Shop owners who have participated in direct repair programs (DRPs) since the 1990s probably remember when the agreement they signed with an insurer could easily be read from start to finish in less than one-tenth of a labor hour.
Reviewing the contracts today, with many stretching over a dozen or more pages, is more the equivalent of a 3- or 4-hour dent, at a minimum. But taking that time is critical to truly understand what you’re signing and what impact it could have on your business.
Here are some of the key things to consider the next time a new or revised DRP agreement reaches your desk.
Understand the indemnification requirements. Many DRP contracts require the participating shop to “indemnify” (or “hold harmless”) the insurer, which could prevent the shop from pursing a legal claim against the insurer, or make the shop responsible to compensate or defend the insurer in a legal claim arising from repairs made under the agreement. Some shops feel this is unfair, particularly if the insurer pushes for use of parts or procedures the shop would prefer not to use.
Allstate’s Randy Hanson said that concern could be overblown.
“I can say in 30-plus years, I have not once evoked an indemnification clause in a contract for a DRP partner,” Hanson said. “Not once.”
He said five of the six indemnification elements in the Allstate DRP agreement have nothing to do with repair issues. They prohibit such things as a shop making a claim against the insurer if a shop employee files a workers’ compensation claim related to an Allstate job, and prohibits someone who repaired vehicles under the agreement seeking Allstate employee benefits.
But it’s important to note that not all DRP contract indemnification clauses are the same.
“Our initial Select Service agreement did have a one-way hold-harmless against us,” State Farm’s George Avery said. “It was in our benefit. As a result of input from our (repairer) advisory council, we changed that, and now it’s both ways. We added a two-way hold-harmless for both the repairer and for us.”
Look for any and all changes. If an insurer whose DRP you currently participate in brings you a new agreement to sign, put the two agreements side by side and look for changes paragraph by paragraph. Even Avery acknowledged this can be a frustrating process, comparing it to when iTunes occasionally asks users to re-agree to its terms of use.
“I feel like they’re saying, ‘There’s a change in there somewhere. You find it,’” Avery said.
Michigan attorney Andrew Rodenhouse, whose family operates a collision repair business, said the contract terms regarding pricing are often a good first place to look for changes. But he cautioned that other changes could be seemingly more mundane, such as the jurisdiction in which any conflicts arising under the contract will be handled. But, he said, such a change can be potentially huge if it means a shop elsewhere in the country would be required to go to court in California (after finding a California attorney) if a dispute arises.
Check for mandated use of products or services. Shops say that just as labor rate or parts discounts required under DRP contracts can have a big impact on a shop’s bottom line, so too can other contract requirements. If you’re happy with your current customer service indexing (CSI) provider, for example, do you really want to take on the expense and hassle of a second one being required by another insurer? The contract might also tie you to use of a particular estimating, parts procurement or scheduling system – all of which may come with fees attached and may impact your internal processes and productivity.
Look for a “most-favored nation” (MFN) clause. MFNs first gained prominence in the collision repair industry in 2006 when State Farm added one to its Select Service agreement, requiring the shop to provide State Farm all the best pricing the shop offers any other insurer.
The challenge with some MFNs is their piecemeal nature. Say you offer Insurer A a labor rate discount but no parts discount. Insurer B receives no break on labor rates but gets a parts discount. State Farm is among the carriers that want both those discounts because each are offered to another carrier – regardless that that makes them the only insurer getting both discounts. State Farm has said it can check up on how a shop bills other insurers when subrogating claims paid by the other carrier for which State Farm is ultimately responsible.
The good news for the industry is that MFNs can be what leads a shop to rethink all the concessions they may be offering. And MFNs are also coming under regulatory fire, at least in the medical field. In late 2010, the U.S. Department of Justice and Michigan’s Attorney General sued Blue Cross Blue Shield of Michigan, saying its MFN clauses in contracts with hospitals actually raise prices, discourage discounting and prevent other insurers from entering the marketplace.
The suit was dropped this past spring, but only after Michigan passed a new law prohibiting MFN clauses in health insurer preferred provider contracts. A similar ban was enacted in North Carolina. And the Automotive Service Association (ASA) has been urging the Department of Justice to look at MFNs in auto insurers’ DRP contracts.
Watch for options “held in reserve.” For a number of years prior to State Farm’s initial required use of PartsTrader, its Select Service agreement included a clause obligating the shop to use a parts procurement system should the insurer choose to mandate one. So such clauses can be a sign of things to come.
But they may also just be a remnant from previous agreements the insurer has chosen to hang on to, keeping their options open. State Farm’s agreement, for example, also gives the insurer the right to require use of salvage parts, just as the company’s contract with its insureds does – yet State Farm chooses, for example, not to use salvage airbag components. The agreement also states that shops may be required to use a particular estimating system, yet State Farm continues to accept use of any of the Big Three estimating systems.
“We put that in the agreement so it could perhaps carry us into the future and if we ever needed it, it would be there,” Avery said. “But I understand that can be a little confusing.”
Get some extra eyes on the contract. Although some shop owners fail to read and fully understand the DRP contract themselves, even more don’t have it reviewed by others. Shop estimators, for example, are among those whose daily work is impacted by the contract, so consider having them review any new contract you are considering.
Bob Redding, ASA’s governmental affairs representative in Washington, D.C., said he encourages shops to have all DRP agreements reviewed by a local attorney. They can help spot and explain things – such as the jurisdictional issue Rodenhouse mentioned – that those less familiar with contracts may not think about while reviewing the contract.
While it’s unlikely an insurer will be willing to change any of the terms of a DRP contract with an individual shop, your attorney can at least help ensure you understand what you’re signing.
Consider what business information the insurer wants to see. Rodenhouse disagrees with those who complain about insurer contracts requiring shops to conduct employee background checks and to make shop financial data available for review by the insurer. He said in many professions, that is a common contract provision to protect those you are doing business with.
“I don’t think that’s unreasonable at all,” he said. “That may be going a little too far if they want you to provide bank account statements. But maybe a credit report is sufficient.”
Ask questions – but remember that it’s the contract that counts. Avery said shops can discuss any questions they have about the State Farm agreement with local claims personnel. He encourages shop owners to ask about the “why” behind some aspects of the contracts. He said one shop owner couldn’t believe State Farm really added a requirement that shops wash and vacuum repaired cars when that’s something most, if not all, shops do. But, Avery pointed out, State Farm can’t promise its customers that that service will happen if it doesn’t make it part of the shop agreement.
He also said an insurer might be able to provide more detail about its policies and procedures that aren’t fully spelled out in the agreement. The contracts usually have terms related to repair quality, Avery cited as an example, but they may not spell out what happens if a quality issue arises. That’s something shops may want to ask about. State Farm, for one, Avery said, has a written policy related to quality issues, though it’s not spelled out as part of the DRP agreement.
But Rodenhouse also points out that if anything an insurance company representative tells you contradicts something in the agreement, the written terms always will be upheld in any disagreement. That’s why there’s no substitute for thoroughly reviewing it yourself.
DRP agreements: My, how you’ve grown!
Compare one insurer’s current direct repair program agreement from the one used in the early 1990s, and the first thing that will strike you is just the difference in heft. The earlier agreement is just a couple of pages; the most recent agreement from that same insurer is 13 pages long with twice as much text per page.
So what has changed?
Certainly the “mechanics” of how the shop and insurer are to interact is different. The old agreement says any “handwritten estimates must be accompanied by an adding machine tape.” It says a check payable to both the customer and the shop will be mailed upon receipt of the estimate (as opposed to the current “electronic funds transfer” directly into the shop’s account). And it calls on the shop to take photographs of the vehicle when requested, while the more recent agreement spells out many required digital images.
But the new agreement has a number of elements not discussed in the older one. The shop, for example, is required to:
• Give the insurer “full access” upon three days notice to all “billing records, repair facility invoices and payments, orders, data, etc., and all other relevant records in the repair facility’s custody that concern the repair facility’s relationship” with the insurer.
• Indemnify, defend and hold harmless the insurer from “any and all liability” (including attorneys’ fees) related to any claims brought against the insurer based on the shop’s negligence or failure to comply with the agreement.
• Use an insurer-approved scheduling system and an insurer-chosen estimating system and customer satisfaction indexing (CSI) provider, and participate in an insurer-chosen safety and environmental training program.
• Provide pick-up and delivery of customer vehicles upon request, and provide a guaranteed vehicle completion date, picking up any costs associated with failure to meet this deadline.
But one key element of the DRP agreement hasn’t changed: Both the oldest and the latest agreement clearly state that the insurer “has no obligation to refer vehicles to this particular repair facility.”
Be aware of “ban the box” laws
A number of insurer direct repair agreements prohibit participating shops from employing anyone who has been convicted of a felony. If your shop participates in one of these programs, you still should be careful about when you ask potential employees about any criminal convictions in their past. As of May 2013, 50 cities and counties plus nine states (including California, Illinois and Massachusetts) prohibit some or all employers from requiring job seekers to disclose criminal backgrounds on the job application or initial interview.
The laws are often referred to as "ban the box," referring to the yes-or-no question on many job application forms asking if the applicant has been convicted of a felony.
In some jurisdictions, the law applies only to public employers, to those contracting with government agencies, or to companies with 10 or more employees. But in all cases it does not prevent employers from conducting background checks or asking questions about criminal convictions after the initial interview.
