Update 2020: Insurer pays bonuses to skimp on repairs

A great deal of information is being published regarding some insurance companies’ plans to implement so called “Managed Repair” programs. The rationale is that they will reduce costs (and I assume increase profits) by partnering with restoration contractors and some independent adjusting companies who supposedly will oversee the work and provide some sort of due diligence. So here we have yet another scheme being proposed allegedly to reduce policyholders' premiums which likely will be added to other failed proposals, given they never seem to accomplish the stated goal of getting costs down so the policyholder actually benefits by getting lower premiums. So the most important questions we should be asking ourselves are: What’s the real cost to the policyholder and will rate increases continue despite these managed repair programs?

As I have written before, the process of repairing a policyholder’s property after a covered loss (regardless of the fine print) that is rolled out in the guise of a managed repair program is in my opinion, a fool’s errand.  In fact, as much a foolish errand as taking appraisal clauses out of the property insurance policies and thus having to litigate causation as it relates to the scope and the price of the loss.  We all saw how that worked out with soaring legal fees and huge delays due to backed up courts.

Since I have not seen the restoration contractor/independent adjuster managed repair cost issue vetted, I think it would be wise to let a little sun shine in on the archaic and misleading billing method demanded by most insurance companies and used by their restoration contractor friends.  As most of the readers of this blog may know, particularly those of you in the loss adjusting business, insurance companies require a line-by-line detailed scope of the loss, listing linear feet, square feet, and other descriptive terms of damaged building components which they claim allows for pricing each item within the scope of the loss. Then at the very end of sometimes reams of paper representing the “estimate,” there are two line items which are supposed to support the profit and overhead that the restoration contractor can collect above their unit or line-by-line cost. To the uninformed and helpless property owner this may look like a simple and justifiable method for the contractor to get paid but do not be fooled! What you are seeing is misleading at best and at worst…..fraud.

You see, I have yet to meet any restoration contractor anywhere that has told me his or her business can survive in a very competitive market on a 10% overhead and 10% profit business model.  In fact, the honest ones will brag that their profit margins are more in the 30% to 40% range. And remember that is PROFIT!  So how do they do it?  Well, it seems that by using their own or others estimating software program, they mark-up the prices on individual line items to achieve the profit margins they think they can get away with.

So why is this being allowed? It certainly appears fraudulent telling a policyholder and the insurer one thing, but doing something else to line their pockets with a whole lot more profit.  Good question you might say! I’ll address more on that issue in a separate blog. Maybe the simple answer is that it just looks logical and explainable. So what does this have to do with managed repairs?  Well, the obvious question is, how will the carriers pay their partner restoration friends under managed repair? Will they hold the restoration contractor’s feet to the fire and only give them 10% profit and 10% overhead or will they let them make the margins they are used to (30/40%) but continue to show 10&10 to the policyholders and the regulators whose task it is to review rate increases, a.k.a. premium increases.

So if repair costs are the real driving factor for the insurance companies managed repair scheme, let’s make sure there is not a slight of the hand going on with billing one price for profit and overhead but in fact pocketing double or triple the profit with the true picture hidden in the line items to maintain the margins that restoration contractors say they need to be the darlings of Uncle Insurance.

What say ye, Uncle Insurance?