or wrongfully!

When asked about the story, an Auto Club Officer, objected to any inquiry saying, “You are crossing the line! You are getting dangerously close to an area you don't want to go. What business is this of yours? You had better watch yourself!” He apparently felt the threatening tactics the “Club” may have used on shops should apply to free press as well. Unfortunately for him, he would not be able to remove this news from his all powerful IRP program. He also failed to realize that the actions of his IRP staff have had enormous consequences and negative impact on shops throughout the regions. They have ruined lives, destroyed businesses and cost consumers millions of dollars. While most shops and the staff at Auto Club are innocent, the wide brush of rumor alone seems to paint everyone with suspicion.

Unfortunately, this story only isolates the actions of one high-level manager from one insurance company, but reports have run rampant about abuse at numerous other insurance companies for years. There could be dozens or more implicated in this regional DRP scam. And, there could be even hundreds of shops and insurance personnel implicated if this epidemic of abuse exists and is exposed in other insurance company referral programs across the country. This could easily evolve into class action lawsuits and hundreds of civil actions.

The most ironic part of the larger story is that some insurers have been pushing shops to pass background checks while apparently some insurance company staff members and management are able to evade detection for theft, fraud, and other legal violations. It seems to be a matter of the wrong kind of checks being run. Perhaps before any more checks are written by shops that want to be on an insurers direct repair program, the insurers should run background checks on all of their own staff and management! Unlike legal rebates or when a shop pays a dealer for their referral, it is illegal for a shop to pay an insurer and an insurer to accept any form of payment.

The worst part of this story is that this type of insurance corruption and fraud could be rampant throughout the entire DRP system in every part of the country and with nearly all of the major insurance companies. But who really knows? Regardless of the potential pervasive nature of these violations and the overwhelming number of complaints, there is never any official acknowledgement of wrong-doing by the home offices and senior management seems to turn a blind eye. Adding insult to injury, complaints have fallen on def ears and insurance companies have ignored the need to establish an anonymous grievance and abuse reporting system for years. Perhaps they are all complicit by their inaction. Perhaps now, they will do something!

The potential upside of this story, no matter how it turns out in the end, is that perhaps this incident and all of its implications will serve as a wake-up call to all insurers about the potential abuse of their DRPs by their unregulated employees and a current system that is ripe for extortion and distortion. It has been said, power corrupts, and absolute power absolutely corrupts! Such seems to be the case where mid-level managers without any controls, checks and balances are in charge of allocating nearly $14 billion through DRPs. Shops can be added, subtracted, knocked off, and suspended for any interpretation of a violation – real or made up! Shops have no recourse, but the cost can be devastating to the shop and potentially cost them their entire business! And, it should be noted that there is not a safe and easy process for shops to report abuses further creating a fertile garden of opportunity for corruption.

There are other ramifications, too. The business practices of forcing or requiring various products or particular services by an insurance company may be brought into question as well. What is the basis for the requirements and did anyone pay off an insurer to get their product or service forced into the shops participating in an insurer's DRP? Even without payment, it is possible that there are violations of unfair trade practices, Robinson-Patman, RICO, and other laws. As with all cases of lying, cheating and stealing, now everyone and everything falls under suspicion!

Regardless of the specific outcome, and even if time proves Gil Palmer and all of the cast of characters in this story innocent, the potential pandemic proportion of this problem will surely raise many questions about all of the insurer's business practices by regulatory agencies and Attorney Generals. Undoubtedly it will serve as the grounds for numerous lawsuits. Perhaps with the far-reaching implications of this case, insurers of all sizes across the country will be forced to review their hiring, review and management practices. Perhaps it may even force significant reform in the direct repair program operations.

At this point, all insurers are guilty until they prove themselves innocent since all of the programs are almost begging for abuse and nurture corruption and fraud. For the thousands of shops that have not violated any laws nor stepped over any ethical lines, unfairly, they too will be painted with the brush of suspicion. How do they keep their good name clear and their reputation intact when the insurance company for which they do direct repair work is under suspicion? Are there more NBA referees guilty just because one is discovered taking bribes for years? It may not be right, but it is the ramifications of some people's actions and everyone's inaction. The potential implications are far reaching and nearly mind-boggling if one considers just how far this could go. Could this be a tipping point? If nothing else, all of this should certainly make for interesting conversations at NACE and other meetings this fall and winter! Who will be the next to be discovered in the wrong bed or with their hand in the till?