Salvaging The Total Loss Claim

Stephen C. Ryan

 Mr. Ryan can be reached at 
Steve Ryan [SteveRyan@AZIS.COM]

Attorney:             "Did everything go all right in terms of settling with your insurance company for the value of your car?"

Client:                           "I guess so.  I really didn't get what I thought the car was worth, but my adjuster said he was offering the most he could for my car, so I said okay."

This article will discuss insurance company practices and procedures which the personal injury attorney should be aware of when a client's vehicle has been deemed a total loss.^[i]  Unfortunately, the amount of attention paid to the client's total loss claim is usually quite minimal, for at least two reasons.  First, as already alluded to, the settlement of the total loss claim is more often than not, water over the bridge by the time the attorney first has a chance to be of any meaningful assistance to the client. 

Secondly, most attorneys regard any effort they make to assist their client in resolving the property damage aspect of a claim somewhat of a "courtesy" to the client, the attorney usually refraining from taking any fee from the property damage portion of the claim.  After reading what follows, it is hoped that the plaintiff's bar will not only be more enlightened as to this aspect of their client's accident claim, but will recognize that the procedures normally used by insurance companies to evaluate their insureds' total loss claims are deceptive, financially biased and, in many instances, so intentionally unfair as to constitute first party bad faith.

            Before discussing how your client's total loss vehicle is evaluated for settlement purposes, it is important to understand who the players are in virtually every situation.  Not all that long ago, claims adjusters appraised the value of a total loss vehicle the "old fashioned" way, i.e., by actually contacting dealers, by personally inspecting comparable vehicles, and by relying upon nationally recognized publications not affiliated with the insurance industry.^[ii]  Within the past decade, however, insurance companies have adopted a new method of "appraising" total losses.  As you would expect, the vehicle valuation is now done by the use of computers, but the computers, themselves, aren't the problem.  Spending less time does not have to equate to reduced accuracy.  The problem today is the reliability of the data that is input into the computer and, more specifically, the financial bias of the entities which assemble and disburse the data. 

Do the insurance companies subscribe to a data base that is objective or "neutral?"

The answer is "no."  Indeed, the largest vendor of total loss values calls itself a "partner" with respect to its insurance company clients.   When literally every client of the valuation service has the financial motivation to pay as little as possible on its total loss claims, one can easily see how the current "system" is not likely to be fair and equitable to the consumer.

There are two companies who solicit insurance companies to use their total loss valuation services, CCC Information Services Group, Inc. and ADP/AutoSource.  Because CCC has such overwhelming control of the market (over 85%), this article will pertain exclusively to the operation of that company.  CCC has contracts with over 350 insurance companies nationwide, including what it calls "the top 50."  CCC went public in 1996 and, because it has been so favorably received by the insurance industry, its annual revenue growth has increased an average of 22% over the past several years. ^[iii]

Just like the good old days, the process still begins with the claims adjuster performing a personal inspection of the vehicle.  Once it has been determined that the vehicle is a total loss, the primary function of the adjuster is to input information about the vehicle into the CCC data base.  As one would expect, the input begins with the entry of basic information about the vehicle such as its make, model, year and mileage.  The identification and input of any options or upgrades should also occur.  The entry of this type of basic information is almost ministerial in nature, with little opportunity for the adjuster to manipulate the final value figure. 

The next part of the process, however, is critical in terms of the eventual value assigned to the vehicle.  In addition to the input of the mundane information just referred to, the adjuster has to select a condition category for a number of vehicle components, the effect of which will be to prompt the CCC computer to either raise or lower the actual cash value of the vehicle depending upon the condition selected.  The components evaluated are the interior, body, glass, tires, exterior and mechanical condition of the vehicle.  The claims adjuster normally has four conditioning categories from which to select.  Although CCC's nomenclature for the four categories has varied over the years, the most common categories currently used by CCC are "below average," "average," "above average," and "exceptional."^[iv]   As will be pointed out in more detail below, a downward conditioning adjustment on even one component can dramatically affect the final value of the vehicle.   

How does CCC determine the values of the "comps" which go into its data base?  There are two primary sources of information.  The first source comes from CCC employees who periodically visit used car lots at certain pre-selected dealerships at which time the "take" prices of the used vehicles for sale are recorded.  As the term suggests, the "take" price is the lowest cash price for which the dealer would actually sell the vehicle "today" -- it is not the price that the dealer is "asking" for the vehicle which, of course, will almost always be a higher figure.  Because CCC uses only "take" prices to determine the value of the insured's vehicle, any fairness to the system depends upon the necessary but unrealistic assumption that the insured is always going to be able to negotiate the car dealer down to that same "take" price when the insured eventually goes there to buy a replacement vehicle.  While some consumers may have that ability, the vast majority do not and will not be able to buy their replacement vehicle for the "take" price.  As a result, when an insured has settled his or her claim based upon a valuation report relying upon "take" prices, the very best the insured can do is break even.

The second source of information for CCC's data base is written advertisements, such as from the local newspaper or the Auto Trader.  Needless to say, the reliability of this type of information gathering is suspect.  The vehicles that are relied upon from the ads are not personally inspected.  All owner "representations" in the ads as to critical facts such as mileage and vehicle condition are unconfirmed.  Mechanical and maintenance history is unknown.  Finally, does CCC identify and input all advertised vehicles into its data base or does it input only those vehicles which would tend to bring down the average price of comparable vehicles?  Specific facts and evidence support a finding of deliberate bias and unfairness in this regard.  Using an actual insured's claim as an example, a specific edition of the Auto Trader relied upon by CCC contained ten vehicles which met CCC's criteria for being comparable to the loss vehicle, but the only two "comps" from the Auto Trader actually used in the insured's valuation report were the two lowest priced vehicles. 

There are numerous deficiencies with CCC's "take" price methodology which result in underpayment to the consumer:

1)  CCC's methodology for establishing the "take" price of any given vehicle is simply arithmetic in nature.  Instead of taking the time to determine an actual and realistic "take" price for any given vehicle, CCC simply solicits a uniform dollar amount from each car dealer which CCC then deducts from the dealer's asking price for each vehicle to arrive at that vehicle's "take" price.  For example, CCC uses a $2,000 deduction for many dealers, meaning that a vehicle for sale on the dealer's lot at $10,000 will be entered into the CCC data base as a potential "comp" at a "take" price of only $8,000.  These uniform deductions are completely unrelated to the make and model of the vehicle, the age of the vehicle, the local supply and demand for that vehicle, or how much money the dealer has into the vehicle.  Simply put, there is no expertise or "judgment" exercised by CCC.

2)  The CCC field representatives who are in regular contact with the dealerships are trained to solicit the dealers into lowering their "take" prices, usually by encouraging the dealers to increase their arithmetic deduction for each vehicle from, for example, $1,500 to $2,000.  Lower "take" prices mean lower-priced comps, which mean lower valuations, which mean lower claim payments.

3)   Insureds are not routinely advised as to how they can buy their replacement vehicle for this "take" price.  Insureds are not provided with their CCC valuation report as a matter of course.  The insureds do not know which dealers to contact, nor do they know the name of the sales manager who will supposedly honor the dealer's "take" price without any bargaining or negotiation with the insured.  In essence, the insureds are put in a position where they have to contact secret and undisclosed used car managers at secret and undisclosed dealers in order to attempt to ascertain a secret and undisclosed price. 

4)  The "come on" to the car dealers is that they are told that in exchange for allowing CCC to regularly inventory their used cars, the dealer's used cars are going to be identified as "comps" in CCC's valuation reports which will, in turn, cause some insureds to come to the dealership, settlement check in hand, to buy their replacement vehicle.  CCC reports regularly distributed to CCC's dealer network specifically state, however, that if the dealer's vehicles aren't "competitively" priced, i.e., not priced low enough, CCC will not be able to use the dealer's vehicles as comps in their valuation reports.  Even aside from the impropriety of enticing dealers to arbitrarily lower their "take" prices just to get consumers to come to the dealership, these dealer reports are at least an indirect admission that CCC only uses the lowest priced comps in determining a vehicle's actual cash value. 

CCC's own documents also reflect that they determine the fair market value of a vehicle in a "backwards" fashion.  Specifically, the documents state that CCC first determines a predetermined range of value for the given vehicle and then, after that range has been determined, the computer then searches for comps which support the range.  In other words, the final value isn't determined by all available comps, but only by those comps which fall within CCC's predetermined valuation range.  With CCC, the comps aren't determining the values -- the values are determining the comps.

Another fault with CCC's system is that it automatically assumes that every advertised vehicle from the local newspaper or the Auto Trader which CCC uses as a comp is in "dealer ready" or showroom condition.  How many used cars owned by private parties are in showroom condition?  By assuming that these advertised cars are all in showroom condition, however, the actual value of many of these vehicles ends up being too low.  For example, if a sight unseen vehicle in the newspaper is advertised at $8,000, but is not in "showroom" condition, that same vehicle in showroom condition would clearly be worth more money.  By assuming that every uninspected advertised vehicle is in showroom condition, CCC is deliberately undervaluing the actual value of every uninspected vehicle that is not, in fact, in showroom condition.

Beware of the conditioning adjustment.  As stated previously, the claims adjuster has to input numerous conditioning assessments into the CCC data base.  A downward adjustment on one or two components can substantially affect the value of the vehicle, often as much as 15% of the overall value.  Although CCC's promotional and "how to" literature is very careful to avoid directly telling insurers how to achieve a low value for any particular vehicle, such material leaves no doubt in the adjuster's mind as to how the vehicle's overall value can easily be manipulated downward.  Quoting directly from CCC's training material:  "Upon entering a vehicle valuation request, the claim handler or appraiser will be given 4 condition choices with corresponding valuation [i.e., price] ranges for each choice. . . . This allows the claim handlers to better and more fully appreciate the impact of their condition choice and brings them one step closer to the establishment of the ACV."  The document goes on to state that the use of these conditioning adjustments will result in "increased indemnity savings" so as to "best serve the needs and interests of all of our users." 

Indeed, CCC itself has openly admitted in judicial proceedings that its valuation methods are intended to result in indemnity savings for its insurance company clients.  In a lawsuit filed by N.A.D.A. against CCC in Illinois in 1992, CCC's answer to the allegations in the complaint acknowledged that ". . . it [CCC] has also told insurance company customers that they will save money in reduced payments on policy claims if the company uses CCC services in place of its previous valuation method."^[v]

Inadequate allowance for recent vehicle improvements.   It is not unusual, especially in the case of vehicles at least 4 or 5 years old, for the insured to have recently spent a significant sum of money on mechanical improvements such as a new engine, transmission, or even tires.  CCC's computer data base will allow virtually nothing in terms of enhanced value for these expenditures.  For example, one CCC valuation report allowed for the following increases in value to a vehicle:  a rebuilt transmission at a documented cost of $400 enhanced the value of the vehicle $45; a rebuilt engine at a documented cost of $2,600 added $465 to the value of the vehicle; 4 brand new tires at a documented cost of $336 added only $24 to the value of the vehicle.

Superior negotiating skills of the claim adjusters.  Insureds who have lost their normal and often sole means of transportation are in an extremely vulnerable position.  They usually have no way to get to and from work and, of course, they have yet to be paid any money by their insurance company in order to be able to purchase a replacement vehicle.  Even if the insured's policy provides for rental car coverage, that coverage is usually limited to a maximum of 30 days, seldom long enough to resolve a total loss claim, especially where the insured can't accept the insurance company's offer.  Many companies use this leverage to their advantage and take the position that once the company has made what it contends is a fair offer to the insured, the insured has to either accept the offer or, if not, be confronted with immediate financial losses.  For example, rather than going ahead and paying the insured the "undisputed" value which the insurance company claims is appropriate for the totalled vehicle, insurance companies often attempt to obtain improper leverage over their insureds by demanding the return of the insured's rental car and/or advising the insured that all future storage fees for the totalled vehicle will become the obligation of the insured if the insured fails to settle the total loss claim at the insurance company's figure.   

Another tactic commonly used is to advise the insured that if the company's valuation is not deemed acceptable, the insured will be "invited" to resort to the appraisal provisions found in most policies.  Whereas insurance companies have their regular appraisers ready to go with just a phone call, the insured almost invariably knows nothing about how to go about selecting an appraiser.  In addition, of course, there are the costs associated with going through the appraisal process.   The insurance companies are well aware that in the majority of claims, insureds who are faced with these financial hurdles and additional delays will "fold" and settle for the amount which the insurance company has offered.

To stack the deck even further, CCC has in the past provided written material and training tapes to its insurer clients which specifically coach the adjusters on exactly what to say in response to what CCC calls "common" complaints or concerns raised by insureds as to the amount of money which the insurance company has offered.  CCC has literally provided insurance companies with stock answers to give dissatisfied insureds.  For example, CCC has advised adjusters to tell the insured that the valuation service used by the company is "an independent source and completely impartial."   If the insured should dare to probe further, the adjuster is supposed to tell the insured that the source of its information is from a computer and that the adjuster "has more and better information than they [the insured] will ever have." 

To what extent are the insurance companies who use CCC naive or unaware that its valuation figures save them money?  The answer, of course, is rhetorical.  In the first place, CCC markets its total loss valuation service to prospective insurance companies by openly representing that contracting with CCC will save the insurance company money.  CCC often offers statistical proof that its total loss figures are lower than what CCC calls the "correctly calculated guidebook" figures.  While part of the savings from using CCC can be attributed to the ability of an adjuster to determine a total loss valuation very quickly by using a computer, the marketing materials and projections provided to insurance companies by CCC specifically discuss the anticipated indemnity savings that will occur if the company agrees to "partner" with CCC. 

In addition to the fact that the mutual hopes and expectations of both CCC and the insurance companies are what one could term less than subtle at the outset of the relationship, actual studies made available to this author reveal that significant indemnity savings are being achieved by contracting with CCC.  To illustrate, Farmers Insurance Group has conducted a number of "in-house" comparative tests at various regional offices around the country, the general format of each test being that the local claims office will calculate what it would have to pay out on its total loss claims without using CCC compared to what it would have paid by using CCC over the same time period.  By way of specific example, two claims offices in the Columbus, Ohio Region of Farmers were directed to use "non-CCC" methods on all of their total loss claims for the third quarter of 1995.  Total loss payments rose between 6.6% and 31.8%.  Farmers concluded that it had paid an average of $382 more per total loss file by not using CCC.  As stated in a resulting memo by one of the monitoring claims managers,

". . . . Columbus has terminated the test, requiring that all future losses (with an ACV greater than $1,000) be settled using CCC."

If an attorney gets involved in this type of litigation, and assuming the insurance company turns over its statistical studies and audits concerning any comparisons done between valuing total losses through CCC as opposed to non-CCC methods, what will likely be apparent is that the sole criteria for evaluating CCC's worth to the company was whether using CCC was saving the insurance company money.  The appropriate thrust of any such study should be whether CCC's total loss valuation service is  accurate, objective and/or fair to the insureds of the company.  This author has never seen a study with that objective in mind.  Instead, these types of studies appear to talk only in terms of whether there has been any favorable impact on claims severity, i.e., whether using CCC is profitable for the company or not. 

Pursuing this type of litigation can be problematic to the plaintiffs' attorney.   First, the property damage claim has often been resolved already and the carrier may argue that a subsequent bad faith claim is barred due to settlement, release, and/or accord and satisfaction.  Secondly, even if the client comes to you before the property damage claim has been resolved, the monetary "dispute" between the client and the insurance company is often relatively nominal, often amounting to no more than a few hundred dollars.  The natural reaction to the client's dilemma will be to conclude that you can't fight a billion dollar insurer for that amount of money.  It goes without saying that the insurance companies are well aware of this fact and know just how hard to squeeze -- hard enough to save money but not so hard as to engender litigation over the issue.  

It is the strong opinion of this author that insurance companies conducting themselves in accordance with the practices set forth in this article are acting in bad faith toward their first party insureds.  To the extent that this type of self-serving corporate conduct can be shown to be deliberate, systemic and repetitive, the practitioner will have exposed a textbook example of the rationale for punitive damages.