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Managed care is not limited to the health care
industry. Auto insurers have been practicing a form of managed care for some time by compiling lists of
"preferred" body shops to recommend to policyholders after accidents. For example, Allstate
Insurance Co. has its list of "Priority Repair Option" (PRO) shops, Farmers Insurance Co. has
the "Circle of Dependability" (COD) list, Nationwide Mutual Insurance Co. gives its preferred
repairers a "Blue Ribbon," State Farm Mutual Automobile Insurance Co. has "Service
First" shops, and Travelers Insurance Co. uses body shops in its "Umbrella Auto Repair Service
Program."
These auto insurers, among many others, utilize
"preferred" auto body shops in order to expedite the repair, cut costs, and ensure the repair
is high-quality. Preferred shops can make your life much easier by removing the time-consuming ordeal of
finding a reputable body shop. Your overall costs, say insurers, are kept to a minimum, thanks, in part,
to preferred repair shops. Insurers get discounts on parts and labor, thus keeping overall auto
insurance costs low.
Many insure.com readers have wondered how auto
body repair shops get on an insurer's preferred-network list. Regardless of which insurer the body shop
deals with, the shop will have to show that its facility can handle the repair of any vehicle the
insurance company sends its way. The repairer will also have to show that it has a solid reputation for
quality repairs. If the body shop has complaints filed against it, the insurer is not likely to add it
to the preferred list.
State Farm is the largest auto insurer that uses
a list of criteria with which it selects its preferred auto body shops. Included are pricing
requirements, such as agreeing to provide the insurance company discounts on labor rates and new and
recycled parts. The prevailing rates are based on those of repairers that State Farm uses as its
preferred shops.
"State Farm sets the 'prevailing rate' with
its 'Service First' criteria," says Rocco Avellini, owner of Rocco's Collision Center in Hawaiian
Gardens, Calif. "Every other insurer follows suit by saying, 'State Farm's rate is the prevailing
rate within the market.'" Depending on where you live, the "prevailing labor rate" is
between $25 and $35 per hour, which is about half of what it takes to turn a profit, Avellini claims.
Allstate's expectations are similar. According
to Bob Amy, owner of Auto Body Specialists in Portland, Ore., and founder of the Oregon Autobody
Craftsmen Association, Allstate requires its preferred shops to: adhere to the prevailing labor rate
($38), discount parts by 10 percent, pay for all towing fees, and pay for all storage of cars that are
total losses. Amy also says Allstate requires body shops to kick in for some of the policyholder's
car-rental bill.
According to Avellini, for body shops in his
area to get on Mercury Insurance Co.'s preferred list the shop has to: agree to give the insurer 10
percent off on all parts, agree to a $26 per hour labor rate, pay the first $100 of towing costs, and
pay for the first 10 days of rental-car cost.
Avellini doesn't fault the insurance companies
for trying to make money. "That's the American way," he says. "The insurers' job is to
pay out less than they bring in."
"The referral process has kept labor rates
way down," says Scott Tabak, owner of Frank's Auto Body in Taunton, Mass. "It's an artifical
way of keeping costs down for insurers." Tabak says he is paid between $30 and $32 an hour for his
work, depending on the insurer. "I should be getting at least $48 to $55 an hour for the work I
do," he says.
Despite that, "It's been good for me,"
acknowledges Tabak. "If you're not on a referral list, you're out of the loop here," he says.
Tabak repairs between 20 and 25 cars per month and participates in four insurer referral programs: Amica
Mutual Insurance Co., Arbella Insurance Co., Commerce Insurance Co., and Plymouth Rock Insurance Co.
Since his shop became a referral shop back in 1996, his business has doubled.
Staying on the preferred list
How do body shops absorb the discount on parts and
labor? "What we tend to see is procedures that were not performed are put on the bill," says
Mark Cobb, president of Cobb's Collision Center in Windham, Maine. Or the body shop will charge for more
hours than it actually worked, which one Southern California auto body shop owner called "funny
times" in his testimony at an October 1999 California Senate committee hearing on collision-repair
services and insurance.
Avellini, who also testified at that hearing,
explains: "Funny times is when a body shop deliberately charges double the hours to make up for the
reduced labor rate."
"The labor rate in southern California is
about $30 per hour and in northern California it's more than $50 per hour," says Richard Steffen,
staff director for California's senate insurance committee. "The insurers insist, however, that the
cost of a repair is the same in both areas. The chair [Sen. Jackie Speier] asked, 'How can it be the
same with the labor rate discrepancy?' The body shop owners didn't say they were padding their
hours, but what else can they be doing?"
Auto insurers routinely inspect their preferred
body shops on a monthly basis. State Farm inspectors, for example, are told to look for a shop's failure
to use "quality replacement parts and quality recycled parts where commonly available,"
including doors, wheels, and quarter panels; a repairer's use of clear-coat finishing "where not
needed"; "suspension alignments where not appropriate"; and "no betterment [of the
car part] where appropriate."
Betterment is when the insurance company
replaces a used product with a new product, but does not cover the entire cost of the replacement
because the policyholder got use out of the original.
Failure to use quality recycled parts and
failure to use betterment are "shortfalls" of competitive repair estimates, according to State
Farm's claims manual. "Failure to write competitive estimates should be grounds for removal from
the [Service First] program," according to State Farm's claims manual.
A gift from me to you
There's constant pressure on preferred body shops
to maintain their relationships with insurers: If they fall off the list or out of favor, the steady
stream of business can slow to a drip. As a result, body shops have long distributed gifts to insurance
company claims officers and adjusters in order to stay in the preferred loop. Is this a system of
kickbacks that hurts consumers or is it just good business?
Body shop owner Cobb says, "Is it blackmail
or buying out the competition? The attitude among preferred shops is, 'If I'm not doing it, the guy next
to me is.'" Cobb says that preferred shops in his area find it imperative during holiday time to
take gifts to the insurance company personnel. And it's the same across the country.
These offerings range from the innocuous
chocolates, pens, and flowers to the outrageous. "A line of limos went to one insurance
adjuster's office and took the staff from Hawaiian Gardens, Calif., to Las Vegas," says
Avellini.
"The preferred shop [paid for] a bunch of rooms for the adjuster's staff." Cash, toys, and
free repairs or installations for insurance employees are also among the gratuities that preferred shops
proffer.
"There's a payola system," confirms
body shop owner Amy. "The implication is that the preferred shop will stop getting the steady
stream of cars if the gifts stop."
Gerald Manuel, second vice president for claim
performance auto collision damage at Travelers and former auto-damage appraiser with the company,
recounts how one body shop tried to give him a free ticket to an event: "I left my clipboard
outside the body shop and went into the shop. When I came out, the free ticket was on my
clipboard." Manuel says that Travelers' gratuity policy is zero tolerance: "Under no
circumstances do you take anything from anybody."
State Farm, too, is aware that gifts may be
coming from preferred shops and landing in insurance company employees' pockets. In a Dec. 9, 1999, memo
to State Farm business associates, Tom O'Mahoney, vice president of operations for State Farm's South
Coast office in Costa Mesa, Calif., writes, "In the past, you may have expressed your appreciation
to our agents and employees in the form of gifts, etc. We simply wish to re-emphasize that our corporate
policy opposes the acceptance of any gifts, entertainment, favors, or gratuities."
Moreover, Amy and Cobb assert that not only are
gifts a conflict of interest, but also they shrink choices for consumers. "Preferred repair shops
have put themselves in a position of getting referral work in exchange for gifts and taking the choice
of consumers away," says Amy.
"What happens when a policyholder calls in
a claim? He or she will get a biased adjuster and a biased claims officer" because of gifts, says
Cobb. "Body shops have no right to interfere in the contract between a policyholder and the
insurer."
And O'Mahoney of State Farm sums it up this way:
"These practices may be viewed as possible conflicts of interest or may inflate costs and the
premiums ultimately paid by our policyholders."
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