CAA Says a New Kind of Insurer Steering is Impacting the Industry
Written by Ed Attanasio, Autobody News
Published July 5, 2022
The California Autobody Association (CAA) recently held a one-hour Zoom meeting with the California Department of Insurance (CA-DOI), covering a handful of topics of interest to the entire membership.
One particular subject that has been a pebble in CAA’s shoe for several years was brought up again during the meeting. You might be thinking that pebble was illegal steering, but you’d only be half right.
When we talk about steering in this industry, it’s usually about insurers trying to persuade consumers to take their vehicles to DRP shops, because those shops offer the insurer more attractive labor rates, and in many cases, a promise to use the lowest priced parts available.
Instead, this is about “parts steering." Parts steering is where insurance companies search a multitude of different online vendors scattered across the country to find each part at the lowest price, and then cap payment on their estimate based on that price. Sound reasonable?
Monte Etherton, chairman of the CAA State Legislation Committee and state board member of CAA's San Diego chapter, has been monitoring this situation for years and doesn’t think it’s reasonable at all.
“Here’s an analogy,” he said. “Your 8-year-old car needs some work, so you take it to the dealer and they give you an estimate for $3,500. You tell them you’ll get back to them. Their estimate lists five parts that total $2,000 of the $3,500. Since you want to save some money, you start scouring the internet for those parts.
"You find the cheapest parts from five different online stores, and all offer free shipping. Buying those parts instead of the parts from the dealer will save you almost $500. You make a neat list of all the store’s phone numbers and the prices and take it back to the dealer and ask them to buy the parts they need from those places so you can save some money. What do you think they would do?”
Etherton cites “parts steering” as a major problem in the industry.
“Some insurance companies will only pay us based on the price of the cheapest parts, so they are literally forcing us to buy certain parts from their vendors or lose money," he said.
“I did one job on a Volkswagen where the insurance company’s estimate had an aftermarket headlight from an out-of-town vendor, because it was cheaper than my local aftermarket supplier," Etherton said. "I emailed them that they can't require me to buy a part from a specific supplier, and they replied with this fallacy: ‘We can’t tell you where to purchase your parts, but we don’t owe more because you select a different vendor.’”
In 2018, CAA received a written legal opinion from the CA-DOI in response to questions regarding several industry problems, including parts steering. Two paragraphs from the opinion explain how parts steering is related to customer steering, which is illegal in California:
“No insurer may require that an automobile be repaired at a specific automobile repair shop. (Cal. Ins. Code §758.5(a)). If the claimant elects to have the vehicle repaired at the shop of his or her choice, the insurer may not limit or discount the reasonable repair costs based on charges that would have been incurred had the vehicle been repaired by the insurer’s preferred shop. (Cal. Ins. Code §758.5(d)). As a result, by refusing to pay any reasonable price for a replacement part that is higher than the price quoted by the insurer’s preferred parts vendors, the insurer is limiting or discounting the reasonable repair costs based on the charges that would have been incurred had the vehicle been repaired by the insurer’s chosen repair shop thereby preventing customers from using the repair shop of their choice and preventing the policyholder from using any shop other than those shops that purchase their replacement crash parts from the preferred parts vendors of the insurer.
“Limiting or discounting the reasonable repair costs based on the charges that would have been incurred had the vehicle been repaired by the insurer’s chosen repair shop is a violation of Insurance Code section §758.5(b) (3) and would constitute a violation of the Unfair Insurance Practices Act. Cal. Ins. Code §758.5(f). That is, if an insurer limits or discounts the reasonable repair costs based upon the replacement part prices available from a certain parts vendor, the insurer would effectively prevent a customer from using the automobile repair shop of his or her choice in violation of Insurance Code section 758.5(b)(3). An insurer would, however, be permitted to reasonably adjust a collision repair shop’s written parts price estimate for any part, including new OEM crash parts, if the insurer demonstrates that the price charged by the repair shop for the replacement part is “unreasonable.” 10 CCR §2695.8(f).”
Read the full legal opinion here.
This opinion was also a topic of the Zoom meeting. Both the DOI’s deputy commissioner and the Claims Services Bureau chief urged shops experiencing this problem to send a copy of the DOI letter to the insurer with their supplement.
There is another facet to this problem. In California, the law requires shops only list parts on their estimate as new, used, reconditioned, rebuilt, an OEM crash part or a non-OEM aftermarket crash part. Insurers are also supposed to follow these regulations when writing estimates, but some do not.
“A few months back, we had a 2021 Mercedes in the shop," Etherton said. "It only had 1,000 miles on it and was hit pretty hard in the right suspension. The customer’s insurer specified 13 used, non-OEM or reconditioned parts from six different vendors located in California, Texas, Michigan and Oregon. The parts' prices ranged from about $10 to $1,000.
“Some of the part descriptions were really questionable, like a reconditioned upper control arm and a reconditioned engine cradle, and a used wheel that was also refurbished. By law, we have to be crystal clear about parts with our customer, but how can I do that if I don’t even know what they are?" Etherton continued. "And none of these parts had a manufacturer’s warranty, something we would get if we bought them from the dealer. We ended up losing that job because we believed new genuine factory parts belonged on that car, and the customer didn’t want to pay the difference. She did tell me she was changing insurance companies though.”
The Difference Between Opt-OEM Parts and Genuine OEM Parts
Many parts on insurers' estimates have been miscategorized with such terms as “alt-OEM”, “opt-OEM” and “surplus-OEM." In reality, these parts may be over-production, blemished or damaged OEM parts. One thing they all have in common is none of them carry the original car manufacturer’s warranty.
Every part sold by every vehicle manufacturer has a manufacturer’s suggested retail price (MSRP), which is the price a shop charges for the part. In contrast, opt-OEM parts do not have an MSRP, only a cost. When a part does not have an MSRP, insurers will allow a “markup," usually 20%.
Etherton thinks he knows how opt-OEM came into existence.
“Let’s say a shop buys a bumper from a Chevy dealer that has an MSRP of $200, and the shop gets it for $140 wholesale. The shop will make a $60 profit," he said.
“Let’s also say an opt-OEM vendor---maybe a wrecking yard---has bought 50 of those bumpers on the gray market for $120 each. They offer the bumper to insurers for $150. The insurer marks the part up $30---20%---for the shop. The insurer now gets the $200 bumper for $180, but the shop loses half their profit, the shop’s Chevy dealer loses a sale and the customer loses the Chevy factory warranty because the shop didn’t purchase the part from the dealer. Who wins here?”
Another issue is some vendors are mislabeling their parts to gain an advantage with insurers.
“Something else we see is when the vendor lists a bumper cover as a used part when it’s actually a new 'surplus part," Etherton said. "Many new factory bumpers are raw plastic, which requires a special prep to make the paint stick. That prep costs about $100. Since a used bumper is already painted and wouldn’t need that treatment, the insurer won’t put the treatment on their estimate. The problem is, the bumper isn’t a used part, and the work still has to be done.”
How Shops Choose Which Vendors from Which to Purchase Parts
Just like any business, body shops must choose their vendors carefully. Shops need to know a vendor will be in business next month or next year if there’s a problem. They need to deal with experts that will send the correct parts the first time, quickly and at no charge, whether that part is a $2.50 fastener or a $700 aluminum hood.
Another problem Etherton brought up is the logistics of adding unnecessary vendors to his shop’s bookkeeping system and staff.
“Most online vendors limit what they sell to big-ticket high-volume parts, so they can’t fill a complete order,” he said. “If you buy from one, you either have to pay COD or have an open account, right? Any body shop worth its salt has charge accounts with their vendors because you can't afford to write a check for each invoice and have $100,000 tied up before you get paid.
"Not being able to use our regular vendors means we have to pay upfront for the parts, either by check or credit card," he said. "And when I call these vendors to see if they really have the part, I usually spend at least five minutes on hold waiting for people to answer the phone. Probably half the time they either don’t have the part, it’s not what they said it was, or they won’t deliver to our area.
“And if you do buy the part and it's wrong, they already have your money,” Etherton said. “Hopefully they'll give it back, but you need to pay return shipping and wait.
"The other option is to open an account with each of these vendors. Now if you know anything about bookkeeping, we already have like 50 various parts vendors on our list. If we had to add a new vendor to our database for every time an insurance company found a cheaper part, we’d probably have 200 more vendors, and who's going to keep track of that? Two hundred credit applications? Two hundred more monthly statements to reconcile? It’s ridiculous.”
Doing the Insurance Adjuster’s Job
Another subject discussed during the CAA CA-DOI meeting was how insurers are requiring more and more documentation from shops before they will pay the claim. The documentation is in the form of damage photos, work in process photos, purchase invoice copies and more.
“What happens is that we have a customer who wants us to fix their car, so we write an estimate and send it to their insurance company,” Etherton said. “Now some insurance companies review our estimate and pay it to the penny, while others cut the estimate no matter what you send them. And it’s not uncommon for an insurer to start off low at $2,000 and end up paying an actual cost of $8,000.
“I think the insurers that cut estimates are just trying to make our job so difficult that we will give up and accept their lowball offers,” he said. “They want pictures and copies of everything, and as I said before, whatever the lowest part prices they can find on the internet is the most they will pay us for the parts we need to fix the car.”
Etherton’s main point is this---other than allowing the insurer to inspect the car at his shop, he has no obligation to them to document anything. The obligation he does have is to the vehicle owner.
“The law says if I fix your car, we will have a contract between us, which is my estimate," he said. "I give you the estimate, and then you authorize the estimate so it becomes a work order. So, I repair your car based on that work order. If I don't follow that work order while repairing your car, then I have committed fraud and could lose my license.
“Even though these insurance companies have the right to inspect the damaged car, they choose not to. It’s easier to deny the claim from a distance than it is in person.”