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Letter to the Editor

The Industry’s Own Pro-Choice Movement

Shops this year have seen a flurry of anti-steering efforts around the country.

INSIGHT received an email recently in which a shop owner made it clear what topic he wanted to see continued coverage of within the pages of this magazine.

“There is no more important issue facing the collision repair industry than steering,” the shop owner wrote. “We need to know what’s going on around the country to address this issue.”

Indeed, the topic has been discussed at many association and industry events in the past year. And although parts-related legislation has also been on the table, steering has probably been the single most common focus of industry-related state legislation introduced in recent months. There has been some recent movement in lawsuits related to steering as well.

And so INSIGHT this month offers this wrap-up and analysis of the latest episode in the long-simmering battle over whether and how insurers are allowed to influence motorists’ choices of shops.

States eye legislation

Most of the anti-steering bills introduced around the country this year failed to gain much legislative traction.

After about 70 representatives of the collision repair industry attended a legislative day at the Missouri Capitol this spring, for example, a hearing date was set for SB 775, a bill that would have required an insurer to halt “any efforts to re-direct, refer or otherwise influence the vehicle owner in the choice of repair facility… once the vehicle owner has stated they have chosen a repair facility.”

Backers of the bill said that the hearing provided an opportunity to educate legislators on the issue, but even the Senator who sponsored the bill acknowledged that, “the chairman of that committee tends to be more friendly to the insurance industry than to the collision industry.”

Surprisingly, however, the committee voted in favor of the bill in May, but the vote came just a day before the end of the legislative session and it moved no further.

A bill in Kansas (HB 2653) would prohibit an insurer from using “a deceptive referral practice whereby the consumer is misled into thinking that a particular repair shop, facility, vendor, or supplier must be used.” The bill, however, did not move out of committee.

Legislation that would have prohibited insurers in Washington state from recommending a source for glass repair or replacement if an insured indicated he had chosen a facility did not make it out of committee after insurers, calling it “a gag order,” opposed it at a Senate hearing.

A bill introduced in Alabama that would have prohibited insurers from recommending or suggesting that repairs be made by a particular shop unless a shop recommendation were specifically requested did not move forward in the legislative process.

What California’s “anti-steering bill” (SB 1167) requires has changed on almost a weekly basis. As introduced, it required insurers to determine if a claimant had selected a shop prior to any discussion of repairs, and prohibited the insurer from discussing its DRP if the claimant had selected a shop.

Insurers launched an all-out attack on the bill. California-based Mercury Insurance sent a letter to shops in March urging them to contact state lawmakers to oppose SB 1167.

“We believe this bill represents a substantial threat to the way in which we currently do business,” the insurer wrote in the unsigned letter to shops one week ahead of a hearing on the bill.

Three insurance associations jointly created a website (www.caautobodychoice.com) to oppose the bill. They published an opinion piece that said, “Claimants who have chosen a specific auto body shop without adequate information would be denied vital information about shops pre-qualified by insurance companies.”

But even prior to the April hearing, the bill was amended, stripping out the prohibition on an insurer discussing a shop or program once the vehicle owner has chosen a shop. The version of the bill eventually approved by the full Senate calls only for formation of a task force under the insurance commissioner to look into issues arising from changes to existing California anti-steering laws and to report back to the legislature by the end of 2009.

A committee in the other chamber of the California legislature, the Assembly, amended the bill yet again in June. The Senate version called for the task force to include insurers and consumer advocates; the Assembly version added that collision repair industry representatives also will be on the task force.

The only state INSIGHT has found that has actually passed anti-steering legislation this year is Connecticut, where Attorney General Richard Blumenthal has been a vocal supporter of strengthening limits on insurer referrals.

Blumenthal endorsed legislation that said an insurer may not “recommend, request, or require” that a specific shop be used. The bill also would have required that insurer estimates state that insurers “may not interfere with the consumer’s choice of repairer.” The bill specifically prohibited insurers from waiving deductibles or offering warranties if the consumer used an insurer-recommended shop, and would have prohibited insurers from suggesting that use of any shop would result in delays, added costs, or lack of a warranty.

“The consumer may be under the impression that he or she has no real choice. We want to make clear: Your car, your choice,” Blumenthal said in a television news piece on the topic.

It was a second, less sweeping piece of legislation that Connecticut legislators eventually passed, however. Under that new law, all estimates and insurance cards must include a statement that the customer has “the right to choose the licensed repair shop” where damage will be repaired. Shops must post a sign with a similar notice. Perhaps most significantly, no vehicle may be repaired under a direct repair program unless the vehicle owner signs a written acknowledgement stating, “I am aware of my right to choose the licensed repair shop where the damage to the motor vehicle will be repaired.”

Connecticut lawsuit moves forward

But the legislation is only one part of a several-pronged approach the Auto Body Association of Connecticut (ABAC). A number of shops in the state are taking other steps to combat steering.

The Connecticut Supreme Court in late May affirmed a trial court’s 2006 order granting the association and a group of body shops class action status in a suit they filed in 2003 against The Hartford. The class in the lawsuit could include hundreds of independent shops across the state.

The Hartford had challenged whether the shops, who allege that the insurer has engaged in unfair trade practices by steering consumers to its DRP shops and improperly establishing artificially low reimbursement rates, should be granted class action status. A spokesman for The Hartford said the company was disappointed with the ruling but would not appeal and was “eager to move ahead” and “confident of prevailing on the merits.”

The ABAC, which said a trial in the class action suit is tentatively scheduled for December, filed a similar suit against Progressive Insurance last year.

One of the challenges in bringing such suits is finding an acceptable way to calculate the damages or loss to a shop caused by steering of insureds to other shops. In its May ruling, the Connecticut Supreme Court said the methodology presented by the shop plaintiffs demonstrated that “generalized evidence,” rather than that specific to one shop, may be used to prove “ascertainable loss.”

The plaintiffs had presented an analysis by economic consultant Frederic Jennings Jr. that showed the lowest percentage of insureds referred successfully by a Hartford claims representative in a given period was 19 percent, while the average was 47 percent.

“If 19 percent is used as the benchmark for the number of insureds who would use DRP shops in the absence of steering, no more than 19/47ths, or approximately 40 percent, of all referrals to preferred shops would have gone to those shops without steering,” the court said in its summary of Jennings’ affidavit.

That would mean the insurer successfully steered 60 percent of those who would have otherwise gone to non-DRP shops, according to Jennings. In 2003, he said, that meant about 2,200 jobs in Connecticut were diverted from non-DRP shops. Multiplying that number by the average repair cost per claim determines the revenues lost by non-DRP shops, Jennings stated.

The last step in the equation, Jennings wrote in his analysis, is if the average net profit margin of shops is 5 percent, the profits lost by the non-DRP shops to steering equates to 5 percent of the total revenue from those 2,200 jobs.

The end-game?

To be sure, not all repairers are of a like mind in wanting to see legislative or courtroom efforts to halt steering be successful. Many of the largest collision repair businesses – whether single- or multi-location or consolidators – have built their business models around insurer referrals.

But too often the discussion is framed as a “DRP shop vs. non-DRP shop” conflict. The relatively small minority of shops not involved in any DRPs are sometimes among the most vocal supporters of efforts to halt steering. But they often find allies among those shops who benefit from referrals they receive from the insurers in whose DRPs they participate, but who also recognize their businesses may be equally harmed by the steering of work away from them by other insurers.

“Give me a level playing field and I will keep my customers and attract the new business I need,” one shop owner in the Southeast told INSIGHT. “I accept some insurer steering to my shop because if I didn’t, those customers would be steered elsewhere. But I’m all for ending the steering across the board.”

Some industry observers view that as a pipe dream, believing that referral programs are here to stay and that even stemming some of the worst abuses and unethical steering practices is not likely to happen. But lawsuits like that in Connecticut and the legislative activity in many states are a good indication that anti-steering proponents are not giving up any time soon.   o

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