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Insurers & the Rebuilt Wrecks Scam

Hurricane Cars Flood the Market

By Lisa Wade McCormick
ConsumerAffairs.com

September 25, 2006

• Certified Dangerous: Used Cars' Airbags • Insurers & the Rebuilt Wrecks Scam • State Farm's Rebuilt Wrecks • How To Protect Yourself • Airbags in New Cars Seldom Fail, Experts Insist • A Baffling Airbag Case • Airbag Safety Tips • A Short History of the Airbag --- Company Responses • DaimlerChrysler • Ford • GM • Honda • Kia • Mitsubishi • Nissan • Volkswagen --- More About Airbags • Feds Probe Airbag Failures in BMWs • Honda's Immaculate Airbag Deployment • New Airbag Rule on the Way • Researcher Says Airbags Pose Threat To Hearing

Not long ago, the Senior Counsel for the Consumer Federation of America (CFA) testified before a U.S. House of Representatives subcommittee about the problem of wrecked and storm-damaged cars being rebult and sold as "certified" used cars.

"Each year, millions of severely damaged vehicles are not destroyed, but rather are sent by unprincipled insurers to auto auctions where they are sold to unscrupulous auto dealers and rebuilders," CFA's attorney Rachel Weintraub told the House subcommittee. "Unscrupulous insurers, auto dealers, auto auctions, and rebuilders pocket billions in ill-gotten gains from the fraudulent sales of prior damaged autos -- at the public's expense."

Weintraub said the scam works this way:

• A consumer wrecks a vehicle -- or it's damaged in a flood or other catastrophic event. The insurance company totals the vehicle, and pays the claim. The insurance company may or may not brand the title as "salvage." A salvage title reduces the vehicle's value by 50 percent;

• The insurance company sells the vehicle to a salvage auction. The auction gives the insurance company part of the profits from the vehicle's sale. A 2002 Consumer Reports investigation estimated that insurance companies recovered $2.5 billion a year from the salvage sales of wrecked vehicles;

• An unscrupulous rebuilder buys the wrecked vehicle and makes cosmetic repairs to conceal signs of previous damage. Rebuilders typically don't have the expertise to repair wrecked vehicles, are often unlicensed by the states, and sometimes are based in Mexico and other countries Another dangerous ruse? Rebuilders often disable the airbag systems or fail to replace the deployed ones. Air bags are expensive to replace; one airbag for a luxury car may cost as much as $2,000. Multiply that by six and the price tag quickly adds up.

• Rebuilders sell the wrecked vehicle to another auction, a dealer, or a curbstoner. Those are people who make repairs in their own shops or backyards, and then sell directly to consumers. If the title was branded as salvage, rebuilders try to erase all signs that the vehicle was damaged. That's called "washing" a title. Rebuilders wash the titles by sending them to states that don't recognize the salvage brands. They also use the correction fluid, Wite-Out, to conceal the vehicle's history or make a counterfeit title. "There is a large incentive to commit fraud," Weintraub testified. "A vehicle with a clean title can command a far higher price than one with a branded title."

• Rebuilders often advertise these damaged vehicles as "certified" used cars in mint condition. If consumers ask about the car's history, they're told the title is clean. Consumers can't confirm that information because they usually don't see the title before the sale. If they get a loan, for example, the lien holder gets the title.

Weintraub told House members this scam threatens the safety of hundreds of thousands of unsuspecting consumers nationwide.

"Consumers may unwittingly purchase a car that superficially appears in good working order, but has been previously severely damaged by serious collision or flood damage," she testified.

No one knows for sure how many rebuilt wrecks are on the market, but the Consumer Reports investigation estimated the industry "beats, bends, and bangs out as many as 400,000" annually that are five or less model-years old. And many consumer experts say that number is likely much higher.

In her testimony, Weintraub added: "These vehicles are sold across the nation, from state to state, and pose a serious hazard to the American public, especially vulnerable consumers such as young, first-time buyers, recent immigrants, and members of the armed forces."

Rosemary Shahan, founder of Consumers for Auto Reliability and Safety, has heard horror stories from car buyers who've unknowingly purchased a rebuilt wreck. Many of those consumers, she says, have later discovered someone deliberately disabled the vehicle's airbag systems or failed to replace the deployed airbags.

"I heard from a woman whose son bought a car on craigslist.com," Shahan says. "The car had lots of problems and he took it to a mechanic who said, 'Oh, by the way, did you know the airbags are missing and the circuitry that monitors the airbag system is disconnected?'

"I also heard from an elderly woman in Orange County who bought a used car and then learned that instead of having airbags, the cavity where the airbags are supposed to go was filled with rags," she says, adding California is the only state that requires rebuilders to replace the airbags in damaged vehicles to their original specifications. That means it's a crime in California if a rebuilder puts an airbag designed for a VW Beetle into a Ford F-150.

Nationally recognized car expert Richard Diklich of Missouri is familiar with these airbag scams.

"I had one case where the airbag light came on in a vehicle and the dealer told the consumer that it was no big deal ... just a sensor problem. The consumer later found out the car had been wrecked and the airbag had deployed.

"The person who fixed that car had folded up the passenger side airbag and shoved it back in the cavity," Diklich adds. "But they couldn't do that to the driver's side airbag. So they cut the airbag out and restuffed the cavity with paper."

Consumer attorney Bernard Brown recalled a case where a rebuilder removed the airbag warning light from a wrecked mini-van.

A single mother of three later bought that rebuilt wreck.

She died two weeks later in a head-on collision.

"This was an obvious case where the airbag should have deployed but didn't," Brown says, adding the dealership ran a Carfax on the minivan and the title came back clean. "The woman's head hit the steering wheel and she died.

"After the accident, investigators learned the minivan was a rebuilt wreck out of Kentucky. And someone had removed the airbag warning light -- the light bulb itself -- that would have let her know there was a problem with the airbag system."

During our investigation, we discovered the Iowa Attorney General's Office sued a Des Moines car dealer who knowingly sold a 1995 Pontiac Firebird that did not have working airbags. The 2002 lawsuit also alleged the dealer didn't disclose the vehicle had substantial damage from a previous wreck.

"Vehicles being sold without working airbags is a growing problem," Attorney General Tom Miller said when his office filed the lawsuit. "The California Highway Alliance recently found that 1 in 25 previously-damaged vehicles inspected had phony or dummy airbags ... about 2 out of 5 'totaled' vehicles are rebuilt and put back on the road... and many might not have (replaced) airbags."

Hurricane Katrina Cars Hit Market

Our investigation reveals these dangerous rebuilt wrecks -- that often have disabled airbag systems -- continually flood the marketplace.

Consumer experts say this often happens after a national disaster, like Hurricane Katrina that ripped through Louisiana and Mississippi in 2005 and severely damaged thousands of vehicles.

"We know there were 600,000 cars damaged by Hurricane Katrina," Shahan says. "And most of those cars were not destroyed. Everyone agrees those are ticking time bombs. That's 600,000 cars that have airbags that might not inflate, and the insurance industry is dumping them back on the market. Almost all of them are back on the market."

CFA's Attorney Weintraub warned the House subcommittee about the dangers these Hurricane Katrina cars pose to consumers during her March, 2006, testimony.

"Most of those vehicles are grossly unsafe and are beyond proper repair: the electronic components will corrode; the airbags may not inflate in a collision; the brakes and seatbelts may not work; and they are also prone to toxic mold, and can pose a health hazard to anyone who rides in them ... these cars are, however, being sold today on at least one auto auction Web site."

Shahan and other consumer groups blame much of this problem on the insurance industry.

"It starts with the insurance companies," Shahan says. "They take possession of the vehicles and they could oversee the repairs and make sure they're fixed properly. But that's not profitable. So they sell them to a salvage pool and get a cut of the profits when the car is sold to the highest bidder. You have to take some of the profit away from the insurance company."

Insurance Industry's Response

John Eager, senior director of claims for the Property Casualty Insurers Association of America, says that's not a fair criticism.

"Our industry's position on this has always been clear," he says of his association that represents more than 1,000 insurance companies. "When you have a valid total loss of a vehicle -- where the cost to repair the vehicle exceeds its fair market value -- and it generates a piece of salvage, then that vehicle should be branded. And that brand should stay with the vehicle for the life of that vehicle."

Eager says his industry also supports putting a flood brand on all the vehicles totaled in Hurricane Katrina.

"And if those cars are rebuilt that flood brand should stay on the title," he says, adding his industry worked with law enforcement and entered those flood damaged vehicles into a database so they could be tracked. "But we have not seen a single one of those flood damaged vehicles turn into a problem vehicle."

He adds: "Of those 600,000 vehicles, there were a large number that didn't have damage to the wiring, the electrical, the airbags, or any contamination. Those vehicles were repaired. If they had damage to the computers, they were pulled out and replaced. Those cars were not totaled because they didn't put consumers at risk."

Next: How to Protect Yourself

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