If you are an insurer who is using direct repair providers or third party administrators to settle automobile damage claims, please take note. Recently, I conducted a survey comparing desk audits by third party administrators to the claims that I have handled as an independent appraiser.

The third party administrator reports to an insurer the original estimated repair cost provided by a body shop. Then, using whatever guidelines have been set by the insurer, the TPA negotiates for a lower cost-to-repair dollar value. The completed audit report states the savings the audit company was able to negotiate on behalf of the insurer.

The third party audits I reviewed consistently displayed the following: higher dollar repair costs, non-standard repair procedures, omission or removal of repair procedures, labor allowance changes by the use of more than one estimating guide, supplements conducted without re-inspections (Was that quarter panel sectioned, when a full replacement was requested, agreed, and paid for?), lack of appraiser license numbers on audits, and additional violations of state regulations.

Additionally, in my state, 10 percent of first party automobile claims require reinspection. Who is going to reinspect these audit claims and DRP claims? I do not think it will be the independent whom the insurer circumvented with the original estimate.

Settling claims with a third party administrator is risky. The TPA is unable to confirm or deny the extent of damages that are being reported by repairers. It also is unable to determine any relationship to the claim statements of estimated damages by repairers. Instead, the third party administrator relies on repairers' opinions and judgment.

The TPA is unknowing of the existence of proper tools and equipment of the repairer. Has the frame allowance been exaggerated to compensate for a sublet frame repair? How about refinishing? Does the repairer have the ability to perform the estimated refinishing procedures, or are the values exaggerated to compensate for sublet repairers?

My state has very lax tool and equipment requirements for auto body repair shops. To be licensed, the shop only has to meet a dollar value of unspecified tools. For several years, the Auto Body Association of Rhode Island has attempted to establish minimum standards for repairers mandating such items as specific tools and equipment, as well as technical continued training. The state, however, has failed to implement any standards. Nor has the state taken the responsibility to safeguard the constitutions of the state and the motoring public that may be traveling through or visiting.

Repairers are not taking advantage of training, such as that being offered by I-CAR, and are not being required by insurers to attend technical training as part of their DRP contracts. Repairers also are least informed of the laws and regulations of the insurers and appraisers, but are writing estimates (repair orders, with respect to the Supreme Court) reflecting the best practices of the insurer. Knowing all this, insurers still endorse the use of DRPs and third party administrators.

I cannot think of another industry in which the grossly undertrained and uninformed contractor is chosen over that of the well skilled and knowledgeable contractor.

Interestingly, in Rhode Island, a body shop employee is prohibited from obtaining a state-issued appraiser license. So then, how does the state intend to assure its constituents, and the general motoring public, that estimates completed by repair shop employees (DRP or unaffiliated) are written within certain safety guidelines by trained, qualified people using proper tools and industry-proven repair methods? They can't, nor have they embraced the idea of minimum standards which would ensure that appraisers and repairers are trained in the proper methods of estimating damages and possess the proper required tools for repairing those damages.

Where's the Watch Dog?

When using a third party administrator or DRP, can an insurer be certain that unrelated damages are not being repaired wrongly? Can an insurer be certain that the repairer estimated damages correctly? Can an insurer be certain that industry-proven repair methods are being employed by the repairer? No, it cannot.

Interestingly, in December 2003, J.D. Power and Associates rated the satisfaction of vehicle owners who have had their automobiles repaired through insurer direct repair provider programs, as opposed to repairers of the owners' choice. The greatest percentage of satisfied owners, by a large margin, were those who had chosen their own repairers.

Keep in mind that some insurers are providing reduced deductibles and free loaner vehicles as incentives to use their network repair shops. Even after these incentive attempts, the vehicle owner is still unsatisfied and CSI is diminishing.

What about arbitration, customer complaints, and state insurance department inquiries? How confident can insurers feel about their vendors' representation, considering the aforementioned statements and concerns?

Vehicle owners have spoken, and they wish to choose their own repairers.

The use of DRPs and third party administrators also has had a negative impact on every independent appraiser throughout the nation. I, personally, know two independent appraisers who have recently left the independent service industry due to the reduction of available work. This reduction of work is the direct result of an increase use of DRPs and third party administrators.

Ultimately, the use of DRPs and third party administrators will reduce the availability of qualified, trained appraisers willing or able to work for insurers. The appraisers left to serve insurers' needs of the future will be those who are now collecting pensions. Most of these old dogs rely upon the training and experience of their pasts and, as a group, they do not keep up on current technical training. This crop of semi-retired appraisers is unaffected by trends and volume, as they are working mainly to supplement their pension incomes. Diverting claims to DRPs and third party vendors practically guarantees that the young independents will not be around to serve insurers when the pension crop of appraisers eventually retires.

How about the vendors an insurer chooses? Are insurers familiar with the experience, training levels, and certifications of the vendors handling their claims? They should be; those vendors are representing the insurer.

The continued use of direct repair providers and third party administrators, in the manner in which I have observed and which J.D. Power and Associates has reported, ultimately may damage the insurer's image and its profits to a greater extent than the relative savings. The use of qualified independent appraisers, however, can lower the severity of claims; provide protection against fraud; provide a positive presence for insurers; establish relationships among insurers, local collision industries, and their local communities; greatly reduce future claim liability exposures; and, lastly, increase CSI and policy renewals.

Insurers, please consider your company's policies on the use of third party administrators and DRPs. Are they really worth it?

Christopher Sheehy is an appraiser and adjuster with ACV Appraisal Services in Rhode Island.

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