(An edited version of this article appeared in the November 1997 issue of Claims Magazine)

FOXES, PART II

by Ronald J Zaremba, CPCU,AIC,ARM

Two years ago, Mike Harp of Newsam Harp, Inc. wrote an article in Claims magazine, entitled, "The Fox in the Property Repair Hen house". The main point of the article was that the contractors (foxes) are being turned loose among the policyholders (fat hens) in "preferred repair programs". Mr. Harp argued that without proper supervision and training, the contractors will drive up indemnity costs by overpricing, and ignorance of fraud, insurance terms and subrogation. True, all those things can and have happened, but...

The resulting howls from the contractors was memorable. But I do not remember hearing even one "peep" from the protectors and indemnifiers of the "chickens", the insurers. There is a reason for that; the insurers invited the foxes into the henhouse to begin with. So they are not likely to complain too vigorously about a concept they initiated some time ago.

I have been in the claims business for over thirty years. All during that time insurers have used contractors and repair shops to determine damages and what they owe to the policyholder. Some insurers still require three estimates of repair to be submitted to determine the damages. Now you know and I know that there is no free lunch. Contractors and repair shops cannot provide free estimates ( except to their brother-in-law). The costs are absorbed by the repair facility but recovered in the overall price structure. In other words the customer pays and the insurer ultimately pays for this "free" service.

So if the insurers are ultimately paying for the service of the repair facilities to determine damages and indemnity, what advantage is it to them to maintain the status quo ? Accountability. The costs, to the extent they are identified, are paid out in indemnity dollars and not expense dollars. As indemnity dollars, the cost of this service is being built into the premium rate structure. Whereas if the cost of providing this service was a pure expense cost, it will rarely generate a corresponding rise in premium rates. Thus to the extent that the insurers can rely on the repair shops and contractors to provide this service, the costs are passed directly back in the rates to the insurance buyer.

The costs of appraisers and independent adjusters are always an expense, not indemnity. Thus insurers will try to minimize the "outside adjusting expense" since "expenses" are more difficult to work into the premium rates and the expenses are subject to strict budget guidelines. The claims managements pay can be directly effected by their ability to meet their budget. Thus they will prefer to have the reasonably reliable contractor provide the service and absorb the costs and pass it on to the policyholder (and ultimately the insurer).

With competitive pressure in the contractor and repair shop environment, they are now not only providing estimates on damages and indemnity. They now also document damages with photos and diagrams and "adjust" the loss and claim with the policyholder. From the property owner's point of view, it is a fine line between whether the contractor explains the coverage limitations or benefits in person and an inexperienced inside adjuster tries to do the same long distance. Although a number of contractors are trying to train their staff on subrogation, indicators of fraud and insurance terms, they will probably never have the same interest in these concepts as long as it has no positive effect on what they are paid. In fact, to the extent that these concepts adversely effect them, it seems likely that they will be ignored.

Realistically though, accountability is a rather nebulous argument for the insurers increasing use of contractors and repair shops. The real reason is that the contractors and repair shops are providing more value to the insurers than the alternative independent adjuster. Maintaining an "understanding" with a capable, interested and honest contractor or repair shop makes the adjusters' job much easier. This symbiotic relationship can be healthy and helpful to the repair shop, the insurer and the property owner. This is particularly true on smaller losses, under $10,000. The keys to maintaining the relationship to the mutual benefit of both are found in constant communication and mutual trust. The means for instant communication abounds. Trust is harder to come by and maintain.

As an independent adjuster, I recognize that this symbiotic relationship exists. In fact, up until the last five years, we used it regularly too ! Now, however, we rarely work with "select" shops and contractors to determine the amount of the loss and claim. More and more of our clients want to distance themselves from the contractual relationship between the repairer and the property owner. Our clients want a knowledgeable adjuster to inspect the loss, scope the repairs and reach an agreed cost of repairs with the insured's contractor. They also want a knowledgeable adjuster to be able to spot coverage problems and limitations, subrogation, salvage potential and potential fraud.

So don't berate the repairer for "sleeping" with the insurer and don't berate the insurer for "enslaving" the repairers. Although the system has many problems, it is workable and will continue to work for some time to come. To stay competitive in today's environment, the independent adjuster must demonstrate superior ability, knowledge and integrity at competitive rates. An important way for the independent adjuster to do this is to join and participate in professional adjusters associations and training. If you are standing still, you are a sitting duck and you are losing ground to your competitors.