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 dissention, 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
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. 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 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! 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 whistleblower 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, nonfeasance, 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 ANNONOMOUSLY: 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.
Insurers obviously use DRP’s to reduce their costs and keep their loss severity in check. Insurers can point out many abuses by crooked shops, too in support of there business practices. They can also invoke their service to their customer. Regardless, reforming the DRPs does not have to be contrary to these other important goals. There are many improved methods that insurers have not considered until now because the current questionable practices have allowed them to achieve financial gains, while just turning a blind eye to the growing crisis on the horizon. Those days are hopefully over!