pci ri auto body report

© 2012, Property Casualty Insurers Association of America

PCI SPECIAL REPORT May 8, 2012

Rhode Island Auto Body Repair: Back for More Since 2003, sixteen (16) pieces of legislation favorable to and promoted by the Auto Body Association of Rhode Island (ABARI) have become law in Rhode Island. All of them have been geared at either increasing the amount paid for auto body repairs, or limiting the role of auto insurers in the claims process, reducing the insurers’ ability to provide “checks and balances” on behalf of their customers. In 2012, ABARI is again back for more with Senate Bill 2686. This bill consolidates legislation passed in previous years, but adds new concepts like a private right of action for body shops, that could mean higher costs for consumers that already burdened with some of the highest costs for auto body repair and auto insurance in the nation. This special report will provide background on the issue and look in more detail at the provisions in the new bill.

Rhode Island’s High Cost of Auto Repair and Auto Insurance Rhode Island continues to be one of the most expensive states in the nation for auto body repairs. Average collision claim costs (severity) continue to increase; the average claim cost accelerated 12.1% from 2006 to 2010; overall through 2011(3), the cost has grown 8.6%. In contrast, the countrywide average has been very flat, decreasing 0.3% overall1.

Rhode Island Collision Claim SeverityContinues to Grow

‐4

‐2

0

2

4

6

8

10

12

14

2006 2007 2008 2009 2010 2011(3)

Rhode Island Countrywide

Note: Claim severity is the average claim costSource: Fast Track Monitoring System @ 3rd Qtr. 2011

% Growth Since 2006

1 Fast Track Monitoring System @3rd Qtr. 2011, a publicly available report of auto loss trends prepared by Independent

Statistical Service, Insurance Services Office, Inc. and National Independent Statistical Service.


Given Rhode Island’s rapidly rising costs, it is no surprise that drivers in this state pay the 6th highest collision insurance premium in the nation.2

Rhode Island’s Average Annual Collision Premiumis 6th Highest in the Nation

0

100

200

300

400


$356

$294

Source: National Association of Insurance Commissioners

$

Back for More: A New Year, a New Bill That Will Harm Consumers

In 2012, in the midst of a struggling economy, not satisfied with having the most restrictive laws or some of the fastest increasing costs in the country, ABARI brings forward a bill designed to insulate auto body shops from competition with each other, potentially risk the safety of their own customers by encouraging more repairs on severely damaged cars, and further limit the insurer’s ability to manage costs and quality of repairs with more restrictive requirements. And as the icing on the cake, the bill provides for the ability to file lawsuits against insurers for alleged violations and is designed to discourage any attempts by insurers to do right by their customers under the threat of protracted and expensive litigation. S. 2686 Motor Vehicle Property Damage Claims Settlement Act S. 2686 moves existing laws on rental vehicles, steering, procedure pages and appraisals that have played a significant role in making Rhode Island one of the most expensive states in the nation to repair or insure a car are moved into the new chapter. Moreover, they are compounded with several new concepts aimed at preventing auto insurers from making any attempt to do right by their customers under threat of protracted and expensive litigation. By looking at the historical results, we have seen what the existing laws have done to repair and insurance costs, let’s look at the new provisions. Total Loss Vehicles: Section 4-6 The language in this section is identical to legislation filed (and later withdrawn pursuant to an agreement between the parties) in 2011 and seeks to limit when an insurer can declare a vehicle a total loss by amending the law governing the conduct of appraisers to state that no appraiser may deem a vehicle a total loss unless the cost to restore the motor vehicle to pre- 2 National Association of Insurance Commissioners, Auto Insurance Database Report, 2008/2009 (2011 Edition)


accident condition is more than 75% of the “fair market value” of the vehicle based on a nationally recognized source of such values. This measure would severely limit the ability of an insurer to declare any vehicle a total loss. Just because a vehicle can be repaired doesn’t mean that it should be or that it’s in the best interest of the owner that the car be repaired. Why we oppose this provision:

This provision is focused only on the initial estimate of the cost to repair the vehicle and does not consider other factors that drive both the decision and overall loss costs:

o In most cases, the initial estimate prepared by a shop or insurer does not reflect

the ultimate cost to repair the vehicle. It is often the second estimate or “supplement” that is prepared after the car has been partially disassembled (and damage that is not visible at the initial inspection can be seen) that leads to a vehicle being declared a total loss.

o The decision to “total” a vehicle is based on other factors than just the cost of

the repairs, for example:

When it is likely that additional damage will be found when the vehicle is disassembled.

When the nature of the damage indicates that the vehicle should

not be repaired, even though it may be “possible” to repair, for safety reasons, the likelihood of future problems or serving the best interest of the customer.

The more severe the damage, the longer the repairs will take, so

rental costs (paid by insurance or the owner out of pocket) are a key consideration. The longer the repair takes, the less likely the consumer is going to be satisfied with the experience and the more likely that there could be problems after the repair.

The vehicle may have significant salvage value that could lower

the overall cost of the claim and contribute to lower loss costs in the long run.

Both insurers and body shops accurately claim that they have the right or obligation to

protect their customers’ interests. The relationship between repair shops and auto insurer provides “checks and balances” that benefit consumers; this bill would significantly impair that function.

o This bill and others that have preceded it seek to remove those checks and

balances, and push the insurer further out of the repair process.


o This bill provides an incentive for body shops to “low ball” initial estimates or cut corners to keep cars under the 75% threshold and may result in unsafe or unsound repairs. Ironically, body shops often accuse insurers and direct repair shops of doing this very thing.

o This bill ignores the fact that the “total claim cost” is a critical factor in

determining if a vehicle should be deemed a total loss or not.

o This bill does not allow the insurer to consider the customer’s claim experience, including the length of time it will take to repair the car and the likelihood of problems with the repairs in the future.

Agreed Price for Repairs - Section 4-8 This provision requires that every insurer, agent and employee must not only negotiate in good faith with its insured and its chosen body shop, but it is required to reach an agreed price on all aspects of the repair including labor rates and gives the shop the right to sue the insurer for the amounts in dispute and other damages Why we oppose the bill: This provision is all about labor rates, and removing the effects of competition between

body shops from the market place. Having failed to achieve a “name your own price” interpretation of the existing labor rate survey in the courts, this is yet another attempt to circumvent the existing labor rate survey law as applied by the Department of Business Regulation and the courts. Here is what the Rhode Island Supreme Court had to say;

We further note that an interpretation of § 27-29-4.4 as requiring that the results of the labor rate survey be the sole determinant in setting the prevailing labor rate would lead to an absurd result—since such an interpretation would in effect permit rate-setting in the uncontrolled discretion of the auto body shops.3

This provision will drive huge increases in legal costs for the state, body shops and

insurers. Thousands of auto damage claims could wind up in litigation, incurring legal costs not only for body shops and insurers, but for the court system, further straining already stretched budgets.

The provision diminishes, if not completely eliminates, the effects of competition between shops on labor rates, which are already high and rising fast. Rhode Island’s auto repair labor costs are already among the highest in the nation and since 2003 have been rising at a faster rate than any neighboring state or the national average.

In 2011, Rhode Island had the 4th highest overall labor costs in the nation.

The average total labor cost in this state is now 26.7% higher than the countrywide average. The cost of labor is a significant part of the total

3 ABARI v. State of Rhode Island DBR, footnote 7, page 13


collision repair cost in Rhode Island; at 43.5%, this portion is one of the highest in the nation.4

Labor Costs in Rhode Island are Fourth Highest in Nation

0

200

400

600

800

1000

1200

1400


$1,216

$960

Dollars

Cost per Claim

Source: Audatex Reporting Services, 2011

26.7%

From 2006 to 2011, Rhode Island’s average hourly labor rates (reflecting body and frame combined) rose faster than the nearby states of CT, NY, ME, MA, NH, NY, PA and VT. Specifically, Rhode Island’s labor rates rose 14.1% overall, much faster than the other states whose individual rates rose between 2.9% and 9.5%. 5

Rhode Island Average Hourly Labor RateIncreased Faster than Nationwide and Nearby States

2006 to 2011

0

2

4

6

8

10

12

14

16 14.2%

9.5%

7.9% 7.8%7.1% 6.9% 6.7%

2.9%

$

RhodeIsland

Connecticut

Vermont

Source: Mitchell International

New York

Maine

Pennsylvania

New Hampshire

Massachusetts

4 Source- Audatex Reporting Services 5 Source- Mitchell International


The faster rising labor rates (body and frame combined) in Rhode Island from 2006 to 2011 contributed to this state’s having the 9th most rapid growth rate in labor costs in the nation during this same period, at an overall rate of 4.2%.6

During 2006 to 2011, nearly two-thirds of the states in the nation had a

decrease in total labor costs. Rhode Island is in the minority (roughly 1 out of 3 states) that had an increase in labor costs.7

Rhode Island is in the Minority of StatesWhose Labor Costs (per Claim) Increased from 2006 to 2011

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‐1

0

1

2

3

4

5


4.2%

‐1.3%

Percent

Source: Audatex Reporting Services

o Labor costs are a major reason why Rhode Island’s overall repair costs and

auto insurance premiums have consistently been among the highest in the nation. This state’s average collision repair cost is 5th highest in the nation and, as illustrated earlier, its latest average collision insurance premium is 6th highest, 21% higher than the countrywide average.

Both insurers and body shops rightfully claim that they have the right or obligation to

protect their customers’ interests. The relationship between repair shops and auto insurers provides “checks and balances” that benefit consumers; these measures significantly impair that function.

o These bills and others that have preceded them seek to remove those checks

and balances, and push the insurer further out of the repair process. Section 4-9 Penalties This provision also provides for administrative penalty of up to $5,000 for each violation,

which if applied on a per-claim basis could mean up to $365 million in fines paid by Rhode

6 Source- Audatex Reporting Services 7 Source- Audatex Reporting Services


Island’s insurers; this amount could ultimately be passed on to consumers in the form of higher premiums.8

8 Assumes a total of 73,000 vehicle claims in Rhode Island each year (73,000 X %5,000 = $365 million)

pci ri auto body report

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