In a Down Economy, Fleets Repair Rather than Replacing Accident-Damaged Vehicles

The slowdown in the nation's economy has prompted many companies to re-examine their cost containment strategies, which has resulted in new initiatives to reduce the cost of operating their company fleets.

One cost-reduction initiative, adopted by some fleets, has been in their accident management programs. An increasing number of companies has modified their fleet policies to minimize total losses, opting to repair a greater number of extensively damaged vehicles and return them to service.

This shift in fleet policy by some fleets, is seen in the results of the second annual accident management survey conducted for AF by CEI, a Philadelphia-based company specializing in accident and risk management. CEI handles approximately 120,000 accident claims per year.

The current CEI study, which covered the 2001 calendar year, reveals that fleets, since the economy entered into a recession, have become more inclined to raise the dollar threshold at which an accident-damaged company vehicle is declared a total loss, according to Greg Neuman, quality control supervisor for CEI.

"Normally, a $10,000 hit on a 1-year-old car with between 15,000to 30,000 miles would prompt a fleet to walk away and order a new vehicle. However, more fleets are deciding to repair these vehicles," said Neuman, who is also a licensed appraiser. "The trend is confirmed when you compare actual cash value (ACV) if what a vehicle is worth versus how much fleets were spending on repairs."

Vlad Diaconescu, sales and marketing administrator for CEI and the study's statistician, points out that the sums fleets recover from the salvage of total-loss vehicles are being restricted by a tighter salvage market. "For sales fleets that typically average total losses of 6 percent, that restriction would certainly be considered in their decision to repair rather than replace," he said.

Significant Severity Increases for Publishing, Technology Fleets

The average vehicle repair cost, or severity, increased 4 percent or more for fleets in six of 13 industry segments surveyed during the 2001 calendar year. (The accident management term "severity" is defined as the total dollars a company spends on the repair of a vehicle, which includes the cost of labor and parts, but excludes the cost of a replacement rental vehicle.)

A key reason for the severity increase is not that vehicles are sustaining greater damage, or that the cost of repairs has increased significantly, but rather that fleets are repairing more of the extensively damaged vehicles that previously would have been declared a total loss.

According to CEI, the ratcheting upward of average severity was first apparent in the August and September 2001 time frame, as the slowdown in the national economy began to affect the bottom line of more companies.

For instance, the study revealed that the average severity for fleets operated by companies in the publishing industry increased 15 percent in 2001. When compared with the prior 12 months, the average severity in 2000 was $1,436 per vehicle, which increased to $1,651 in 2001.

The next greatest 12-month increase in accident severity costs by industry segment was with technology companies, whose average severity per vehicle increased 10 percent, from $1,585 to $1,740. The third greatest increase in severity was with pharmaceutical companies, which increased 7 percent, from $1,469 to $1,565 per vehicle.

Another factor that has increased average severity is that the prices for automotive parts have increased in 2001.

"Parts prices have increased from a low-side of 10 percent to a high-side of about 25 percent," said Neuman.

Labor rates have also increased 4 to 5 percent in 2001. "Nationwide, labor rates are averaging around $30 to $45 per hour," add Neuman. "However, in Northern California, the labor rates are $65 to $75 per hour, the highest in the nation, while in Southern California it is $32 to $34 per hour."

Increased Vehicle Complexity is Increasing Accident Repair Costs

As the complexity of new vehicles has increased, primarily because of the proliferation of electronic components, so too have the costs to repair vehicles damaged in accidents.

"Increased vehicle complexity absolutely translates into higher repair costs," said Neuman. "As vehicles have become more complex, the cost of replacement parts has increased and so has the required level of technician expertise, which have increased labor costs."

Subrogation and the Shift to electronic Document Management

A current trend in subrogation is the transition to electronic document management. (Subrogation is defined as the monetary recovery of damages from the insurer of an at-fault third party, or if necessary, directly from the third party.)

"Technology is definitely helping us to reduce our days-to-recover during the subrogation process," said Chris Villella, loss recovery manager for CEI.

Currently using electronic document management, CEI has decreased days-to-recover by more than 50 percent, said Villella. This reduction in days-to-recover in the subrogation process has been even more dramatic when compared against the use of traditional paper-based methods.

"With paper, we were using the mail, and the average days-to-recover was 45 to 60 days, said Villella. "Another advantage to using electronic document management during the subrogation process is that it has increased recoveries for our clients by almost 25 percent," added Villella.

Also included in subrogation recovery is the loss of use of a vehicle. Approximately, 60 percent of all estimates include a dollar value for the loss of use. Recovery of monies for loss of use first began in the accident management industry about12 years ago.

"Essentially, if a vehicle is out of service, let's say, for five days, then a value is assigned to those days and that value is added to the estimate," said Villella.

Recovery of Diminished Value Pursued; Insurers Resist

Subrogation recovery has been expanded to include recovery of a vehicle's "diminished value" following an accident. The concept behind diminished value is that when a vehicle is damaged in an accident, it will never have the same original market value as if it had never been damaged. Diminished value is based on the perceived difference between a vehicle's pre-loss value and its post-loss value after complete and proper repairs.

"When you sell that vehicle, you are going to have to take some of the loss based on the hit you took," said Villella.

CEI has developed a formula to calculate diminished value that factors in the age of the vehicle, its mileage, and the extent of the accident damage.

The insurance industry has fought the concept of diminished value. To date, the only state that recognizes diminished value is Georgia. On Now, 28, 2001, the Georgia Supreme Court ruled against State Farm Insurance in a class action suit stating that it was liable for diminished value for accident-damaged vehicles it had insured.

In January 2002, Allstate became the second insurer in Georgia to agree to a class action settlement over claims for diminished market value of damaged vehicles. The Allstate class action suit, which resulted in a $59 million settlement, involved claims that customers in Georgia over the last six years were entitled to payment for their vehicles' loss of market value after an accident, in addition to repair costs.

However, auto insurers have successfully won appeals court rulings in other states, such as Delaware, Louisiana, Massachusetts, and Texas, stating that auto policies do not cover diminished value.

Paperless Auto Claims Program Designed to Reduce Repair Cycle

In the fall of 2001, CEI began implementing a "paperless" auto claims program with its supplier network, which includes nearly 8,000 collision repair facilities, independent appraisers, and auto glass installers.

"At the heart of this program is an auto repair industry's first virtual clearinghouse," said Wayne Smolda, chief executive officer for CEI. The clearinghouse was created through a developmental alliance between CEI and Auto Vista, a division of ADP.

"Going completely paperless ends routine delays in receiving, reviewing, and approving actionable data, such as repair assignments, estimates, vehicle damage images, POs, supplements, and updates," said Bill Lawrence, chief information officer at CEI. Lawrence estimates that the new program will reduce the repair cycle by an average of several days.

The virtual clearinghouse was first installed in October 2001 in selected CEI Direct Repair Network auto body shops. Implementation of the "paperless" program throughout the remaining supplier network is currently underway.

The installation, service, and support of the clearinghouse are provided directly by AutoVista.