DRPs on trial: Shops around the country fighting ‘steering of customers’ with legal, legislative action
by John Yoswick
If it feels like more and more collision repair work is being processed through insurer direct repair programs (DRPs), the numbers back that feeling up.
As recently as 1996, claims handled through DRPs amounted to only about 8 percent of all insurance-paid repair work. Within two years, that figure had more than doubled to 20 percent and is expected to be about 30 percent this year.
“The question you have to ask is: Will it be 50 percent by 2005? Or even before then?” Rick Tuuri, director of industry relations for ADP, asked rhetorically at a recent industry gathering.
There are some within the collision repair industry who say the answer to Tuuri’s question is an emphatic, “Hell no!”
“For the past few years, these DRPs have been like a train gathering speed and getting set to run us all over and leave this industry in a shambles,” said the owner of a shop in northern Kentucky, who didn’t want his name used. “But now I’m thinking we may be able to put the brakes on this thing yet.”
Those “brakes,” he said, are coming in the form of a seemingly growing number of lawsuits and related efforts to halt a number of practices – such as insurer “direction” or “steering” of work toward DRP shops – that these shops believe is illegal and constitutes unlawful business interference.
Lawsuits date back to 1970s
While there are those who disagree that the DRP trend is stoppable – nor even entirely negative for the industry – everyone seems to agree the number of lawsuits appears to be on the rise. The idea of the lawsuits, however, is hardly new. Back in the 1970s, Don Berger, then a shop owner in a small town on the Oregon coast, made national headlines in the industry when he was awarded $315,000 in a lawsuit he brought against Allstate Insurance for direction of work. The suit was one of the first of its kind brought against an insurer and, although a higher court later reversed the circuit court’s ruling, the suit is still cited in cases today.
Oregon, in fact, is home to one of the most recently-filed lawsuits regarding DRPs. Four Portland area collision repair shops are seeking $10 million in damages in a lawsuit filed late last year in Multnomah County against Farmers Insurance Group. The shops – Leif's Auto Collision Centers, Bill Hall Body and Frame, All in One Autobody and Mark Odell Body Shop – contend they have lost millions of dollars because of the insurer’s efforts to direct vehicle-owners to shops participating in Farmers’ “Circle of Dependability” direct repair program.
The lawsuit contends that Farmers steers customers to shops in the program because these shops have agreed to offer discounts to the insurer. The four shops bringing the lawsuit allege this policy discriminates against small and mid-sized shops, and results in vehicle-owners receiving inferior repair work.
“The name ‘Circle of Dependability,’ itself is to imply that the shops that they’ve selected are the dependable shops or the high quality shops,” Leif Hansen, owner of Leif’s Auto Collision Centers, said. “That’s absolutely not true. They put shops on that list based on their ability to sign up and handle a lot of volume. It has nothing to do with quality.”
The suit also charges Farmers with negligence in that its employees used “word tracks” to steer customers to its Circle of Dependability (COD) shops and away from the plaintiffs.
Hansen said his business, which employs about 60 people, was involved with the Farmers program in the mid-1990s. He said he removed his business from the list after a year because he felt Farmers was asking him to cut corners.
A Farmers spokesperson said Farmers – the third largest auto and home insurance company in the country – would “defend [the suit] aggressively.”
“Any customer that comes to us has the choice of going to any shop that they choose,” Farmers’ Jack Barnes said. “Really we’re just offering another option.”
“Oregon has very clear anti-steering laws,” another company spokesman said. “You can walk into any of our claims offices in the state of Oregon and it is clearly posted that customers have the right to choose where their auto is repaired... And Farmers does not steer...That doesn’t mean, however, that the Circle of Dependability is not a good program. It is designed to be in the best interest of consumers. And we have information readily available for customers who would like information about quality shops to take their cars to.”
He said shops included in Farmers' direct repair program must meet rigid standards, including equipment standards and training standards for the staff, and that Farmers guarantees their work.
“What’s happening is that the insurance industry is trying to turn autobody repair shops into HMOs,” said Daniel Gatti, the lead attorney representing the shops in the case. He said his clients are seeking a total of $10 million in damages, and that he would also ask the jury to award punitive damages, suggesting an amount of at least $10 million, although the actual amount would be up the jury.
He said similar suits are being planned for other insurers, including State Farm, Allstate, Progressive, Safeco and USAA.
Similar lawsuits throughout country
But such lawsuits are hardly limited to one state. Ronnie Pack and Pack Brothers Paint and Body Shop Inc. in Belmont, North Carolina, filed a lawsuit in late February against Nationwide and its agent Joe Benkendorf. The lawsuit alleges that the insurer and Benkendorf have engaged in "wrongful interference with the plaintiffs’ contractual relations."
The suit also alleges that the insurer engaged in fraud, libel and slander. The lawsuit states, “Defendants were motivated to engage in unlawful steering because of Nationwide’s ‘Blue Ribbon’ program under which Nationwide received lower rates for automobile repairs.”
The lawsuit cites examples of vehicle owners who planned to have repairs made at Pack Brothers but changed their minds after Nationwide adjusters allegedly made false statements about the shop. It also claims that Nationwide supervisors instructed adjusters to ‘total’ vehicles at Pack Brothers when repair costs reached 65 percent of the vehicle’s value while at other shops Nationwide used 75 percent of value as a ‘total’ threshold.
Benkendorf and a spokesman for Nationwide declined to comment other than to deny any wrongdoing.
Meanwhile, nine collision repair shop owners, most of whom are African American, have filed a class action lawsuit against State Farm for steering work away from their businesses. The case is similar to one filed in Mississippi against Allstate late last year by nine shop owners in three states. The plaintiffs in that case allege that State Farm steered work away from them. The examples in the complaint all involve windshield replacement, although an attorney for the plaintiffs said it is not just about glass but about all repairs and steering work away from the plaintiffs’ shops, a violation of Mississippi law.
A State Farm spokesman said, "We believe the allegations are without merit."
Since bringing two lawsuits against insurers more than a year ago, John Purcell has closed his Paducka, Kentucky, body shop, blaming what he calls an illegal effort on the part of State Farm and Grange Mutual Casualty Company to defame his shop’s reputation and interfere with its right to do business by steering its insureds away from it.
Along with Grange, Purcell’s is also suing a claims adjuster for Grange who, according to the lawsuit told prospective customers that the paint booth at Purcell’s was dirty and contaminated and that Purcell’s had to charge for color, sand and buff. The adjuster also allegedly told vehicle owners that their claims would be paid in full if they took their vehicles to other shops, but if taken to Purcell’s, they would be responsible for paying additional costs.
Again, the insurers deny the allegations in the suits.
‘Consent decree’ seen as opportunity
The Purcell suits reflect one of two seemingly common outcomes of shop lawsuits against insurers over direct repair programs. In some cases, such as Purcell’s, any victory that may result from the lawsuits will come too late for the business allegedly damaged.
A number of such lawsuit have also resulted in happier outcomes for the shop owner – in terms of a cash settlement – but little benefit for the industry as whole. Such settlements usually involve no admission of guilt, no court review of the issues at stake, no establishment of legal precedent, and often little or no publicity because of gag orders.
That’s one of the reasons several hundred shop owners around the country are looking at a “1963 consent decree” as a possibly more effective lever to address what they see as improper insurer practices.
A consent decree, in a nutshell, is a written agreement in which a company or organization under investigation by a governmental agency (in this case, the U.S. Department of Justice and then-U.S. Attorney General Robert Kennedy) essentially agree to do or not do something in the future – without admitting any past wrong-doing. It’s a type of settlement.
The history and details of the 1963 consent decree aside, it essentially states that three insurance trade associations and their members (more than 250 at the time) agreed to forever refrain from several practices, including setting prices and steering. One portion of the document appears to forbid the signers from establishing “any plan, program or practice which has the purpose or effect of…directing, advising or otherwise suggesting that any person or firm do business with or refuse to do business with...any independent or dealer franchised automotive repair shop.”
“You read this thing and it all seems so clear that it’s hard to understand why it isn’t being enforced,” said Tommy Green of Green’s Paint and Body Shop in Brasstown, North Carolina. Green is part of what’s become known as the “Consent Decree Community,” a grass roots effort to determine if and how the document can be used to address shop concerns.
In 1993, a small group of shops attempted to raise the issue of the consent decree to the Department of Justice in Washington. D.C., but were seemingly not successful. But last fall, a group of shop owners returned – this time with two Pennsylvania attorneys on their side, including one who is a former attorney general for Pennsylvania. That meeting, according to one attendee, was “very, very, very positive.”
The Consent Decree Community is strategically keeping its cards pretty close to the vest, not wanting to reveal too much too early in its efforts. It does, however, have a website, at which participants can download a copy of the consent decree document and keep up-to-date on the group’s progress. To view the content at the website (www.consentdecree.com), you must first register and wait for entry approval – a process that reportedly can take some time as the group works to ensure that only those interested in helping it move toward its goal “get in the door.”
Legislative efforts also tried
Though shop owner Green thinks the 1963 consent decree offers much hope, it’s not the only avenue he’s taking in efforts to thwart the DRP steering of work issue. Over the past two years, Green created a petition – eventually signed by about 60 shops – asking state officials to change the state statute that they say allow insurers to direct work. The effort hit a brick wall, he says, when it reached the state’s insurance commissioner.
Undaunted, Green went on to help establish the Independent Auto Body Association of North Carolina, which earlier this year hired a lobbyist – a former candidate for state insurance commissioner – to work on its behalf. Its first victory came this spring when its anti-steering bill sailed through the state House. Green said he was disappointed with some of the changes made in the wording of the bill in the process, but said the group will try to strengthen it as the state Senate takes up the issue.
The ultimate legislation, Green hopes, will require the insurer to clearly inform vehicle owners that they are not obligated to use a recommended repair shop, and will also establish a Legislative Research Commission to "conduct a comprehensive study of the practices of the insurance industry in recommending repair services.”
One problem Green has faced in his efforts, he said, is trying to rally industry support for and involvement in the effort.
“At times, I’m almost as disappointed in my industry as I am in the elected and government officials who should be doing something about this,” he said. “So many of these guys want to gripe about DRPs but that’s all they do.”
Indeed, most of the shops – from Florida, Texas, Alabama and Kentucky – who responded to ads in this paper asking for comments from people involved in lawsuits against insurers were vocal in their complaints about DRPs, but said it would be up to someone else to take the action necessary – either through lawsuits or legislative efforts – to make a change.
That’s a problem, Green says, but he’ll continue to try to improve things.
“There will probably always be a place for this DRP thing,” he admits. “The only thing I’ve complained about is the process. If it can be done a little more fairly, where it still allows me a chance to make a living, then I have no problem having DRPs. But the way it’s currently done, there’s no way that anybody can consider it fair.”
Insurers still predict DRP growth
Despite all this anti-DRP activity, Green and other opponents of the programs may be discouraged that insurers don’t appear to be planning to even slow the expansion of their direct repair programs. Take the country’s largest insurers as an example. Although State Farm doesn’t like to refer to its “Service First” program as a direct repair program, from a shop’s perspective it is very similar to the DRPs of other insurers. The program currently includes about 15,000 shops nationwide, and about 34 percent of State Farm claims nationwide are currently handled through Service First.
But John Kent, a senior claims consultant for State Farm, said he expects the program to continue to grow given that in some regions of the country, 60 percent of its claims go through Service First.
“We’re very pleased with our Service First program,” Kent said. “It’s worked very well for us. We haven’t realized the full growth potential of that program yet.”
John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988. He can be contacted by email at (503) 335-0393 or by email at jyoswick@teleport.com.