While the insurance industry touts the virtues of the free-enterprise system and hails the free market as the driving force behind labor rates, behind the scenes they do just the opposite of free enterprise. It’s all about “control” of labor rates and the collision repair process.
The insurance industry, as a whole, has done everything in its power to abolish the free-market system in collision repairs and auto glass replacement.
Often to the detriment of the consumer as well as auto body and glass shops, insurers have—over time—developed an art-form that systematically denies contractual promises and fair payment to claimants. This art form is known as glass “networks” and body shop “direct-repair-programs” (DRPs).
Many body shop owners say that they lose many thousands of dollars annually because insurance companies effectively set labor rates for repairs as well as steer business to certain “preferred” shops. Insurance industry officials deny the charge. However, the majority of body shop owners would rather see a level playing field
and a true free-market system in their industry.
In 2000, Brian J. Tennyson of Wayside Auto Body in Northampton, Massachusetts sued 34 insurers that do business in Massachusetts. His claim: the way insurers set labor rates “collectively control nearly 100 percent of the payments” made to shops and this situation cost his business $270,000 over a seven-year period (1993–2000).
Whatever happened to that lawsuit is anybody’s guess. Maybe the insurers “settled” with Tennyson or maybe it was thrown out of court. At any rate, Tennyson is no longer associated with the body shop he once owned. Repeated attempts to locate Tennyson have been unsuccessful.
Walter Thomas, owner of Thomas Autobody in Worcester, Mass., said labor rates haven’t kept up with inflation. He said auto body labor rates have hovered around $30 an hour since 1988 and today, in 2009, labor rates are only around $36 per hour in Massachusetts—the lowest in the nation.
Thomas has witnessed Massachusetts labor rates for body shops go from “the highest in the nation” years prior to 1988, to “the lowest in the nation” today.
The reason, according to Thomas: The state (Massachusetts) began requiring insurance companies to develop a “preferred shop list” in 1988. The shops that signed on to the “preferred shop list” agreed to a certain labor rate. The insurers, for the most part, never raised those rates over the years.
One shop owner, wishing to remain anonymous, said, “Be careful what you sign; You may live to regret it.”
Currently, Massachusetts legislators are considering a labor rate bill for the collision repair industry. However, this legislation has been under consideration for nearly five years without a vote of the General Court.
Thomas had this to say about that: “For going on five years now, the legislators have been ‘doing their tricks’ to keep this legislation from passing.” Thomas believes the state is reluctant to take on setting of the body shop labor rates. “The shops can’t get together on rates nor they can go to jail for anti trust violations,” Thomas said.
The labor rate dispute in Massachusetts, as Thomas cited, has its roots in a 1988 law meant to bring auto body rates under control. By the late 1980s, when rates were escalating, state lawmakers allowed insurance companies to strike rate deals with body shops in exchange for guaranteeing the quality of the repairs. As a result, insurers developed lists of “preferred” body shops that companies like his had to be on to get work.
“Once (an insurance company) has enough shops in an area, it would consider a prevailing rate,” Thomas said. “If a shop wanted more, why should they pay it? They have a number of shops at that rate.”
A special legislative commission in Massachusetts is gathering labor rate data through June 30, 2009 to determine what effect the implementation of “managed competition” has had on labor rates. Once that data is evaluated, the general court will then consider whether alternate methods are necessary “to ensure that the labor rate insurers pay to auto body shops for repair of damaged motor vehicles is fair and reasonable…”
Fair and reasonable? How is it that labor rates for mechanical repairs range from $75 to $120 per hour, but body shops will settle for $35 to $40 per hour for labor and give concessions to boot?
Forty years ago, labor rates for sheet metal work were actually higher than labor rates for mechanical work in many states.
Consumers are not generally aware of the DRP contracts, setting of labor rates, etc., whose main purpose is to benefit the insurer, not the the consumer or body shop. While some shop owners advise customers of their rights (including the right to contact an attorney if they feel unfairly treated and wish to seek a fair settlement), most lack the courage to share this information. As a result, they fail to protect themselves and their customers against insurance companies that bank on the public’s lack of knowledge. Unchallenged, insurers will continue pressuring body shops to lower their repair costs and cut profit margins.
Of course it’s not enough just to say ‘no’ to the insurer. After all, the insurer is the party holding the checkbook and the pen that writes the check. The shop owner must know what is required in a proper repair according to the industry Procedural pages (P-pages) to get paid for the work already done. There are systems available, i.e., Paint-Ex that will PROVE to the insurers the total cost of paint and materials and the shop CAN be paid for their work, in spite of “Paint Caps” and such.
As one State Farm adjuster said, “Most shop owners don’t know how to get paid for all their work, parts and supplies because they don’t know how to document the requirements to show the insurer what is necessary to restore the vehicle to its pre-accident condition.”
It is a safe bet that the insurer knows perfectly well what is required to restore the vehicle to its pre-accident condition, but the insurers goal is to pay out as little as possible. That’s why they want cheap labor, parts and a quick turnaround time.
What will it take to restore free enterprise and consumer rights to the collision repair industry? Will the Massachusetts General Court solve the problem for the entire nation by coming up with a solution to the labor rate dilemma this year? Or will we have to wait another twenty plus years with more and more shops going belly up?