Senate Bill 617 is good for consumers

Testifying at the Oregon State Senate Hearing

by Anne Koppel Conway

SALEM, OR—At a recent Oregon Senate Consumer Protection Committee hearing auto body shop owners, insurance representatives, lobbyists, a tech and a dissatisfied customer gave pro and con testimony as to whether Senate Bill 617 should make it out of committee and onto the Senate floor for a full vote. The hearing was chaired by Oregon State Senator Suzanne Bonamici (D).

 

Everyone at the microphone gave an opinion . . . except Darrell Fuller, representing Northwest Automotive Trades Association (NATA), who said, “I’m firmly in favor of whatever happens.” Members of NATA come down on both sides of the issue, he said. So he is opting for neutrality.

 

Some people spoke to the Collision Standard before and after the hearing.

 

SB 617, sponsored by Oregonians for Safe Auto Repair (OSAR), is an anti-collusion bill that, if passed, would prohibit insurers from entering into direct referral contracts with body shops – eliminating DRPs (Direct Referral Programs) in Oregon. It would also prevent insurers from having any type of office or permanent presence within 100 feet of the facility where the consumer's vehicle is being repaired. In addition both insurers and other third parties that are financially responsible for paying for repairs to a consumer's vehicle will not be able to directly influence or suggest how the repair shop repairs a vehicle, including the cost of repairs.

 

Ron Reichen, owner of Precision Body & Paint and representing Oregon Collision Repair Specialists, said, “There are many good insurance carriers, but consumers need protection from rogue insurance carriers who partner with unscrupulous, substandard repairers through backroom contracts. These repairers see the insurers as their clients, as opposed to the owner of the automobile being their client.”

 

In the 1970s insurers entered into secret deals with pre-screened repairers to get reductions in repair costs. These insurance contracts created Direct Referral Programs (DRPs) guaranteeing that insurers would get reduced labor rates. These contracts are “motivated by profits.” The value and safety of consumers’ automobiles are being compromised.

 

We’re here to address those insurance carriers that aren’t following the law and are not maintaining the standards of the industry.

 

Certain repair procedures like air bag timing are denied by some insurers. Not allowing pertinent repairs are unsafe repair practices, which not only endangers customers but could also jeopardize their vehicles’ warranties.

 

The supervision of Senate Bill 617 would fall under the Unfair Trade Practices Act administered by the Oregon Department of Justice (DoJ). The DoJ would be able to mandate proper controls, he said.

 

Oregon State Senator Larry George (R) was concerned that if insurance companies were not in the picture as watch dogs over costs, consumers would get gouged, that “shops would up-charge.”

 

Reichen, a 37-year veteran in the collision repair industry, responded, “There’s not much chance that repair shops would charge more” if DRPs were no longer permitted in Oregon. The free-enterprise system is very much alive and well.” It puts checks on gouging. “The market place is self-policing.”

 

Darryl Burkhardt, owner of Custom Touch Collision Care, serving the community in Gresham, Oregon, for 26 years said, “In respect to controlling costs, there are four database companies that give the amount of time it takes – and the corresponding rate for a geographical area – to do a particular repair. So the difference in rates from one body shop to another should not vary more than $20-$30. No one just arbitrarily sets rates.”

 

The shops that have contracts with insurers look at the repairs totally differently than shops that don’t. DRP shops “no longer see the repair from a customer standpoint but from the standpoint of the guidelines they have to meet” through insurance companies’ repair programs. “So it changes the DRP shop’s process completely. I oppose contracts that hurt consumers,” Burkhardt said.

 

Shawn Miller, who is with Liberty Northwest and employed as an insurance lobbyist for the property/casualty industry in Oregon, spoke in opposition to 617. He first wanted to talk about 523, the anti-steering bill that became Oregon law in 2007, saying that this law was adequate to protect Oregonians and no other was necessary. He said 523 enabled the insured to choose the shop of their choice and the insurer could not require the insured to go to any particular shop. So, under 523, the insurer educates the insured on what their options are. “Insurers may not limit payment for repairs to return the vehicle to a pre-loss condition relative to safety, function and appearance,” he quoted from the law.

 

Leif Hansen, chairman of OSAR and owner of Leif’s Auto Collision Centers, has been in the business 35 years.

 

In response to Shawn Millers comments about 523, Hansen said, “The problem with 523 is:

1. The insurance companies don’t follow the law and the insurance commissioner won’t enforce it.” Without the threat of enforcement consumers are inadequately protected in the marketplace from unfair treatment by insurers.
2. There’s a loop-hole in 523. Insurance companies operate with the full knowledge that they can at any time, deny legitimate elements of any repair—because current Oregon law does not adequately address consumers’ rights.

Hansen is “a certified technician who has worked from the ground up.” His business – not a DRP – includes seven shops with 68 employees doing about 5,000 repair jobs a year.

 

Randy Dagel, owner of Lents Body Shop and secretary of the Oregon Collision Repair Specialists said, “Some insurance adjustors try to unsafely dictate what goes into a repair.” One adjustor told Dagel, “‘Don’t put that part on that car.’” Dagel chose not to do business with that insurer anymore. “I stood up for the consumer, because that’s what’s legally right.” When Dagel stopped doing business with that company, his business “plummeted,” he said.

 

He wanted the senators to know, “I am not anti-insurance. State Farm is at the top of the list of good companies.”

 

Dagel has been in business for 40 years.

 

Shawn Miller: “Our concern for this particular bill [617] is that it is far overreaching. We believe that passage will lead to less choice, higher costs for the consumer and puts quality, competition and consumer convenience at risk.”

 

According to JD Powers and Associates, Miller said, customers are happier when they take their vehicles to DRP facilities than when they take them to a body shop without a recommendation. He reasoned, “That’s because insurers insist on fair pricing and quality repairs of their DRP shops, which are guaranteed by the insurer for as long as the claimant owns the vehicle.

 

Hansen: The auto industry like any other industry is responsible for its own customer service. I’m almost ashamed of body shops that say ‘I need insurance companies to make my customers happy.’ I need to take care of my customer service. That’s what I do as a company.

 

Shawn Miller: “SB 617 threatens the competition and the quality of auto repair.”

 

Hansen: “Actually the contracts between insurers and their DRP shops threaten competition and the quality of repair. SB 617 provides for no contracts between shops and insurers for a reason.”

 

The contracts enable insurers “to squeeze certain shops to do less than quality work. I am known in the Northwest as a very large re-repairer. We’ve seen thousands of these poorly repaired vehicles that have come in from other shops.” Dozens of these jobs have gotten so big that insurance companies have had to buy back the vehicles and mark them off as totaled, because “the initial repairs were so poor it could not be repaired correctly the second time.”

 

Like “many of my colleagues have said, this sort of business action is not practiced by all insurance companies. There are good insurance companies out there. State Farm is at the pinnacle right now of doing the right thing at all times. They are the standard in the industry. Auto body shops have given State Farm an ‘A’ rating.

 

“Whereas insurers such as Progressive, GEICO, Safeco were given a ‘D’ rating because of the predatory practices they impose on the shops in their programs.” Insurance companies with inexperienced adjustors shouldn’t be able to come into a body shop and dictate to the experts who have the training on the methods of properly repairing vehicles how a repair should be done.

 

“Two State Farm reps are in my shop 8 hours a day working on 10-15 claims a day. They never dictate to us on how to repair a vehicle. If I told them that instead of charging the going rate of $50 an hour, I was going to charge $100 an hour, they wouldn’t go for it. They do not oppose the way vehicles are repaired in my shops or my costs. But at the same time I am not trying to go above the prevailing rates or outside the database – that dictates to 1/10 of an hour what it costs to repair a vehicle – that the insurance company and my shop share.

 

“So what we’re asking in this bill is to stop the insurance companies that are not doing the right thing from having this adverse influence over shops where they feel obligated to do a poor repair just so they won’t get blacklisted or kicked off the insurer’s referral program.”

 

Shawn Miller: SB 617 would eliminate Direct Repair Programs.

 

Editor’s Note: Everyone agreed on that one. Shawn Miller: 617 is so broad it could be interpreted to even eliminate glass networks and even rental car agreements.

 

Editor’s Note: No one commented on that one.

 

Shawn Miller, who urged the committee to take no action on SB 617, said the bill bans having a claims facility within a shop, which is a convenience for the insured.

 

Hansen: “The problem with these claim centers,” he countered, “is that they are actually set up for only two purposes – and customer convenience is not one of them.

 

“First, insurers want to get a check into the customer’s hand. According to data from the CIC (Collision Industry Conference), whose members are collision industry experts and insurance industry personnel, traditionally the amount of the offered check will be 50% below what customers would have gotten had they opted to have their vehicles repaired.

 

“CIC data also indicates that 30% of the people going through these claim centers accept the checks and do not get their cars repaired.

 

“So insurance companies know they can get away with paying half the amount of money owed to customers by getting them to go through these claims centers.

 

“The second reason for the insurer to have the claims center at one of their DRP shops is that it allows the insurer and the shop to collude to keep the customer at that shop.”

 

The customer is required to go to that DRP first to get that first estimate. “If the customer chooses to exercise his freedom of choice and take the car to my shop, the insurer’s adjustor has to go out to Leif’s to reevaluate the vehicle. So it actually speeds up the process to let the customer go to Leif’s in the first place.”

 

Shawn Miller: By passing 617, he said, it would actually eliminate the free enterprise system, because the contractual arrangements between the insurers and their DRP shops controls costs and guarantee quality.

Editor’s Note: Seems a bit of twisted logic. If costs are controlled by insurance companies, how is that free enterprise?

   

Brian Miller, Government Affairs Representative, Farmers Insurance, said that customers benefit from making informed choices. He encouraged the committee to only consider legislation that confirms this benefit. “DRPs availability to customers is beneficial both to customers and to the auto repair industry.”

 

Jim Marr, who represented OSAR but also was at the hearing as an Oregon consumer, disagreed. Following the hearing he said he had a recent unpleasant experience with his insurance company. “After a car accident, when I chose a repairer outside the insurance company’s list of direct repair program shops, the insurer attempted to punish me economically, by not offering me a complete repair. I believe my claim was written incorrectly and incomplete as a way to retaliate toward me simply for exercising my rights under the law.

 

“In short, the insurance company refused to pay for at least two standard repair procedures recommended by the body shop. This placed me in the position of paying for the procedures out of my own pocket or personally negotiating with the repair shop myself for what I considered a complete repair.”

 

Fred Linenko, owner of Specialty Auto Body in Newport, Oregon, “It’s a dangerous situation for consumers to be driving around with improperly repaired vehicles.”

 

One vehicle was brought to his shop that when disassembled needed $6,000 in repairs. The initial insurance estimate had been $2,500, which was not comprehensive and did not include all the damage. “For liability issues we refused to use the used parts that the insurer wanted us to put on the vehicle. For safety issues, I wouldn’t want to put any of you in that vehicle given the way the insurance estimate would have had us repair it.” The repair ended up costing $7,000. The insurer would only pay $5,600, so the customer picked up the balance of the tab - $1,700.

 

Jerry Geiszler, owner of Jerry's Custom Paint & Collision Center, also testified about some independent shops having to charge their customers a co-pay to get the vehicle repaired properly. “Practices like that are a real eye opener and absolutely wrong,” he said. “I would never engage in practices like that because the repair is supposed to be indemnified by the insurer. Beyond his deductible [the cost of repairs are] not supposed to be paid for by the car owner.”

 

Geiszler said he appreciates insurers that do post repair inspections “to make sure the repairs were done correctly with appearance, fit and finish.” All insurance companies, whether they have DRPs or not should have these re-inspection programs. “It’s a good way to monitor the cars to see if they have been repaired the way they are supposed to be.”

 

He has been in the auto repair industry since age 15. For the last 30 years Geiszler has operated his own business.

 

Linenko: “We use pre-loss condition as the standard for repair.” To live up to DRP contracts many partnered shops turn out sub-standard work, he said.

 

“I struggle with the idea that the one who is paying for the vehicle is setting the cost of the repair,” said Linenko, who has owned his business for 35 years.

 

Brian Miller repeated Shawn Miller’s comment about “the great level of convenience for the insured to go to a DRP.” But added that “vehicles taken to DRPs are returned to consumers three days sooner than those at independent shops.”

 

Eric Frawley, an auto body tech, said in some situations insurance companies make sure it takes longer at independent shops. If the shop is “not in a DRP and we need supplemental parts for a procedure,” the insurance companies “puts us at the back of their list.” He has been in the industry for 30 years.

 

Steve Patterson, Vice President and General Council, Oregon Mutual Insurance Company in McMinnville, said DRP agreements in communities do not take customer rights away, they preserves rights.” There are no concessions on price. We want happy customers. We got into DRP arrangements because customers demanded it.

 

“Oregonians need protection from the current [insurance DRP] system,” testified Chris McMurry, an unhappy GEICO customer. SB 617 “is a good bill.” If it had been in force when he had his accident, “it would have helped.” Insurance companies “have a huge influence on body shops.” That’s not a good thing, according to McMurry.

 

His car had been repaired at a GEICO DRP (Direct Repair Program) shop. He complained to both the shop and GEICO that car parts were missing and seat belts didn’t work properly. Both told him “the shop did everything it was supposed to do,” he recalled.

 

Frustrated, he took his vehicle to an independent shop to get an independent estimate. At this shop the “inspector found fraudulent/shoddy work had been done,” McMurry said.

 

When the “fraud” word popped into the picture, GEICO’s claims division decided to listen to their customer. “They agreed to pay me three times the value of the vehicle, if I would give them my truck. I needed a working truck. And I needed to get on with my life.” So he settled. “I bought a new truck” with the proceeds from the claim.

 

Jerry Richardson, owner of Advanced Collision Repair in Seaside, OR, said, “I’m an independent shop owner – it’s self-inflicted,” he quipped. The auto collision industry has “changed a lot in the last five to ten years.” Not for the good. “There’s a point where the repair of a vehicle becomes a safety issue.

 

“I personally have DRP arrangements and not all [insurance] companies are bad.

 

“We should be looking at the consumer protection point of view. It’s the consumers who are the ones who pay for the insurance coverage. When insurers short the repairs, the only ones who profit from that are the insurance companies.

 

“Insurers emphasize the price of the premium when they try to attract customers. But this is a hand-crafted repair industry. Each person who does repairs is supposed to follow specific procedures, for us it’s following I-Car standards.

 

“If those procedures are followed, the repair will be a little more expensive. But in the long-term it is a better value – the car will be repaired properly. We’ve had cars brought in from other shops that cut corners when they did the repairs. Those cars aren’t safe to drive.”

 

Don Braden, President of Kadel’s Auto Body, founded in 1954, testified that his shops are in 26 DRPs. “Shoddy repairs don’t happen” at his shops, he said. “I’ve never been asked to use unsafe parts.” However, he has seen unsafe repairs. He emphasized that his shops do quality repairs.

 

Frawley, an auto body tech, had problems with allegiance when it came to repair procedures at DRPs. Giving an analogy, he said, it would be like an insurance agent telling a doctor how to treat a patient. “I was put in a spot, because I wasn’t getting what I needed to fix the car right.” He was being told by the insurance representative how to fix a car. “My concern – I need to feed my family, and to do that “I had to compromise on repairs. If a structural member or a mechanical component needs to be replaced a technician should make that call.”

 

During post-repair insurance audits at the DRP, insurance reps would find $5 to $10 missing items and put shops on probation, he said. “The owners were too concerned or scared” about the probationary status and “didn’t want to get kicked off the DRP program. So I was not allowed to ask the insurer for the proper supplemental parts to fix these cars. It made it hard for me to feel comfortable in that kind of set up.”

 

He’s currently working at an independent shop and has seen previously repaired vehicles coming in whose work was “substandard,” he said. “About 90% of those vehicles have safety or corrosion protection issues . . . which we had to address.” His employer has him document the problems. “Sometimes the customers get back involved because of liability issues.”

 

Craig Campbell, representing AAA, testified that his organization’s Approved Auto Repair Program might be jeopardized if SB 617 becomes law. AAA has 223 shops in this program. He is suggesting that if the bill is passed that a narrow exception be made for auto clubs providing referral services.

 

Tom Gallagher representing the Oregon Auto Dealers was also looking for an exemption for his organization.

 

Hansen: From a cost standpoint $440 billion was spent on premiums in America for the property and casualty industry in 2007. Over $2 billion of this amount was written in premiums by Oregonians for automotive insurance alone.

 

That same year a little under $200 million of this amount was paid out to our industry, according to AutoBody Business. That’s less than 10% of the auto insurance premiums. In 2007, according to Insurance Information Institute, the insurance industry posted almost a 15% average profit. That translates to $330 million in insurer profits in Oregon alone. That’s 1½ times more than they paid out to the entire auto body industry to fix cars, he said.

 

“So if insurers had to pay an additional $20 million to ensure that air bags went in correctly, air bag sensors were replaced, seat belts were inspected, new suspensions were put on, brakes were fixed, shocks put on, glass was put in correctly, structural members were replaced instead of repaired (according to manufacturers’ requirements), new OEM rims instead of AMP rims . . . the list goes on and on about the things that cut into the insurance profit margin.

 

“If the insurers paid this additional $20 million, or 10%, the insurance industry could live with the smaller profit. So instead of 15% profit, they could go down to 14.6% profit.

 

“Just to put it into perspective, the average body shop has a profit of 6%.”

 

Sen. Bonamici asked Hansen: “How did you decide not to become a DRP? Did you just say, no?”

 

Hansen: “In 1994, with the advent of computers the insurers started rolling out the referral programs. Estimates were no longer hand-written, so it was easier to figure out who was charging what. Farmers was the first to roll-out a DRP. I got on their program. But in six months I took myself off, because they started asking me to do things I should not do. I remember the day it happened. They asked me to cut in half a core support and weld half of it in – that’s something that needs to go in as a unit – you don’t do that.

 

“I realized that if I was in their program and developed my business model around them, I would be beholding to them for my bread and butter. Five regional managers in the insurance industry in this state control over 60% of the work that goes to body shops. If they controlled 50% of my work, I realize if I got three of them mad, I could lose 50% of my work. I didn’t want to be controlled by an insurance company that could kick me off their program if I didn’t cut corners according to their directions or repair a part when replacement was called for, or not inspect seatbelts as required by manufacturers.

 

“And to this day on a DRP estimate you will never find a line item that says, ‘Inspect seatbelts,’ even though it is required by a majority of manufacturers. They won’t write it down; they won’t do it. When we write it down, we get a lot of flack. It’s becoming a bigger and bigger problem.

 

“This last year, according to a nationwide survey, 64% of DRP shops do not want DRPs and 88% of independent shops don’t want DRPs. In 2003, only 33% of DRP shops didn’t want DRPs. So the figure has really jumped to 64% because of the squeezing that has been going on.”

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The bottom line for the proposed bill is that it would ensure that cars will be repaired to the “highest quality” possible to the letter of the law, said Jim Marr. It will not prevent insurers from having contact with customers, or preparing estimates or deciding on the validity of a claim.

 

“Today’s vehicles are rolling computers,” he said. “If incorrectly repaired, people are in danger.”