Collision repairers tend to look at jobs by type of hit (light, medium, heavy), by vehicle type, by insurer involved, and by whether they are DRP or non-DRP claims--with the result being hundreds of different types of jobs.
Pat McGuire said shops may want to instead think of just two types of jobs: first-party claims and third-party claims. One can be handled very differently and, McGuire pointed out, is potentially more profitable than the other.
"They are so fundamentally different that I think it behooves every shop to understand this and know how this is affecting their industry," said McGuire, an Illinois attorney who specializes in insurance coverage law, in particular how it applies to collision repair.
"I think there's a sentiment that the industry is not completely going in the right direction," he said. "I think by understanding this, this is one of the ways to kind of bring it back and get some sense of normalcy. By understanding this stuff, you can figure out a way to…get paid for what you're doing."
Though McGuire said he is the first to admit that what he is talking about is legal theory, it's not that he lacks an understanding of the realities of insurer-shop relationships. He's worked with shops and consumers on such issues for about a decade, including doing consulting and training work with a group of Illinois shops; defending shops against charges of insurance fraud; helping get insurance payments due shops and consumers; and bringing suits against some shops for fraudulent repairs. He's also conducted seminars at NACE and other industry events.
And although he was careful to point out that he's not offering legal advice and that insurance law and regulations vary state by state, he said he's surprised how few shops understand the important ways first- and third-party claims differ.
First-party claims controlled by contract
To explain the differences in the two kinds of claims, McGuire used an example of a blue car rear-ending a red car. Liability for the accident and damages to both cars are not in question in this example; the blue car's insurer, "County Cos.," is on the hook.
The driver of the blue car and County Cos. have a contract (the insurance policy) that governs the rights and responsibilities they each have in terms of repairs to the blue car. That contract, for example, requires the owner of the blue car to notify County Cos. about the loss and give the insurer an opportunity to inspect the vehicle prior to repairs.
County Cos., in turn, is required to pay for the loss in good faith and a fair manner, according to the terms of the policy.
"They can't interject terms after the loss has occurred any more than the consumer can change the terms of the coverage after the loss occurred," McGuire said.
The terms of the policy generally say liability is limited to the cost to replace or repair the vehicle. The policies generally give the insurer the right to use salvage or non-OEM parts--provided they are not defective--in first-party claims. Depreciation or betterment may apply if not restricted by state law. And the blue car owner's deductible and loss-of-use (rental car) coverage are all spelled out in the policy.
McGuire pointed out, however, that nowhere in the insurance policies he's reviewed are limits on any specific repair procedures spelled out, so they can't be arbitrarily put in place after a claim.
"There's no blend-within-a-panel exclusion set forth in any policy that I've ever seen," McGuire cited as an example. "I think another prime example of that would be a paint and materials cap. If that car legitimately needs $700 or $900 worth of paint and materials, the insurance company cannot arbitrarily say after the fact they're going to cap it at some other amount.
"You have the P-pages and manufacturer recommendations, and all of that comes into play as to what they owe," he said. "If anyone comes out and tells you, 'We don't pay for that,' or, 'That's not covered under our policy,' I would ask to see the policy or ask the adjuster to put it in writing. Not to just be in his face about it or anything, but because it becomes a liability issue for you. You want it documented that you asked to be paid for it, and they refused."
But the bottom line in first-party claims, McGuire said, is that the shop and (in this case) the blue car owner need to understand the terms of the contract that he or she signed with the insurer.
No such contract in third-party claims
Things are very different for the owner of the red car and the shop repairing that vehicle, McGuire said. That driver has no contract with the owner of the blue car or County Cos.. County Cos. can no more dictate where or how the red car's owner has the vehicle repaired than can the owner of the blue car (if he or she didn't have insurance or was personally paying for the red car repairs).
"Would I as a repair professional go to the driver of the blue car and say, 'Hey you hit my customer; how do you think I should repair their car?'" McGuire said. "So why would someone base repair decisions on what that driver or their insurance company say?"
The only portion of the blue car owner's insurance policy impacting repairs to the red car is the liability clause, which McGuire said is generally only one or two paragraphs long. It generally says something like, "Our limit of liability is to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage and to defend against any claim seeking damages under this policy."
So what does that mean for the red car owner and the shop? First, neither is obligated to give County Cos. notice of loss.
"Shops I consult with will start work on a third-party claimant's vehicle faster than they might on a first-party," McGuire said.
He said such shops put the red car driver in a rental car and call the insurer and say they plan to start work on the red car the next day. The insurer may say they can't have an appraiser out for a week, but in third-party claims, the shop and vehicle owner isn't required to wait.
"The shop might say, 'That's fine. I understand,'" McGuire said. "'But I'm telling you I will start repairs on the red car tomorrow. You're free to see it whenever you want. She's a third-party claimant and we're going to get going on these repairs because that's what she wants us to do; she's authorized the work.'"
Similarly, third-party claims are not subject to depreciation or betterment, required use of salvage or non-OEM parts, or required use of a direct repair shop (insurance policies often give the insurer the option in first-party claims of actually repairing the vehicle, which allows so-called 'concierge' type programs).
"A person cannot be bound by the terms of a contract he never saw or agreed to," McGuire said of third-party claims. "All that said, I'm not advocating that you don't try to work with each other or that you create disputes where you don't need them. But certainly don't put yourself in a position where you are taking less money while at the same time incurring more risk. That's what I think is happening in probably 99 percent of shops today."
An 'equalizer' in the industry?
There is a segment of the repair industry that understands the differences between first- and third-party claims, and view it as a way to compete as a non-DRP shop, McGuire said.
"Some shops market themselves to third-party consumers knowing they are never answerable to the insurance industry on those," McGuire said. "It's the same thing as a personal-injury attorney. Personal-injury attorneys only represent third-party claimants because they know they're just entitled to whatever the law says without having to jump through hoops."
It's something, however, that McGuire acknowledged that insurers are becoming aware of and addressing by requiring direct repair shops to treat first- and third-party claims with that insurer as the same.
"I think they were getting wind that shops were starting to pick up on this, and they didn't like where it was going because it is a very strong equalizer of rights," McGuire said. "The last thing insurance companies want is for this to be accepted and dealt with in the way the law says it should because it's not in their economic best interest by any stretch. It is, however, I think in the shop's and consumers' best interests."
But although McGuire said he can point to many examples of how shops successfully treat first- and third-party claims differently, he acknowledges it's not a 'silver bullet' that will immediately solve the tough issues shops face in today's market.
"The reality is the rules we're talking about are seldom enforced," he said. "It takes shops and consumers to get together and figure out whether they're going to pursue these issues and then go ahead and do it. No one is going to enforce it for you."