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Insurers are clearly benefiting from the use of preferred repair shops: They receive discounts on parts and labor and can dictate which parts and repair procedures are used. As a result, insurers can minimize the cost of the repair, their expenses, and, as the insurance industry is quick to point out, your auto insurance costs. But is insurer zeal to save money fueling illegal practices that undermine your choice of repair facility?
A national trend could be emerging: Independent body shop owners are filing "business interference" cases against insurance companies. In one, a startling judgment was passed in October 1999, when an Illinois jury awarded American Auto Body, a Springfield, Ill.-based independent repairer, $24 million in punitive damages because State Farm illegally interfered with its operations by steering customers away from the shop.
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The choice is yours
Most states have laws on the books that limit the ability of an insurer or other institution from recommending or directing consumers to specific body shops.
See your state's steering law:
"You always have the option of taking your vehicle to the repair facility of your choice," says a Travelers brochure explaining its Umbrella Auto Service Program.
"We'll gladly work with the repair shop of your choice to determine the amount of damage to your vehicle," is part of Allstate's PRO shop brochure.
State Farm says in its claims manual, "Under no circumstances are our explanations [of the Service First program] intended to interfere with or influence the customer's right to freely select a repair facility."
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American Auto Body alleged that, in 1992, State Farm slandered the shop's reputation in front of customers and took away American Auto Body's business. Six consumers, all potential American Auto Body customers, were told by State Farm personnel that the insurer could not guarantee the repair at American Auto Body and that State Farm had experienced "difficulties" dealing with American Auto Body, according to the complaint.
After the jury verdict, State Farm settled with American Auto Body. The terms of the settlement are sealed.
State Farm's official policy is that it does not "steer" customers to one body shop or another. In fact, it is illegal to steer customers to certain body shops in many states (see sidebar).
Rocco Avellini, owner of Rocco's Collision Center in Hawaiian Gardens, Calif., has also been on the bad end of steering. Avellini was a preferred repair shop for Farmers for six years and was on the insurer's Circle of Dependability (COD) list from September 1996 to September 1998. Since he was "kicked off their COD list," he says he has seen the stream of cars into his shop dry up and an increase in the number of derogatory letters from Farmers to his customers about his repairs.
One Farmers senior claims representative wrote to an Avellini customer on March 25, 1999, "Our customers have experienced delays in the past [at Rocco's] and Farmers does not guarantee their repairs." The claims representative then recommended four other repair facilities to which the customer could take his car.
Another Farmers employee, this time an auto property claims supervisor, told one of Avellini's customers, "Rocco's is very expensive and it is very difficult to get along with Rocco's." That same supervisor also allegedly told the customer, "Farmers would go broke if they paid bills like Rocco's." The supervisor did not deny that he made the statements, but in a memo dated Nov. 4, 1999, to Avellini, the supervisor calls the reported allegations "inaccurate."
Critics of the preferred repair shops lists agree that steering is a widespread problem and that the big auto insurers aren't the only ones being accused of steering. A case filed in Los Angeles Superior Court in 1998 alleged that Clarendon National Insurance Co. forced one of its policyholders to use a repairer located 60 miles from his home. Clarendon settled the case in July 1999 for an undisclosed amount.
But what goes around comes around. Repairers also rake insurers across the coals when it comes to billing and repairs and, ultimately, the consumer suffers.
"Is body shop fraud out there?" asks Gerald Manuel, second vice president for claim performance auto collision damage at Travelers. "Yes, we run into it." For example, a body shop might bill for a new door but Travelers will find that a used door was put on the policyholder's vehicle.
"Typically the response you get from the body shop is, 'Hey, I was going to call you.'" Manuel says that normally, if Travelers detects fraud, it will demand compensation from the body shop, get the car repaired again, and might take the shop off the preferred list if the shop refuses to compensate the consumer and Travelers. That doesn't happen very often, according to Manuel.
| State Farm recognizes that body shops are padding their hours. |
State Farm recognizes that body shops are padding their hours or charging for repairs that were not done but, "We don't call it fraud," says Dave Hurst, a spokesperson for State Farm. "It's more like claim inflation." Hurst says it happens more often than "real fraud" — like the practice of a body shop "enhancing" damages on a car.
Hurst explains that sometimes a body shop will tow the car to its facility and take a hammer or wrench or other blunt instrument and wreck the damaged car a little bit more. "They'll say it was a towing accident," he says. Hurst says that this type of fraud is "not uncommon," and normally doesn't take place within State Farm's preferred body shops.
Farmers Insurance has acknowledged auto body shop fraud in a big way: It filed suit in September 1999 against 14 body shops and one former Farmers employee in California for similar practices. Farmers found that "various auto body shops were deliberately submitting fraudulent property damage reports, repair estimates, and billings to Farmers . . . [with] help from the inside." A Farmers employee helped the body shops process more than 290 fraudulent claims.
Shan Haider, a Farmers special investigative unit manager in Los Angeles, says that all insurance companies are acutely aware of the body shop fraud problem, but actions don't always match the awareness. "The auto body industry needs to be cleaned up a lot," says Haider.
"Too much of our insurance premiums go to pay fraudulent claims," says Jerry Carnahan, an executive for Farmers in California. Property/casualty insurance fraud costs insurers and policyholders an estimated $20 billion per year, according to the National Insurance Crime Bureau. That's between $100 and $300 per policyholder per year. Continue to page 3
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