Volume 9, Issue 4 - August/September 2007

Illegal Interference
Despite Networks, Agent Incentives Remain Rampant
by Les Shaver

Deals Glass Services in Kannapolis, N.C., remains one of the few businesses around that participates in all facets of the glass industry. Because the company does residential, commercial and automotive glazing work, owner John Webb gets visits from all kinds of people—tools suppliers, customers, distributors and, yes, insurance agents. There’s usually one member of this group of visitors who will allude to getting financial gifts or gift cards. Can you guess which one it is?

“One of my [insurance] agents called the other day, said [his] competitor was offering $10 a claim,” Webb says. “I won’t do it. I won’t stoop to that. It’s illegal and, as far as I’m concerned, it’s unethical.”

With the advent of networks in the 1990s, everyone thought the courtship of insurance agents would end, but that hasn’t happened. While many auto glass retailers don’t have the funds to invest in major agent incentive programs, that doesn’t stop them from going beyond the accepted methods to reach agents. These incentives can be found about anywhere and take many forms.

Gift Chain
Whoever said there were no free lunches obviously didn’t know about the auto glass industry. Scott Owens, owner of Excel Auto Glass in Lake Katrine, N.Y., saw his competitors give insurers exactly that.

“They would give raffles to whichever [insurance] offices got the most referrals,” Owens says. “The winning office would get a free lunch.”

But that was just the tip of the iceberg. Owens would hear of local agents getting cards for gas or for any number of retailers. In fact, the salespeople for glass shops would often play Santa Claus, giving agents gift lists.

“There is a form they would drop off,” Owens says. “The agent would check off what they wanted and then get the gift.”

While these gift cards may not be much by themselves, they can add up. “You could get four or five gift cards a month,” Owens says. “If they’re $10, this could be a substantial amount.”

Gift cards may be a popular incentive, but they aren’t the only one. Dave Burns, president of Ray Sands Glass in Rochester, N.Y., sees the larger chains courting agents in his area. He says one company may do a party night for agents, while another may give away a car waxing. One glass retailer sent an agent to Rochester for a weekend.

“The weekend getaway was the craziest thing,” Burns says, “but I’ve also seen televisions, movie passes and gift certificates from malls [given away].”

Fine Line
While Webb doesn’t want to see his competitors give agents big-ticket items, he does provide some freebies. 

“There’s a fine line there,” Webb says. “The fine line being that my shop gives away trinkets and trash, which was the phrase used by Bill Hart [former executive at State Farm]. We give away pencils, pens and pads and we probably don’t spend more than $20 a year on an agent’s office. It’s something to keep my phone number in front of them.”

John Cadwallader faces many of the same dilemmas at his glass company, W.I.N. in Elmira, N.Y., when he hands out promotional items. “I think there are acceptable standards,” he says. “I’m not exactly sure what acceptable standards are, but I know what unacceptable standards are.”

For others, a small gift card isn’t that big of a deal. The problem occurs when the gift is contingent on business. “If you give a kickback versus a card, it’s different,” says Alex Kurkin with Pathman Lewis LLC, a Miami-based law firm that represents car dealers. “It’s one of those things where you know it where you see it. There’s nothing wrong with gift baskets, for instance. A lot of it is the appearance.”

Richard Cellini, who advises corporations on ethical behavior as vice president of Integrity Interactive in Waltham, Mass., says that pens and pads fall under marketing premiums.

“Most companies take the view that their employees can be bought, but not for a notebook,” Cellini says. “They’re worried about people being bought with a case of rare scotch, golf clubs or a trip to Bermuda. Once a gift is past $250, you have to worry if your employees are making a decision based on self interest rather than the interest of the company.”

Judgment Needed
In the glass industry, where margins stay tight, $250 goes a long way. That’s why Owens finds $10 gift cards a problem. But who determines what’s right or wrong? It used to be insurance companies. But Cadwallader doesn’t see them stepping up to enforce these standards like they used to in the past. 

“I’m not sure who had defined that line [of acceptability],” Cadwallader says. “It used to be defined by insurance companies that said nothing could be accepted with a value of X. That would allow pads and pencils and the occasional lunch or golf game together.”

In some cases, agents will set their own standards. “Some agents won’t let me leave more than a pad or pen and they can’t display it,” Owens says. “They don’t want consumers to see it.”

But other insurers won’t touch the issue, mainly because their agents are largely independent operators.

“I don’t think I have any right to interfere with business plans of another company,” says Hal Hare, corporate claims manager for State Auto, a regional insurer based in Columbus, Ohio, which uses independent agents. “It wouldn’t be fair for me to tell them [glass shops] what they can and can’t do. I don’t have any right to do that.”

But Hare has one caveat. “If they do that [provide incentives to agents], I don’t want it to be a pass-through cost to me,” Hare says. State Farm takes a harder line when it discovers incentives. “We do have a policy within our Offer and Acceptance contract that [says] a glass shop cannot a give a gratuity to a State Farm agent, employee or customer,” Bischoff says. “They’re subject to removal from the Offer and Acceptance program.”

Bischoff warns that the insurer can uncover when this happens. “We do get feedback from other glass shops and agents letting us know shops are offering a gratuity,” he says. “We also do our own investigation.”

The shops in the New York Glass Association grew so sick of seeing their competitors hand gifts to agents that they wrote the state’s attorney general. Late last year, the state’s insurance office issued an opinion saying that the acceptance of “cash or cash equivalent payment for a motor vehicle glass repair shop after referring a glass repair claim” was a violation of Section 322 of the New York Insurance Law.

“Stuff like this comes out when someone tips us off,” says Andy Mais, spokesman for the New York Insurance Department. “We have a fraud hotline.”

The Independent Insurance Agents & Brokers of New York also chimed in on the issue in 2006 with a reminder to its member agents not to accept gifts. It also referred to New York Insurance Law Section 322 in the statement.

The net result of these proclamations? Agents aren’t receiving as many incentives from glass shops as they used to, but the practice didn’t disappear. “It’s still going on,” Burns says. Ulterior Motives Bischoff’s problem with incentives and kickbacks is a simple one. And, it’s an issue Webb and others throughout the industry share.

“Customers need to select glass shops for the right reasons,” Bischoff says. “For an incentive to be given, we have a problem with that. We want someone to be selected for the appropriate reasons.”

That’s what Mais said when the New York Insurance Department stepped up to issue an opinion about incentives. “You don’t know if you’ve been sent to the auto glass shop because it gave the insurance agent a $25 gift certificate or because it actually does good work,” he says.

Many law enforcement agencies don’t see kickbacks and incentives as much of a threat as glass shops do, though. “Kickbacks don’t get prosecuted because they take a backseat to more hard-core matters,” Kurkin says. “You will often hear about them when it’s Medicare related and government money. They usually result in criminal prosecution if local law enforcement has resources to devote to it.”

Often they don’t. And, in that case, it means shop owners like Webb will still hear stories of their competitors giving agents gifts to send them business. 

Still Around
When the networks came into existence, their purpose was to steer the decision-making process away from agents. Then why do incentives still exist?

Well, for starters, they don’t exist for every agent. “Incentives are only through agents that stay involved in the claims process,” says Scott Owens, owner of Excel Auto Glass in Lake Katrine, N.Y. 

With the shrinking pool of agents who can actually influence where their customers go, there’s a lot more competition. “Even though there are [fewer] participants, the margins are so tight they [glass shops] become very competitive to get the business,” says Alex Kurkin with Pathman Lewis LLC, a Miami-based law firm that represents car dealers. 

“Things indeed have become more competitive,” says Dave Burns, president of Ray Sands Glass in Rochester, N.Y. “There has been a lot of this last year because the industry had a downturn,” Burns says. “Shops are doing anything they can to get business.”

Widespread Practice 
What do the automotive glass repair shops have in common with architects, medical labs and the pharmaceutical business? On the surface, not much.

But Richard Cellini, who advises corporations on ethical behavior as vice president of Integrity Interactive in Waltham, Mass., begs to differ. He argues that in each of these industries, a third party sits between the end user and the producer of a product.

“In pharmaceuticals, there’s the drug manufacturer and there’s the patient,” Cellini says. “In between them is an influencer specifier [middle man]. In this case, it’s a doctor.” So, the pharmaceutical companies try to influence the doctor with well-documented incentives. But they aren’t alone. It also happens with architects. 

“Manufacturers will make the products,” Cellini says. “Then there are the homeowners. The powerful nexus is the architect. They don’t buy the stuff, but they influence the decision and will ultimately specify what kind of products the purchaser needs. The architect is very vulnerable to these things.”

If that isn’t surprising enough, consider that incentives are an issue in the stuffy world of higher education. “There is the college textbook book publisher and students,” Cellini says. “In between are the professors. They don’t buy the book, but they tell their students what to buy. The publishing companies would love to be able to influence the professors by taking them on trips or making grants to their favorite academic causes or giving money to the university.”

Les Shaver is a contributing editor for AGRR magazine.

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No reproduction of any type without expressed written permission.