The country’s insurance companies and the Israel Garage Association are campaigning to raise the bar for labeling a vehicle that has been in an accident as a “total loss.”
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Blame the rising cost of parts, as well as the fact that even cars that are safe to drive can be defined as a total loss.
The insurance companies themselves were responsible for lowering the bar over the years, as part of their efforts to lure clients from each other. If, several years ago, the damage to the vehicle had to constitute 60% of book value before the insurance company would write it off as a total loss, that figure can now go as low as 50%.
But now, after seeing their losses mount as a result of their write-off policy, insurers have come up with a solution: They are asking the Transportation Ministry and the Finance Ministry’s insurance commissioner to exclude the main parts that are damaged in accidents – such as doors, fenders, bumpers, side mirrors, headlights and even the radiator – from the loss appraisal. Those parts, which are not defined as “safety parts,” account for a hefty chunk of the total appraisal.
The price of auto body parts has increased in recent years. A side mirror for a late-model car, with all its motorized adjustment features – never mind blind-spot detection systems – can cost the same as an entire engine. A replacement bumper with the original manufacturer’s parking sensors — the insurance companies are obligated to restore the vehicle to its original condition — can also be very expensive.
“If the car received a decent whack and a headlight, a fender and a door need to be replaced, together with labor and repainting, the cost can add up to 50%” of the vehicle’s value,” says Israel Insurance Association CEO Meir Shavit. “It’s possible to get to total loss from damage to body parts alone, even though the chassis, the engine and the transmission were not damaged and there’s no safety problem,” he added.
Total loss has become a benefit
Shavit says the original purpose of the total-loss designation – getting unsafe vehicles off the road – has been lost, and that now it’s a benefit extended to policy holders by insurance companies.
“Total loss will never cost the insurance company more than repairing it would cost,” he says, adding that a policy holder with a repair estimate of 40% of the car’s value will beg for a declaration of total loss.
Customers would rather sell the car to the insurance company and use the money for a downpayment on a new car than risk being unable to sell the car later on, after the repair.
Garages also have an interest in decreasing the number of vehicles that are written off after an accident, since they make more money from big repairs.
If the change proposed by the Israel Garage Association is adopted, a vehicle that has been damaged in an accident would only be written off as a total loss in the event that the cost of the damage and the change in the value of the vehicle are equal to or exceed the value of the damaged vehicle – or, alternatively, if the damage is at least 80% and the insurer isn’t interested in repairing it.
In addition, the insurance companies want price supervision imposed for replacement body parts, including doors, hoods, trunks, fenders and bumpers. The garage owners argue that the price of replacement engines, transmissions, steering systems and air bags should also be placed under government supervision. They claim that setting maximum prices for replacement parts will simplify post-accident vehicle repairs.
The Transportation Ministry hasn’t rejected the idea of raising the bar for the declaration of total loss, with officials saying it could reduce the number of legal battles over loss appraisals.
But what about the public interest? If the insurance companies spend less on purchasing damaged vehicles from their customers, they will spend more reimbursing the customers for repairs and for the diminished value of the vehicles. In theory, then, the change will not cause the customers economic damage.
Still, the change would force more car owners to keep their vehicles after an accident, while also making the vehicle harder to sell later on, especially at the price the insurance company would previously have paid, had the car been declared a total loss. In addition, raising the standard for writing off vehicles that have been in an accident will increase the number of less-safe vehicles on the road and create an incentive to “overlook” safety hazards.
The Transportation Ministry has scheduled a meeting with representatives from the Finance Ministry, the insurance companies, appraisers, repair garages and importers of vehicles and of replacement parts to discuss the cost of spare parts in Israel. The car importers, which also import original replacement parts for the vehicles they sell, are expected to oppose price controls.
A bill currenty before the Knesset, would impose sanctions on any repair shop, including importer-owned garages, that fail to provide two price quotes for every vehicle repair job requiring new parts – one with original replacement parts and one with non-original parts, if such parts are available. In addition, any importer found trying to persuade an authorized garage to sell only the replacement parts sold by the importer would face a fine of up to 1 million shekels (around $250,000).
The chairman of the Israel Garage Association, Ronen Levy, argues that that vehicle importers affect the prices of replacement parts, despite the Antitrust Authority order prohibiting such behavior.
“The order is not enforced, and as a result an importer-authorized garage that doesn’t sell enough of the importer’s original parts gets penalized financially by the importer – and the cost of the penalty is passed on to the customer,” Levy says.
According to Shavit, “The key is the price of parts, that’s where the original sin lies. If the price of parts were reduced, 90% of the problem would disappear. Will the Transportation Ministry prevail over the powerful car importers’ lobby? That’s a very big question. It’s a market worth billions of shekels. Vehicle parts account for between 0.5% and 1% of the cost of living” in Israel, he says.
In March, an agreement was reached among the insurance companies, vehicle appraisers and the Finance Ministry’s insurance commission that would give car owners free choice in selecting an appraiser to assess damage to their car after an accident. Currently, insurance companies allow their customers to choose from lists of appraisers maintained by the insurers.
For years, appraisers have claimed that this situation forces them to collaborate with the insurance companies in extortion at the expense of the customers. This historic cease-fire agreement has been added to the reform bill.
Shavit, the representative of the insurance companies, have proposed introducing a negotiation phase to the claims process, allowing the insurer and the appraiser to discuss the repairs before they are made, in order to prevent possible fraud and to avoid court battles.
“If the insurance company could see a draft of the appraisal... it would prevent a lot of disagreements. We are asking for the right to debate the initial assessment with the appraiser, to ask questions and make comments, but not to press for reducing the price of the repairs in an unreasonable manner,” Shavit said.
The garage owners’ group has agreed to accept supervision and the possibility of withdrawing the business license of any garage attempting to cheat an insurer by inflating the cost of repairs. Shavit acknowledged that an insurance company that applies pressure on an appraiser to reduce the price of a repair, is breaking the law and also failing to use common sense.
“An intelligent company doesn’t even try to argue over damage of 5,000 or 6,000 shekels.... After all, only 5% to 7% of customers file claims, and the insurers have an interest in settling claims as quickly as possible,” Shavit said.
What would happen if the insurer disagrees with the initial appraisal? The garage owners say the mechanism that is in place today, whereby a second appraiser is brought in to make a decision in the event of a disagreement is flawed.
“At the end of the day, the insurance companies pay the salaries of the deciding appraiser, too,” Levy says. He says that the repair garages are open to a negotiating mechanism. “The problem is, who makes the final determination of how much the insurance pays? If they don’t agree on the appraisal, we want the decision to be made by a Transportation Ministry or insurance commissioner appeal panel,” Levy said.
Shavit is firmly opposed to giving the government the final say in such disagreements. “Perhaps there’s room for improving the existing decision mechanism, but the state doesn’t have the professional ability to decide such matters. There’s no problem having an external, independent appraiser decide.”