San Jose Police Lt. Dale Morgan of the Regional Auto Theft Task Force, who led the sting operation, said those arrested included body shop owners, managers and estimators at 25 shops in San Jose, Mountain View, Milpitas, Sunnyvale, Santa Clara, Los Gatos, Campo and Morgan Hill, all communities in the Silicon Valley. The undercover officers visited a total of 62 shops, most of which were "suspect" to begin with, according to Morgan. The suspect list was derived from the B.A.R., the Dept. of Insurance, the Organized Insurance Fraud Task Force and crime-tip hot lines.
"We also visited random shops," reported Morgan, "but did not find nearly as many dirty ones among the random hits." Asked if the shops tended to be smaller operations, Morgan said most were, "but we had a few that appeared to be doing a lot of business." The fraud investigation included at least one Allstate DRP shop: "They're not a DRP any longer," Morgan quipped. No auto body shops run by auto dealers were caught up in the operation.
Agencies participating in the task force included local police departments, the California Department of Insurance, the Bureau of Automotive Repair (B.A.R.) and the Underground Economy Taskforce (UET). The UET looks for workers who are being paid "under the table" to avoid income and payroll taxes and minimum wage. The ten shops that were closed down were ordered closed not because of the insurance fraud allegations but because "they were paying people off the payroll," said Morgan, who added that $104,000 in fines had been levied against the shop owners: $48,750 for cash pay violations, $55,000 for worker's comp violations, and $250 for minimum wage violations.
The majority of arrests came on Thursday, September 19, and included six car owners who allegedly filed false reports. The sting focused mainly on shop employees who facilitated the alleged crimes, not the customers themselves, but there are outstanding warrants some for customers. Morgan said police are still investigating another 40 auto body shops as part of the seven month old investigation.
The sting worked this way. The undercover agent would approach the shop and indicate that he wanted to get the car fixed but needed some money for "extras." If the shop complied with the request, wrote and signed a fraudulent estimate and either gave it to the agent or mailed it to the insurer, they were "dirty" and a felony warrant was issued.
Morgan said that the vehicles had all the telltale signs of insurance fraud. When asked why the insurance company adjusters wouldn't have spotted the fraud when they inspected the damaged vehicles, Morgan said. "They never saw them. The deal was that we didn't actually have the shop do the work; they just wrote the bogus estimate. That's all we needed."
All those arrested face felony charges of insurance fraud, Morgan said, noting that the rising popularity of street racing fueled much of the alleged fraud. The street racing also led to the investigation being nicknamed "The Fast and the Fraudulent", the title of a popular street racing movie. Many of the cases involved a young male car owners who would file a false vandalism or auto theft report with their insurer after intentionally causing some minor damage to his car. The car owner would then go to a body shop and ask the estimator to inflate the estimate so he could get more money, which would then be used to pay for mechanical repairs to the car and for expensive upgrades like spoilers or new seats.
"The street racer phenomenon increased this thing dramatically," Morgan said. "You'd wonder how an 18-year-old kid could afford $10,000 worth of extras on their car. A lot of it was paid for by insurance companies."
Morgan said auto shop employees approached by undercover officers would encourage them to scratch or damage their cars, then file a vandalism or auto theft report with an insurance company. One of the auto body shop's insurance estimators would then inflate the claim and the insurance providers would pay it, Morgan said. One body shop employee arrested was filmed by police taking a screwdriver to the undercover agent's car, ruining the paint job to get the maximum return from the insurer.
The agent found shop some helpful estimators who not only inflated estimates but also offered advice on how to do just enough damage to pay for upgrades but not enough to make the repair job too difficult. "Take a key, or take a screwdriver, and drag it here, here and here, but don't do the roof," one shop employee instructed the agent in a scene captured on videotape.
Despite the arrests, police said that some of the shops they visited seemed very honest and at least one was downright indignant - an employee at Arts Body Craft in Palo Alto showed the officer the door. "We usually say if that's what you're looking for, this ain't the shop for you," general manager Mark Bagdasarian told the San Jose Mercury News. "We don't bill more than we should."
One of the shops targeted was Miracle Auto Paint at 850 The Alameda in San Jose, where an estimator who had worked there for fifteen years was arrested. Miracle Auto Paint is a franchise and local owner Frank Thayer said a week after the arrest that the employee is still working for him and that he's been left in the dark by the police and the DA. "They won't tell us what's going on yet, and we haven't seen any evidence. " Thayer said he was worried that police would try to close down his shop. "It's a big concern because it's my livelihood," he said.
"We're not out to close down a shop because one employee is doing insurance fraud," said Morgan. He stressed that the majority of auto body shops operated within the confines of the law. "There are a lot of good-quality, honest body shops out there. That's who we're doing this for. It's hard to compete against these other shops that were not so honest."
"I'm glad to hear that they're going after these guys," said YumiVaught, president of the California Autobody Association. "It gets these bad apples out of the market." Vaught added that this investigation seemed a lot more important than the B.A.R.'s anti-fraud program, which she characterized as "looking for some $10.00 decal that didn't get put on the car."