The Evil That Men Do: What To Do About It (Part II)

It is encouraging to learn that someone other than my mother actually reads the articles I write (though to be fair, I’m pretty sure Mom is just trying to sound encouraging). E-mails I received since the first installment of this article was published all struck the same cord: I had vastly underestimated the evil.

Apparently, individual consumers are far more creative in how they can cheat than I gave them credit for. Wrote one reader:

"These days, the increase of Internet sales gives the customer major opportunity to cheat the system. I'm not trying to drum up business, because I hate (as do inspectors) pre-warranty limited inspections, but they should probably be done more frequently, with strong pre-existing language/education. Speaking of Internet sales, with financing of same, I've seen customers purchase "dual contracts" and file the same claim against two different companies (double dipping -- this is a real money maker). I've seen customers supply "false" service records. It can be fairly easy to verify those records are false, yet I rarely see anyone pursuing this."

Then there was the reader who took me to task for failing to even mention US Fidelis in connection with the potential misdeeds of TPAs.

"Only an idiot of no background could miss so obvious an example of malfeasance."

US Fidelis, you may recall, marketed service contracts direct to consumers outside the dealership environment through a massive television advertising campaign. The company, accused of deceptive trade practices and failure to pay claims, was forced into bankruptcy by 11 state attorneys general in April. In its bankruptcy settlement, reached in November, the principals of US Fidelis agreed to forfeit 90 percent of their assets and all of their yachts.

Thanks for writing, Mom.

But I shall resist the urge to make this an ongoing column on creative larceny. Today’s topic is how to respond to it.

From a bang-for-buck perspective, the most efficient target for corrective action is the dealership. Consumers, after all, have but one service contract to abuse. Dealerships have all of them. So let's begin with a list of suggestions for limiting abuse of the system in dealerships.

Audits and Inspections

Through the miracle of modern data processing, TPAs can know in real time how a dealership is performing. For dealerships whose loss ratios climb toward or exceed 100 percent, the obvious response is to begin inspecting claims. And not just the large transmission replacements - an unethical but careful service writer may think lower-value false claims (CV joints, say) might remain under the radar. So create inspection policies that can randomly inspect a small claim. If dealership personnel believe even small fraud will be detected, they will be more likely deterred from pursuing large-scale fraud.

Another means of inspecting the process is to send customers a letter asking them to rate their experience of the repair and claim process. It is amazing how many customers respond saying they never had the identified repairs done!

Money

In their books Freakonomics and Super Freakonomics, Stephen Dubner and Steven Levitt make the point that people respond to incentives, including economic incentives. Yeah, I know - groundbreaking stuff. But this insight should not be wasted: car dealers and their personnel can and will change their behavior if the price is right.

Assuming the dealership owner is not in on the scam, adjusting service department pay to encourage honesty is an option. This is called a positive incentive. Make service contract program performance part of the appropriate employees' compensation plan. If the loss ratio comes in below 100 percent, pay a bonus. And make the bonus greater as the loss ratio moves south.

The other kind of economic incentive is negative: a surcharge. If a dealership puts the service contract program in a loss posture, assess a surcharge to cover the loss. This assumes the dealer agreement permits such a charge, which it should do. If not, TPAs should take their contract forms to a competent attorney for revision (such advice can lead to the author getting free drinks at Bar functions - an added bonus).

Finally, how about properly incentivizing agents? If agents are to be the eyes and ears of the TPAs they represent, why not spiff them for exceptional dealership performance and penalize them when client dealerships slide into a loss position? (This is the type of advice that makes me need to buy my own drinks at the F&I Conference).

As the old saying goes, "Money can't buy happiness, but it sure keeps the kids in touch." Money can change behavior. Many TPAs, however, seem reluctant to use this most effective of tools. I suspect this flows from a fear of losing the business, both at the agent and the TPA level. But some business isn't worth keeping. Contract count tastes sweet for a while, but losses erase the memory of the sweetness.

Cancellation

Cancellation is the nuclear option, but sometimes it needs to be done. One word to the wise, though: forgive your enemies, but never forget their names.

Black List

Because TPAs are often reluctant to use cold-hearted economic incentives to change dealership behavior, other approaches get suggested. I recently got involved in a discussion among industry participants concerning such a bloodless remedy: an industry black list of dealerships and individuals (remember, the car business has extreme turnover and mobility) known to abuse the system.

First, the advantages of such a program: if TPAs were willing to share their loss experience with an independent third party (an industry association, say) and have access to the aggregate list, they could adjust their premiums in advance of doing business with those on the list. Or they could choose not to do business at all.

Only association members that contribute data would have access to the list. This valuable bit of market intelligence could be a competitive advantage for association members vis-a-vis non-members, and a wash against fellow members. This approach would be proactive rather than reactive, preventing problems rather than trying to fix them.

Now for the bad news: such a program would probably be unworkable and very possibly illegal. As for being unworkable, a black list would need objective standards for putting a person or dealership on it and allowing those on the list to appeal the designation or get it removed over time. As for very possibly being illegal, ask your nearest lawyer to exilian the terms trade libel, collusion and antitrust. 'Nuff said.

But note that there is no prohibition on a TPA using the information in its own database to make pricing and contracting decisions when the names of previously cancelled dealers come up.

Require Agents to Take Training Seriously

In most cases, service contracts are marketed to dealerships and supported by independent agents. For the rest, an in-house sales force performs these functions. But in both cases, pay is usually connected to sales volume. I am not suggesting a revision of pay plans is in order (it might be). Rather, it would be a good idea to stress the education component of the agent's job description.

For a service department manager or service writer, a vehicle needing a repair that is attached to a service contract can look like a great big Free Beer sign. A regular meeting with those personnel to explain how a properly run service contract program contributes to the overall financial performance of the dealership is a reasonable requirement of an agent. Once explained (and repeated), the "I didn't know" excuse is taken away. At some level of conscience, this can change behavior.

One thing's for sure about The Evil That Men Do - they'll keep on doing it if allowed to do so. In summary, the following could reduce the abuse:

• An increased emphasis on TPA training of agents, and agent training of dealership personnel, on the proper use of a service contract program.
• More audits and inspections, including random inspections of low-value claims (the stick).
• Monetary incentives to be honest (the carrot).