Inspections – When to do them and why?

In today’s industry, inspections are a standard part of the claims procedure. While the requirements necessitating an inspection may vary amongst companies, inspections provide warranty administrators justification for the amount and manner in which a claim is adjudicated – whether a repair is approved or denied. They may not be required often, but when they are, they come at an inconvenience for both the customer, whose car is in the shop, and the mechanic, who is stuck with a vehicle on their lift, awaiting approval before starting the repair. Inspections also come at an additional cost to the administrator – they have to foot the bill for the inspection, as well as the cost of a rental vehicle for the customer. The customer and mechanic often find the process to be a frustrating process and view the inspection as unnecessary. They may even view the requirement for an inspection as the company’s first step in trying to deny a claim.

George Krnich, vice president of claims and risk management, American Auto Guardian Inc. (AAGI), addressed this common misconception in the industry, which is often held by technicians as well as end consumers. Krnich said they incorrectly view inspections as a mechanism used to support the denial of a claim, when, in reality inspections are designed to protect all parties. He explained that inspections can also benefit the contract holder. “For example, in the case of an improper repair – we give the inspection report to the contract holder so they can go back to that first repair shop and say, ‘Look, you never fixed my steering components correctly. Here’s [the report] from an independent ASE certified technician.’ It gives the contract holder some ammunition to go back and get the repair done correctly.”

Krnich, whose company requires inspections on fewer than 2% of claims, said most inspections are for high-dollar claims – engines and transmissions – with repairs that can cost $2,500 and greater. He noted that inspections are used to justify the high cost of a repair – or to explain to the customer why a repair is not covered. Surprisingly, he said, inspections are done more often than you might expect at the request of a dealer. “It allows [the dealer] to save face with the customer. If a car comes in and the damage is due to lack of maintenance, impact or something that would cause it not to be covered, then the dealer will tell us, ‘this guy never changed his oil; it’s all sludged up and caused his engine to blow up.’ And then the dealer asks for an inspector to be sent out. That way, they can report the inspector’s findings back to the customer.”

John Wendt, claims director, American Guardian Warranty Services, said his company tends to utilize inspections a bit more frequently than other companies because of the diversity of their book of business. “It’s my opinion that vehicle inspections as a result of a claim are necessary, and an important responsibility of an administrator to assure themselves that the repairs that have been represented by a technician qualify as mechanically failed. An administrator is mistaken if they are not utilizing this resource regularly to protect themselves, their insurer, clients and service contract holders from extra costs associated with repair claims.”

Frank Pfister, claims manager, AUL, said, “Using an inspection is a gut call. There is no real inspection criterion. We base it claim by claim.” The decision to ask for an inspection could be because something just does not feel right to the adjustor, or a shop’s diagnosis does not line-up with the requested repairs. He went on to say that AUL looks at several determining factors, such as the claim cost, the amount of claims called in on that vehicle and the type of failure.

“Our claim system allows us to have access to a tremendous amount of data so we can make the best decisions on each claim. The inspection process for us is a needed and valued part of a proper claims adjudication,” Pfister continued. “While most of our claims are pretty straight forward, there are times where the cause or failure or the level of repairs isn’t clear. So in those cases, we will utilize an inspection company to help us make the right decisions. We feel that inspections are vital to getting the whole picture – not just one person’s view. Inspections can help all parties and we feel they are very important.”

Krinich, however said AAGI does have set criteria for asking for an inspection. In the past, they used a computer program that would “trigger” the call for an inspection when certain thresholds were met. Today, however, even with the set criteria, the ultimate decision is left to the adjustor. The criteria the company uses includes:

• High dollar amount for the repair

• Number of unrelated failures on the same vehicle

• Amount of time since the contract has been in effect – if it is a brand new contract, or if it is about to expire

• If the repair shop reports that the problem is due to rust, impact, modifications or an improper previous repair

Wendt noted the criteria for authorizing an inspection are more or less universal throughout the industry, and based on years of experience and common sense. That list includes:

• The proverbial “Laundry List” of unrelated “found” problems

• High severity claims

• Early claims after a service contract was sold within short time and mileage accruals from the point of sale

• Multiple claims within a relatively short time frame for both time and mileage

• Add on repairs after a claim was authorized

• A high frequency failure that does not match statistical experience in a region for a particular vehicle profile

• Information that suggests a non-covered condition

So how does the issue of trust play in to the equation? Is there any benefit to being a high volume dealer or having a longstanding, good relationship with the contract administrator? Does that result in fewer claims requiring an inspection? It seem that the answer to this question isn’t a simple yes or no. While some companies technically have a policy that all claims are adjudicated in the same manner – regardless of their relationship with the service manager or dealership requesting the claim – there do seem to be advantages for a high-volume dealer who has established a trustworthy reputation.

“Trust plays a huge role in the decision to not inspect a claim,” said Wendt, “As a policy, we provide our dealers with quite a bit of room to conduct their business without our use of inspections to validate their claims. Much of that trust is earned through relationship development over time, and does vary to a certain degree through the administrator’s claim experience. There are other relationships that are characterized as aggressive by nature, and they unfortunately don’t earn our trust and are the primary reason why inspections are a necessary tool in the investigation of claims.”

Krnich explained, “We adjudicate every claim the same exact same way, regardless of the dealer. If it’s our best dealer or our worst dealer, we are black-and-white across the board. Contracts strictly dictate what’s covered, what’s not covered and our inspection criteria mandates whether an inspection is requested or not.” However, he said, there is a caveat. If one of their biggest and best dealers meet the set criteria triggering the requirement for an inspection, they will allow the service manager do what is referred to as a self-inspection. “Instead of hiring an outside company and paying them to send a certified ASE technician, I will have the service manager view the failures, take pictures with a smart phone and then send me an e-mail with the pictures and a couple of sentences stating that it’s a material failure, there are no signs of abuse, misuse, lack of maintenance or contamination. Then, I will put that in my claim, as if an inspector actually went out. So, I have written documentation and I have pictures as proof that it really is a material failure. And that’s nice because it speeds up the entire process. The technician’s bay isn’t held up for a day waiting for the inspector to arrive; the customer isn’t inconvenienced and we save a day of rental. So it’s a win-win all around.”

Pfsiter agreed, noting, “There is a lot of trust there. From the selling dealer, down to the customer.” He went on to say there are advantages to having what he describes as a loyal agent and dealer base for the last 24 years. “We have a solid bond of trust between AUL and them, so it works both ways. They know AUL is always striving to do what’s right and inspection decisions are driven more by data than other factors.” However, the advantages for a loyal and high-volume dealer seem to be only the comfort level that comes with having a long-term relationship. They don’t receive any different treatment than the small mom-and-pop dealers. Pfister said they view it as not discriminating on either type of customer – whether there is an established and trusted relationship present or not.

The majority of inspections tend to be on engines and transmissions – both high dollar repairs. According to a report released by AAMCO earlier this year, the average cost of a transmission repair is $2,585 nationwide, and engine repairs exceed that amount. The time of year also plays a part in the type of repair that most elicits an inspection. In the winter, transmission repairs top the list, but in the summer, AC repairs are most prevalent. Wendt commented that they have many RV service contracts commanding attention for living system claims. They also have large books of exclusionary coverage service contracts with a single deductible so they see many multiple-component claims.

According to our experts, most inspections take between one and two days to be completed once they are requested, and the cost is a flat fee of around $100. The only factor that would increase this cost is location – if an inspector had to travel to remote parts of Alaska or the Badlands, for example, then there would be an additional charge based on the distance. The cost does not vary based on the number of repairs being sought or how involved, or simple, the inspection needs to be.

Krnich noted that from his experience, most inspections are done within a 24-hour period, but even when they are done quickly, it is still a day of inconvenience.

Pfister agreed, saying, “We are very judicious on deciding when to do an inspection. Only a small percentage of our claims are inspected. I won’t get into numbers, but I will say we want to get the customer back on the road and the shop paid as quickly as possible. Inspections can add a day or two to the process, so we really prefer not to do them. We feel there is a need for inspections but we don’t feel it is a very high volume.”

Everyone has probably heard the complaint from a friend or acquaintance of an administrator refusing to pay out on a high-dollar claim that the contract holder felt should have been covered. You can imagine the frustration and anger experienced by the contract holder in response to what they perceived as unjust treatment by the company. Krnich said that while different companies view and adjudicate claims in different manners, there are some after-market, third party administrators who give everyone a bad name. These are companies who seem to look for ways to deny a claim. “I’ve heard horror stories where somebody’s transmission goes bad and the claim is being denied because they didn’t do maintenance on the cooling system – or something that’s completely unrelated. We view that as so unfair and unnecessary. It’s just a way to get out of paying a claim and it shouldn’t be that way. If your contract’s written properly and its priced properly, then you should pay everything; give every benefit that the customer is due.”