Who's at fault? Why some collision shops view third-party claimants differently than first-party insureds

Pat McGuire, an Illinois attorney who specializes in insurance coverage law and how it applies to collision repair, suggests shops may want to think about only two jobs types: first-party and third-party claims. One can be handled differently, and potentially more profitably, than the other.

“They’re so fundamentally different it behooves every shop to understand this and know how it’s affecting their industry,” McGuire says. “There’s a sentiment that the industry isn’t completely going in the right direction. By understanding this, it’s one of the ways to bring it back and get a sense of normalcy. By understanding this, you can figure out a way to get paid for what you’re doing.”

McGuire understands the realities of insurer-shop relationships because he’s worked with shops and consumers on such issues, including:

• consulting with and training a group of Illinois shops;
  
• defending shops against charges of insurance fraud;
  
• helping get insurance payments that are due to shops and consumers;
  
• bringing suits against shops for fraudulent repairs; and
  
• conducting seminars at NACE.

First-party controlled by contract

McGuire uses an example of a blue car rear-ending a red car to explain the difference between the two parts of claims. Liability for the accident and damages to both cars isn’t in question. The blue car’s insurer, County Companies, is on the hook.

Go to related sidebar:
First- vs. third-party impacts diminished value claims

The driver of the blue car and County Companies 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 requires the owner of the blue car to notify County Companies about the loss and give the insurer an opportunity to inspect the vehicle before repairs. County Companies, in turn, is required to pay for the loss in a good faith and 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 says.

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’re not defective – in first-party claims. Depreciation or betterment may apply if not restricted by state law. The blue car owner’s deductible and loss-of-use (rental car) coverage are spelled out in the policy.

However, McGuire points out limits on any specific repair procedures aren’t spelled out in the insurance policies, 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,” he says. “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 can’t arbitrarily say they’re going to cap it for some other amount after the fact.”

The bottom line in first-party claims is the shop and (in this case) the blue car owner need to understand the terms of the contract he signed with the insurer.

Third-party claim differences

The situation is different for the owner of the red car and the shop repairing the vehicle. The driver of the red car has no contract with the owner of the blue car or County Companies, which 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 was paying for the red car repairs personally).

“Would I, as a repair professional, go to the driver of the blue car and say, ‘Hey, you hit my customer,” McGuire says. “How do you think I should repair their car? So why would someone base repair decisions on what that driver or his insurance company says?”

The only portion of the blue car owner’s insurance policy impacting repairs to the red car is the liability clause, which generally is only one or two paragraphs long. It 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 Companies 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 says.

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 it can’t have an appraiser out for a week, but in third-party claims, the shop and vehicle owner isn’t required to wait.

Go to related sidebar:
Track your first-party vs. third-party claims

“The shop might say, ‘that’s fine. I understand,’” McGuire says. “But I’m telling you I’ll 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 aren’t 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 can’t be bound by the terms of a contract he never saw or agreed to,” McGuire says about third-party claims. “But I’m not advocating you don’t try to work with each other or create disputes where you don’t need them. Don’t put yourself in a position where you’re taking less money while incurring more risk. That’s what’s happening in probably 99 percent of shops today.”

The equalizer

There’s 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.

“Some shops market themselves to third-party consumers knowing they’re never then answerable to the insurance industry on those,” McGuire says. “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.”

McGuire acknowledges insurers are addressing the issue by requiring direct repair shops to treat first- and third-party claims with that insurer as the same. Although McGuire can point to many examples of how shops treat first- and third-party claims differently, he acknowledges it’s not a silver bullet that’ll immediately solve the difficult issues shops face.

“The rules we’re talking about are seldom enforced,” he says. “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.”

Type of claim can impact what's a reasonable charge

Track your first-party vs. third-party claims