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Questions surface on how insurance companies calculate a car's "total" value
By Joe Frey
When your vehicle is totaled in a bad accident, your collision auto insurance is supposed to pay for the actual cash value of your car at the time of the crash. Your claim check should put you back where you were pre-accident, right? But insure.com has obtained evidence that shows auto insurers are shrinking your payment in order to increase their profit.
Unlucky folks who've had their wrecked cars totaled often note that their insurance company checks for their totaled cars were much lower than they expected. The Kelley Blue Book and National Automotive Dealership Association (NADA) Guide references that we've been led to believe are definitive sources of used-car values often show higher car values than what people received from their auto insurers.
That's because insurance companies subscribe to private databases of car values, from which they pull dollar amounts for cars. So, while you may be leafing through Kelley Blue Book to find the value of your 1996 Honda Accord, your insurance company is looking at a proprietary database to which you don't have access. The main car-value database competitors are: ADP Claims Solutions Group (which uses data from 1,200 dealers and thousands of automobile trade publications), based in San Ramon, Calif.; CCC Information Services, based in Chicago; and Mitchell International out of San Diego (which uses an average of the Kelley Blue Book and NADA values). But these databases, and in particular the one from CCC, can allegedly be used for fleecing you out of the real-world value of your car.
Internal Farmers Insurance Co. documents submitted in the discovery process of pending litigation (including the pending case Buratovich vs. Farmers Insurance Exchange and Farmers Insurance Co. of Arizona and CCC Information Services Inc. case out of Arizona), allegedly show how these databases can be used by insurers for a systematic pattern of "ratcheting down the price the insurer has to pay a policyholder for his totaled vehicle," according to Stephen Ryan, an attorney based in Scottsdale, Ariz. Ryan represents the plaintiff in Buratovich vs. Farmers, et al. and has investigated CCC for an article he wrote for Trial magazine in June 1999. He also represents three other plaintiffs in similar car-value cases, also filed against Farmers Insurance.
The Farmers Insurance documents suggest that the company chose to use CCC car values not because they were the most accurate, but rather solely because they were the lowest, resulting in smaller claims checks to policyholders. In a letter authored by a Farmers Insurance division claims manager in Columbus, Ohio, Ted Bair, to Dave Colburn and Ray Schmidt, claims officers in Indiana, Bair writes about a pilot program using car-value software that culled values from the NADA price guide, local newspapers, and dealer quotes. When Farmers used that software, collision total-loss costs for Farmers increased 31.8 percent; comprehensive losses increased 6.6 percent; and property damage costs increased 18.5 percent. Farmers felt these payouts were too high, and Bair directed that use of the software "IS TERMINATED".
"Additionally, an analysis comparing 50 closed total loss files from each of your offices reflected an average savings of $382 per file utilizing CCC," the memo states. Seeking lower claims payments and thus lower costs, the Indiana claims managers "reintroduced" themselves to members of CCC management, who "provided 100 percent commitment to 'making things right' in the state of Indiana for Farmers."
Farmers Insurance Co. officials would not comment.
Insure.com has also obtained an April 1993 proposal from CCC in which it promises to save one auto insurer $11.1 million over one year in its total-loss settlements, or $322 per settlement check. A 1996 annual report provided by CCC to that insurer shows a comparison between CCC's total-loss values and those of an "alternative method" the NADA guidebook. CCC's total-loss valuation system saved the insurer $14.9 million over the NADA guidebook value that yeat, or $542 per total-loss claim.
Coming to a claim check near you
According to CCC, about 350 insurance companies across the nation use its database, including the Top 50 largest auto insurers. CCC information is used to calculate the value of 80 to 90 percent of the more than 2 million totaled vehicles in the country. Insurers generally pay between $25 and $30 for each total-loss valuation performed by CCC, depending on the number of valuations the insurer requests.
Allstate Insurance Co., the nation's No. 2 auto insurer, uses total-loss products from both CCC and ADP, according to Al Orendorff, a spokesperson for the insurer. "CCC's program benefits both the consumer and us," he says. It helps keep costs down because the subscription to the database is cheaper than others, and it helps Allstate settle claims quickly and fairly, he claims.
The nation's No. 15 auto insurer, The Hartford, believes that CCC is fair to policyholders because it "takes into account the individual condition of each vehicle, as well as market valuation of the vehicle in its local market," says company spokesperson Cynthia Michener.
Insure.com contacted several other large insurance companies that use CCC data, including Progressive and GEICO, but all declined to comment.
It's difficult to challenge the fairness of total-loss valuation programs, says Paul Fox, an attorney for CCC at the law firm Greenberg Traurig in Chicago, because there's no standard for comparison. "If the CCC product does invariably produce a lower value, does it do so unfairly and inaccurately is the question," says Fox. "It's the only [total-loss valuation] company that inspects any of the vehicles," he says, which leads to a more accurate perspective of the vehicle's value. CCC inspects about one-third of all the vehicles in its total-loss valuation database, according to Fox.
Others dispute that these "comparative values" lead to an accurate valuation. According industry sources, including CCC itself, the company determines the total-loss value of wrecked cars by sending out Field Inventory Representatives (FIRs) to car dealerships nationwide in order to calculate a car model's "take" price. The "take" price is the lowest price for which a dealer will sell the car, not the price the dealer is asking for the vehicle and most times not the price you would pay if you bought off the lot. Attorney Ryan says that few consumers know how to negotiate down to the rock-bottom "take" price. Thus, while you might receive a "take" price check from your insurance company for your totaled car, it's unlikely you'd be able to go to a used-car lot and negotiate the same price for a similar vehicle. That means out-of-pocket cost for you when you need to buy another car.
The way CCC determines the "take" price may also be suspect, accuses Ryan. The FIRs will ask the dealer to give them a fixed dollar amount to deduct from the asking price to get the "take" price, and Jones of CCC confirms this. The FIRs will then subtract that fixed amount off all the sticker prices in the dealer lot. But often, alleges Ryan, CCC will use a standard $2,000 deduction for many vehicles. For example, on an $8,000 used car, the FIR might subtract $2,000 to come up with CCC's total-loss estimate of $6,000. That price deduction doesn't take into account the local supply and demand of the vehicle, the vehicle's make and model, or the amount of work the dealer invested fixing up the car, accuses Ryan.
Jones of CCC contends that the total-loss valuation computer program contains both the "take" price and the vehicle's sticker price. That's because larger dealerships, such as AutoNation, do not establish a "take" price for the vehicles they sell. When the FIRs survey those dealer lots, the sticker price goes into CCC's database, according to Jones.
Coming to CCC's defense A study conducted by Bruce Hamilton, a professor of economics at Johns Hopkins University in Baltimore, Md., shows that in three different markets in the country Atlanta, Baltimore, and Seattle the average CCC "take" price was slightly higher than the average dealer asking price ($10,224 versus $10,110). According to Fox, the attorney for CCC, Hamilton's study proves that the "take" price is a good predictor of dealer asking prices. Hamilton has also given depositions as a potential expert witness for CCC in past litigation.
A study conducted by Finis Welch, a professor of economics at Texas A&M University in College Station, Texas, found that CCC's valuations are "not uniformally less than NADA valuations," a claim that had been made by plaintiffs in Gardner vs. Allstate, a lawsuit filed in U.S. District Court in Alabama, which is still pending. Welch found that, in 345 vehicles he surveyed, CCC's valuations "were, on average, 1.99 percent less than NADA valuations. These figures refute the claim that CCC valuations are "typically . . . in the range of 10 percent to 20 percent less than NADA." Welch was paid $400 per hour by Allstate for his services.
On a scale of zero to three
A second method CCC uses is to search local newspapers and trade magazines for auto prices, inputting its findings into the database. However, the newspaper and magazine ads can be incomplete, claims Ryan. The vehicle's history is unknown and the mileage and actual vehicle condition are unconfirmed. What's more, CCC will not use all vehicles found in advertisements as part of its database. According to Ryan, in one case, 10 trucks were found to be comparable to a policyholder's totaled vehicle. However, only two of the 10 trucks were used in setting the take price, and those two were the lowest-priced vehicles. Ryan subpoenaed CCC's worksheet on his client's claim to discover this.
CCC uses a scale to rate vehicles, as well. The scale a score of zero through three, with three being the best is based on the FIR's inspection of the car's condition. The number assigned to the vehicle will determine how many deductions are made in calculating the total-loss value of a car. A score of one means that the car is in "average private condition." A typical nine-year old car with rust and upwards of 90,000 miles is a good example of "average" condition, according to Jones of CCC.
But attorney Ryan, who questioned FIRs in depositions for his case, says the system is inherently flawed. He says FIRs spend typically less than 90 seconds examining the exterior of the vehicle and don't start it up or drive it to ascertain possible mechanical or electrical damage. Thus, CCC's valuation of a car could be based on a car in bad repair yet that's what might be used by your insurance company to determine the claim check you get.
Jim Nelson, an attorney based in Corvallis, Ore., has four suits pending against insurers and CCC and agrees with attorney Ryan that CCC's process presents enough problems to policyholders to warrant legal action against CCC and the insurers that use its total-loss valuation program.
Dennis Howard, a consumer advocate and independent total-loss claims evaluator, says he's aided more than 1,000 policyholders since 1986 in securing a fair settlement for their totaled vehicles. "[CCC's] philosophy is severely flawed. When I get a CCC report, I follow up on the vehicles that are listed as being comparable to the totaled vehicle," he says. "Almost without variation, either the person at the dealership didn't talk to anyone at CCC to give them a 'take' price or the price quoted in the CCC report was lower than the price the dealership quoted to me."
"[Their system] is designed to lowball total-loss settlements," says Howard. "I've seen too much of it to come to any other conclusion." Howard says that the prices in CCC's reports often don't match the prices he finds in local trade magazines and at dealerships, and, based on his own detective work, he finds that CCC misdiagnoses the condition of cars, driving down their "take" prices.
Jones of CCC staunchly defends his company's pricing statistics as valid. Since the company's FIRs survey reputable dealers, he says, they can justifiably assume that the cars will start and run properly. In addition, "There's no way a dealer is going to let someone take out 100 cars and test them," making individual test drives impossible.
Jones also cites studies conducted by five different insurance departments Connecticut, New Jersey, New York, Pennsylvania, and West Virginia as well as separate studies conducted by a professor at Northwestern University in Evanston, Ill., and Welch's study at Texas A&M. "Those studies show that our valuations are statistically valid," he says. CCC did not commission any of the studies.
Insurers catching heat for using CCC car values
Insure.com has counted 20 lawsuits against insurers for unfairly lowballing total-loss settlements by using CCC's database (CCC itself is named as a defendant in six of those suits). Seven of those have either been dismissed or the insurer has been granted summary judgment, meaning the court has ruled that the insurer did not act in bad faith in using CCC's total-loss valuation product. (That includes the Buratovich vs. Farmers case, which Ryan has vowed to appeal.)
None so far have been able to show any major flaw in the CCC system, contends Jones. "We spend a terrific amount of money to make sure we're doing what we say we're doing," he says. CCC's attorney Fox adds, "The record speaks for itself. No court has ruled in favor of a plaintiff [against insurers or CCC]. Plaintiffs' lawyers are in these cases for financial reward. These aren't consumer advocates out to change the system."
Attorney Ryan contends that that his pending litigation against the company and Farmers Insurance Co. will prove that CCC lowers total-loss car valuations systematically, inaccurately, and unfairly.
Insure.com is not aware of similar litigation against either ADP Claims Solutions or Mitchell International.
The ultimate "fairness" of CCC's valuations is for the courts to decide. But in order to secure a fair settlement for your totaled car, you might try this strategy: Ask your insurer to tell you where you can buy a car comparable to yours for the money it's offering you. Ask for a copy of the insurer's total-loss valuation report. That report will give you an idea of where to look for replacement vehicles at the price the insurer is offering you. Look into your insurer's arbitration process if your car is totaled and after research into car values you suspect your claims check has been lowballed.
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