Tuesday, 28 February 2006 09:00

A look at State Farms new Select Service contract

Last month State Farm, the nation's largest auto insurer, announced that it was beginning the rollout of a new program for its preferred body shops. The contract for that new program was sent to body shops in the test markets of California, Illinois and Michigan. Predictably, the response was mixed, but the "vibe" was definitely negative. Shop owners who admitted that they depend upon State Farm business for a large percentage of their volume either said nothing or said they were taking a wait and see attitude. 

Dick Luedke, media relations for State Farm, told Autobody News in late February that around State Farm headquarters, limited feedback reveals that repair shops "seem to be pleased to be part of the program." Since the programs are administered on a local level, they do not have feedback at this time to make a detailed report. Luedke said that no revisions of the contract have been made at this time, although some issues have been clarified. He made the point that "there are no exceptions to the contract. It is a take it or leave it deal. If a shop cannot meet all the requirements, no exceptions will be made."

Some shops choose to leave program

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Those shops that made the decision to resign from the State Farm program were quite open about how they saw the new contract: "The proposed program plainly sucks," said the manager of a BMW dealer's body shop in Long Beach California, "and only an idiot would sign the new contract - or someone very desperate for profitless business." And therein lies the rub. If State Farm is a big part of your business, or you would like it to be, then you sign the agreement and hope for the best. So let's look at what you could be signing.

The six-page agreement for State Farm Select Service® (Revision 12-2005) starts off by acknowledging "Freedom of Choice" for vehicle owners as to where their cars and trucks are repaired and notes that the vehicle owner must authorize all dismantling or repair of the vehicle. So far, so good.

Limited lifetime warranty

But before the end of the first page we hit the first rough spot: warranty. The shop must provide to the customer a "written national limited lifetime repair warranty for workmanship including refinishing." The paint companies will cover the paint warranty, but only if you refinish it to their standards. What happens if the State Farm adjuster won't pay for clear coat over the entire sail panel as required by the paint company? How about a cheap part you didn't want to use that rusts through at the seam. Just a cost of doing business, right? What about an air conditioner compressor that you replace which then goes bad two years later? You won't be responsible for the part, but are you going to be doing the labor ("workmanship") for free simply because the owner says you put it in wrong and that shortened its life? Vehicle owners commonly believe that their car or truck "was never quite right" after an accident, and guess who they can blame.

What if the car is 500 miles away when repairs are needed. The contract says you will reimburse State Farm for repairs made if "the vehicle owner is unable or unwilling to return" to your shop. Be nice to customers. You don't want them mad at you and taking the car next door for rerepair while you foot the bill. And what if you charge hourly rates for Lubbock, Texas, but the repairs are made in San Francisco at rates that are double yours.

With this lifetime warranty, you'll want to catch potential problems early. The contract calls for a quality control (QC) process that includes quality control checkpoints at various stages of the repair. Do you have a formal system in place for QC? If State Farm thinks you have a QC problem and asks for proof of your QC system, you'll be in breach of the contract if you don't have records.

Efficiency means guaranteed completion

Moving again through the contact, you get almost to the bottom of the second page before the "efficiency" clause makes you gasp. "State Farm repair work will be given preferential status in comparison with other repair work." To be certain that happens, State Farm will require that when you upload the estimate you commit in advance to the start date, repair completion date and the pick-up date. Now, what good is a promise without a penalty if you break it? Not much, so you agree to reimburse State Farm or the customer for additional vehicle rental expenses "if State Farm determines" that you caused the delay. While it's certainly possible that the State Farm adjuster will be reasonable if you're "waiting on parts," it's just as possible that he won't.


Great service, lowest price

Service is big with State Farm. So if their customer wants you to pick up and deliver the vehicle, naturally you'll do it - gratis. And while you're driving to pick up that customer in the next county, you can spend the time thinking about any "deals" you may have given to another insurer or some big fleet customer. That's because you will be agreeing "to estimate and bill for repairs using the lower of "the most recent labor rates and paint and materials pricing; or... the labor rates and paint and materials pricing offered to any other vehicle owner or insurer." So if some other carrier guarantees you 25 repairs a month or a rental car company sends you 500 cars a year to paint and you give them both a sweet deal, State Farm wants the same deal.

"But how would they know?" you ask. First of all, as any lawyer will tell you, you don't want to falsely promise to do something that you don't intend to do; that's a lawsuit waiting to happen, or at the least you could be knocked out of the program. Secondly, according to a discussion between a test shop and a State Farm adjuster, as reported by Sheila Loftus' CRASH Network newsletter, State Farm has the opportunity to learn what a shop is charging another insurer when State Farm and that insurer subrogate a claim. If State Farm learns through subrogation that another insurer is paying a lower rate to a particular shop, that facility could be removed from the Select Service program.

"So if I can't charge 'em enough for labor, I'll hit 'em for parts." Not so fast. The agreement also provides that your replacement parts must be billed at the lowest price offered to any other vehicle owner or insurer. If State Farm has an agreement with a parts supplier that would get them a better price, you're obligated to use that supplier. And if it's a recycled part, your mark-up percentage will be limited to the lowest mark-up you offer anyone else. You've got to admit, they're thorough when they write these contracts.

Before we leave the subject of parts, here's a new and interesting twist. State Farm can now request that you source your parts through their approved automated replacement parts locating system, and you must do so! Forget about using a local, trusted supplier that will get you the parts on time so you can make the promised delivery date: you'll buy those replacement parts where they tell you to. State Farm also throws a bone to CAPA in the agreement. If you use new non-OEM parts and those parts are available as CAPA-certified, you have to use the CAPA part.

Have you given much thought to doing PDR? If PDR is available in your area, this agreement puts you in the PDR business, like it or not. Don't worry about figuring out the pricing, State Farm has its own PDR pricing-matrix that you must use. As we know, PDR can sometimes lead to more traditional work when the PDR process causes a panel to move. You'll want to note that if you disturb the corrosion protection, caulking or panel adhesives, you have to fix it. And seeing as you screwed it up, don't think about charging extra.

Mechanical charges must be competitive

Mechanical charges have typically been "it is what it is," particularly if the work is sent out to an OEM dealer - air bags are a good example of this. This agreement provides that "any amounts charged will be competitive for the local market." Competitive with what? If it's an expensive new European sedan, the hourly charge is likely to be higher than for working on a five-year-old Ford. Perhaps State Farm will take this into account. Perhaps they won't. If you're a dealer-operated body shop, imagine telling the service director that his mechanical rates are too high and you have to send the work to an independent down the street.

Okay, we've exaggerated here to make a point. Like any contract, it's open to interpretation. The real question is, will it prove open to negotiation before the program rolls out nationally?

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