FEATURE

Don’t Let “Prevailing Rates” Stop Your Shop From Being Profitable!

A customer drops off their vehicle to be repaired. After disassembling, scanning and/or blueprinting the car, the shop writes a thorough estimate that accurately portrays the work that needs to be performed to safely and properly restore that vehicle to its pre-accident condition. It’s time to begin the repair…or is it?

In many instances, shops encounter delays and problems in the process through the interference of the third-party bill payer who rebuts that estimate, refusing to pay for certain procedures or even arguing that the shop’s hourly rate isn’t in line with the market’s “prevailing rate.”

Repairers then face several options: • Explain why the remainder of the repair is needed and bill the customer, • Neglect to perform the work and contend with future liability issues or • Absorb the costs of properly repairing the vehicle and subsequently sacrifice profitability.

Insurers consistently use the idea of “prevailing rate” to suppress Labor Rates around the country and underindemnify consumers, but what is a “prevailing rate,” how does it affect safe repairs and how can shops combat this concept to protect their customers and their businesses?

“The ‘prevailing rate’ is an insurance term that is supposedly a snapshot of the existing rates in a specific marketplace at a particular time,” explains Aaron Schulenburg, executive director for the Society of Collision Repair Specialists (SCRS). “Insurers are only able to set market rates through acceptance. If repairers establish – and stick with – their Labor Rates based on a solid understanding of 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, carriers perceive that as the prevailing rate instead.”

“Nobody has a clue what a ‘prevailing rate’ is,” states attorney Erica Eversman (Vehicle Information Services). “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. Unfortunately, over time, insurers have routinely utilized their negotiated DRP rates to determine what they consider to be the prevailing rate. 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.”

Dave Luehr (Elite Body Shop Solutions) agrees:

“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 rates. That negatively impacts the entire market.”

Despite the fact that collision industry experts typically recognize the artificial nature of “prevailing rates,” some shops not only permit a third-party entity to mandate their prices - they also allow insurers to dictate which processes are performed based on payment; however, at the end of the day, the shop is still liable for the safety of those repairs, regardless of whether an insurance company decides to fully indemnify the vehicle owner.

“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,” claims Sam Valenzuela of National AutoBody Research (NABR). “Insurers reject payment based on whether something is a common practice in your market, but who cares what the shop next door is doing? Yes, some shops repair cars correctly anyway and then try to figure out how to get made whole, but that’s not sustainable. It’s not the shop’s job to pay for the repair.”

Acknowledging that “the economic influences insurers hold over repairs creates a terrifying situation,” Eversman observes, “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.”

Luehr takes a more assertive stance on the matter of “prevailing practices.”

“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.”

“Vehicles today are highly sophisticated with complex safety systems, and the manufacturers’ engineers provide explicit instructions on how they must be repaired,” Schulenburg contributes. “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.”

Once a shop commits to the practice of properly repairing vehicles according to those OEM recommendations and requirements, they must then decide how to recover the investment they’ve made into the repair for which the consumer was not fully indemnified.

“If the customer’s insurance carrier doesn’t cover the full cost of a proper repair, something suffers, whether it’s the shop’s profitability, the customer’s wallet when they cover the difference or the customer’s safety,” Valenzuela points out. “None of those options are acceptable because either the shop or the consumer (or both) ultimately bear the burden. Shops need to receive adequate compensation, or there won’t be an industry left to fight for!

“The Labor Rate topic has reached the crisis stage, worsened by the recent massive inflation,” he continues. “Costs and expenses have increased, but since body shop rates aren’t growing as fast, those problems are being magnified, and shops are at the point where they just can’t keep charging or accepting low, unprofitable rates. Real adjustments have to be made so they can continue safely and correctly repairing cars for their customers.”

Record-high inflation is exacerbating these concerns and creating even more problems for shops that simply want to do the right thing for their customers.

“Every market is facing this downward pressure on Labor Rates, and it’s even more exacerbated today due to the excessive inflation of material costs, utilities, even commercial business insurance,” Schulenburg shares. “All businesses, not just those in our industry, are struggling with inflation, but in most industries, the business passes the cost along to the customer. Collision repair shops are in a strange position where the bill payers put pressure against the normal process of adjusting for increasing costs.”

Well, what can shops do to ensure they are being properly compensated (and consumers are being fully indemnified)?

“Labor Rates shouldn’t be determined whimsically; shops need to work with their CPA to determine their true cost of doing business, post their rates based on that data and stand by their decision,” according to Schulenburg. “Far too many businesses are limited by what they believe they can’t accomplish. They think that they have to accept what the carrier proposes because they fail to realize that others don’t, but in reality, other shops operate under a business model whereby they insist on completing the repair properly and reject work that doesn’t fit into that model. These shops have invested the time and energy into developing consumer education initiatives, and they are armed with the knowledge to help their customers receive adequate continued on pg. 16

continued from pg. 15 reimbursement. It isn’t easy, but shops that have done this successfully prove it’s possible. Stop believing you’re the ‘only one.’”

Eversman encourages “anyone who is dissatisfied with how a claim is resolved to use Right to Appraisal as a way of gathering substantiated evidence that demonstrates the insurer’s deliberate attempt to underpay the claim and serves as proof that insurers are treating consumers unfairly.”

Reiterating that “prevailing rates” is not a measure of shops’ posted rates, Valenzuela stresses, “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.”

In order to understand what the marketplace will accept, pricing transparency is imperative.

“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,” Valenzuela says. “Shops need to start thinking differently and determine customer-driven Labor Rates, instead of insurance-driven rates. Although filling out Labor Rate surveys alone won’t directly solve the underpayment issues, it does provide a clear indication of market rate which shops can use to demonstrate to the customer that their rate is fair and reasonable, that the insurer isn’t covering the full cost of an adequate repair and to help the customer get reimbursed for any additional out of pocket expense. The best protection is to do the job right and get paid for it. Many benefits will flow from there. Shops need to stop paying for repairs out of their own pocket and start demanding to be paid what’s necessary to fix the car, even if the customer needs to pay the balance. If the insurer won’t pay and the customer won’t pay, then the only one left to pay is the shop, and that’s just not sustainable nor is it protecting anybody.”

Unfortunately, shops often don’t know how to determine what they should be charging.

“Begin by understanding your true costs and determining what your Labor Rate should be based on overhead expenses, cost of labor, etc.,” Luehr recommends. “What Labor Rate is necessary in order to correctly conduct your business? Next, look at your shop efficiencies and remove wasteful activities from your system. Our industry needs to get better at repair planning, and providing accurate documentation will help with obtaining adequate payment. Incorporate OEM repair procedures and utilize estimate-scrubbing software that reminds you to include the items that are often forgotten. I typically find that shops leave $200-$400 on the table per RO, yet they only complain about the Labor Rate. Our industry needs to stop getting so distracted by our problems that we neglect to see the opportunities.”

We’ve established that “prevailing rates” are a fallacy and that consumers deserve proper indemnification from insurers and safe repairs from shops. Additionally, shops should be compensated for the work performed, and their rates should be based on the cost of doing business. Isn’t it time for shops to pay attention to the numbers and stop allowing insurers to inhibit their profitability? AASP-MN News would love to hear how your shop collects fair and reasonable rates for the valuable work you perform. Shoot me an email: chasidy@ grecopublishing.com.

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