Insurer Investment and the Scourge of Illegal Steering

The announcement of legislation in California seeking to eliminate insurance company investment in collision repair shops provoked a decidedly mixed reaction from many collision repairers I've spoken with since it was introduced. California Senate Bill 1648, was introduced by Insurance Committee Chair Jackie Speier in late February. Beyond seeking to eliminate any amount of insurer investment, the bill also seeks to eliminate incentive programs for referrals.

The California Autobody Association strongly supports SB 1648 and was one of the primary movers behind the scenes to get the legislation introduced. The organization publicly questioned insurance company investment last fall after the announcement that the Interinsurance Exchange of the Automobile Club had invested in Caliber Collision Centers. The fact that Zurich Financial Services, who happens to own Farmers Insurance, has long maintained an investment in Caliber escaped most people's notice.

While the Auto Club's investment in Caliber raised concerns for California repairers, the issue of insurer investment really broke onto the scene with the announcement last May that Allstate's investment subsidiary had bought Sterling Collision Centers.

Since that announcement collision repair facility owners have been concerned about their long-term prospects. This legislation, and other similar bills that will be introduced in other states, will further cloud the industry's future.

Certainly, many shops that are tired of the unending struggle with insurers over fair reimbursement and the legality of steering will support outright prohibitions of investment by insurers. To many others, the thought that government can do a better job deciding who invests in what seems unfathomable. Having government tell individuals or businesses where they should employ their capital smells too much like socialism for me.

As the California Senate Bill is currently written, it is not even clear that Allstate's investment in Sterling is illegal, given the ownership structure through their investment subsidiary. Sterling does not currently operate a facility in California so for the time being, the issue is moot. It is apparent that, to be effective at eliminating bans of insurer investment, finely crafted legal language will need to be created to make the bill effective. Given the ongoing convergence of the banking and insurance industries, this language will be very hard-pressed to cover every contingency. Consider just a few scenarios:

Will auto manufacturers who own insurance companies be banned from investing in repair facilities? Will many large banks be able to continue to loan money to collision repair shops? If these loans are secured by the business assets, what happens if the debtor defaults? The list of challenging circumstances to the present bill language goes on and on.

The real concern of competing repair facilities is not the investment by the insurer, but the market conduct of that insurer as a result of its investment. If insurers who invest steer far larger proportions of their claims through this small number of repair chains, competition and competing businesses will suffer. The fear is that insurers will use the facilities they invest in to further control rates and allowances.

Is this fear unfounded? Not by a long shot. The insurance industry's conduct relative to steering is beyond being suspect; it's appalling and deserves legislative attention across the country.

While insurers' corporate policies may state that they do not require customers to take their vehicles to specific repair facilities, and while their word tracks are respectful of individual state laws, collision repairers in the field are experiencing far too many abuses. Too many customers are left with the impression they must take the vehicle to a direct repair program facility (DRP). Whether its an insurer's field staff managing the number of referrals or simply stretching the truth to eliminate the need to send an appraiser to a non-DRP shop, the frequency of complaints by shops who experience this type of behavior is alarming.

The problem is not new. Investment by insurers in shops makes the concern over the problem that much more urgent.

In the past I have advocated written disclosure of a consumer's right to choose their repair facility at the time of loss. Such disclosure would go a long way toward eliminating the abuse of the consumer's right to choose. But, even if this bill is successful and California bans insurer investment, the scourge of illegal steering will remain. It is time for both parties in this equation, shops and insurers, to get behind the consumer's right to choose, and also support full and open disclosure. Certainly shops are already behind it. Insurers must join in support or see more bills like that before California's Senate take flight across the country.