Prevailing Price Costs Lives: Addressing the Danger of When a Third Party Dictates Repair Practices- Part 1
by Chasidy Rae Sisk
Collision repair shops are businesses, yet too often, a third-party entity exerts an unsettling amount of control on the procedures they implement and the prices they charge.
The term “prevailing rate” carries different connotations for different individuals and various industry segments. Texas Automotive spoke with Aaron Schulenburg (Society of Collision Repair Specialists), industry attorney Erica Eversman (Vehicle Information Services), Dave Luehr (Elite Body Shop Solutions), Mark Olson (VECO Experts) and Sam Valenzuela (National AutoBody Research) about this important topic.
Texas Automotive: What are “prevailing rates,” and why are insurers allowed to determine them?
Aaron Schulenburg: The “prevailing rate” is an insurance term that is supposedly a snapshot of the existing rates in a specific marketplace at a particular time, but it’s actually a highlight of the decisions that shops make and what they accept. Insurers cannot set prices unless we let them. Unfortunately, there are shops that hoist the white flag and allow other segments of the industry to control things that shops have the final say about. If repairers establish – and stick with – their Labor Rates based on the true costs of labor, supplies, specializations and so forth, that’s how prevailing rates should be determined; however, if the majority of shops in that market accept externally dictated rates, it establishes those rates as the prevailing rate instead.
The concept of “fair and reasonable rates” is a much more important conversation, and my favorite explanation of this came from Floyd v. Delross, Mason v. Ellis when Superior Court of California Judge Bertoli indicated that the question before the Court was “whether or not the price that was charged […] for the labor that they performed was reasonable. That is how damages are determined in a negligence case.” He then indicated that “the third-party plaintiff is entitled to be compensated for the reasonable cost of repairs that are necessary to restore the vehicle to its pre-accident condition” and that “a reasonable charge implies a range of charges. If the charge falls within that range, it will be deemed to be reasonable. No particular charge can be said to be the only reasonable charge.”
Erica Eversman: Nobody has a clue what a “prevailing rate” is. Insurers have been able to self-define this term generally, typically setting them based on a survey conducted in a particular geographic region of all shops. One major concern with these surveys is their inclusion of – and possibly focus on – direct repair program (DRP) shops that agree to provide a certain price to the insurance company. As an attorney, I find DRP agreements to be problematic because they never include any binding provision on the part of the insurer, though binding provisions on the repair facility are certainly identified within the agreement. There’s an implication that the carrier will encourage consumers to visit that shop, but their agreement specifies that they have no obligation to do so because they know that in states where they are permitted to designate a repair shop such as Texas, doing so means that they are liable for the quality, propriety and efficacy of the repairs. Unfortunately, over time, insurers have routinely utilized their negotiated DRP rates to determine what they consider to be the prevailing rate. Insurers’ surveys are also problematic because insurers often fail to limit their geographic area within state borders, and since different states have different tax regulations, Labor Rates often vary significantly in neighboring states. I know at least one insurance commissioner who believes this scenario constitutes an unfair claims practice.
Every state’s insurance regulations include provisions that insurers need not pay more than the amount at which they can refer a consumer to an alternate, reasonably located shop that will perform repairs at the price the insurer deems appropriate. In actuality, the prevailing rate should be determined based on the “fair market rate,” which is the rate that an ordinary consumer would pay to repair their vehicle without using insurance to pay, so prevailing rate calculations should be based on retail or posted door rates, NOT contract rates which are given at wholesale price in exchange for that unspoken promise to direct more work to the shop. Given that insurers don’t disclose their surveys and how they determine prevailing rate, we cannot properly analyze their results and determine whether those rates are truly demonstrative of what consumers are paying in the marketplace, yet unless carriers accept 100 percent liability for the repair, they have no right to define the prevailing rate as the rate at which they can convince collision professionals to repair vehicles.
Dave Luehr: “Prevailing rates” are supposedly the average rate that is charged in an area, based on a data sample collected by an insurer, but honestly, there’s probably more mystery than answers around this topic since they refuse to share information on how they came up with that data, making it difficult to identify which factors go into that determination. The most obvious of those factors is the inclusion of DRP shop rates; insurer surveys specifically ask shops about the rate you charge “us” which implies that they are unfairly including contracted rates in their determination of prevailing rate. That negatively impacts the entire market.
Mark Olson: If we’re talking about a true “prevailing rate” in a market, it’s whatever the shops charge, but the problem is that insurers want to pay the lowest rates within regard to a shop’s qualifications or specializations. The industry likes to complain about insurance companies, but insurers simply shop at the place where they can get the best price. Who sets the price? The retailer does. A repair according to OEM specifications isn’t the same as a repair in a shop that doesn’t follow those requirements; it’s like comparing a steak at Denny’s to Outback – you’re going to pay more for the better product! Insurance policies indemnify consumers for the rate they can procure similar repairs in the marketplace, so prevailing rate is dictated by the policy and by what shops in that market charge. The problem is that many shops don’t know what they’re supposed to charge because they’ve never taken the time to sit down with a CPA and determine their actual cost of doing business and what they should be charging in order to make a reasonable profit. If 90 percent of shops in a marketplace accept the rate offered by insurers, that becomes the prevailing rate.
Sam Valenzuela: Does anyone really know what a “prevailing rate” is? Basically, it’s whatever an insurance company says it is. We simply look at those rates as just settlement rates, the rate that the insurer reimburses their customer. It’s not a measure of what shops’ posted rates are, nor is it a measure of what customers are willing to pay. Policy language around this term is vague and doesn’t clearly state how that rate is calculated. At National AutoBody Research (NABR), we don’t really care what insurers say about prevailing rate when they can’t or won’t show the data. Why should anyone believe their numbers? Shops are just playing the carrier’s game when they adhere to that language. In 2022, it’s time to change the game by thinking and talking in terms of “market rates:” the amount a customer will pay out of pocket to repair their car without the involvement of an insurance company. That’s the best indication of what the marketplace will accept or reject. But one necessary ingredient for having a free, open market is to have pricing transparency. That’s the whole reason we created LaborRateHero.com, so shops can show the world what their labor price is, just like a gas station on the corner shows everybody what their price of gas is. In our observation, body shop rates are extremely underpriced when compared to the rates consumers pay for other trades; it’s the bargain of the century! Shops need to start thinking differently and determine customer-driven Labor Rates, instead of insurance-driven rates.
TXA: How are prevailing rates related to prevailing practices, and how does insurers’ influence on rates and practices impact a shop’s ability to provide a safe and proper repair?
AS: While we’ve established that a reasonable rate falls within a range, I can’t say the same about repair practices. Vehicles today are highly sophisticated with complex safety systems, and the manufacturers’ engineers provide explicit instructions on how they must be repaired; there is a right way to fix the vehicle, and if the vehicle isn’t repaired according to those instructions, it may in fact be repaired the wrong way. Of course, a range of practices exists within any market, but if the most common approach to a repair doesn’t adhere to the engineer’s specifications, the wrong way doesn’t become right simply because it’s the prevailing practice in that marketplace. Insurers cannot apply that concept to repair practices and procedures because there’s often only one way to correctly perform a repair.
EE: The economic influence insurers hold over repairs creates a terrifying scenario. While some shops insist on performing the procedures necessary to restore the vehicle to its pre-accident condition and ensure it’s safe for the customer to drive, shops that feel beholden to an insurer often neglect to adhere to every required process merely because the insurer refuses to pay for it. Often, that results in unsafe vehicles returning to the road, endangering not only its occupants but everyone else that encounters them while driving. Because the National Highway Traffic Safety Administration (NHTSA) doesn’t track the cause of fatalities resulting from accidents, we have no way to determine how often fatalities are caused by improperly repaired vehicles or other factors related to the repair. In the John Eagle case, the only reason we knew about the faulty repair was because the Seebachans survived, allowing us to trace the vehicle’s history. No government entity ensures repaired vehicles are safe to return to the road; instead, that responsibility is solely placed on the repair industry’s shoulders, without any support from the insurance industry or even insurance regulators.
DL: I want to put this idea to rest: There should be no correlation. If you’re being influenced by Labor Rates or anything else to perform an unsafe and improper repair, you shouldn’t accept the job! The idea that the insurance company made you do something is a bunk idea. Shops need to take personal responsibility – either take the job or don’t. There’s no excuse for not repairing a vehicle correctly. We can’t blame the insurance company. Unless the shop participates in a DRP, they’re under no obligation to perform the repairs at the so-called prevailing rate. We live in a free enterprise country where we can charge what we want. Repair contracts are between the shop and the customer; the insurer merely pays the bill.
MO: This is a very slippery slope. When insurance companies refuse to pay for certain procedures, many shops cut corners on the repair. The real problem is that shops are typically terrible at estimating, so they leave things on the table, and insurers take advantage of that. At a $55 per hour Labor Rate, the average severity should be around $7,000 per car, but it’s actually only $3,500 nationally; shops are undercharging by around 50 percent! When a shop allows what an insurer will pay to dictate how they repair the car, that shop is liable for failing to follow the OEM’s requirements. Shops need to take a stand for the consumer and insist on repairing the car correctly, but they shouldn’t have to fix it for free because they didn’t buy it, insure it or wreck it. Shops are in business to make a profit, and they’re the professionals, so they need to inform their customers when the vehicle owner’s carrier refuses to compensate for a safe and proper repair.
SV: Labor Rates are inextricably linked to a shop’s ability to provide a safe and proper repair. All roads lead to Labor Rates: Shops are unable to find and hire quality technicians because other industries are more lucrative, and without adequate compensation, shops cannot afford to invest in training, tools and equipment. Yes, some shops repair cars correctly anyway and then try to figure out how to get made whole, but that’s not sustainable. Insurers reject payment based on whether something is a common practice in your market, but who cares what the shop next door is doing? It’s not the shop’s job to pay for the repair. The shop’s job is to safely repair that vehicle and to get paid for it, and the insurer’s job is to pay for that repair!
Catch Part 2 of this Industry Round Table in the March Issue of Texas Automotive!
Want more? Check out the February issue of Texas Automotive!