Microsoft Word - Servicemaster 2018.02.15

ServiceMaster: American Home Shield Contractor Work Incentives at Odds with

Customer Interest

Company Update

American Home Shield (AHS) markets its home warranty as a reliable product that helps consumers pay a little

each month to save a lot over time on expensive breakdowns of air conditioning units, electrical work, and other

covered items.

However, the contractors AHS uses to repair or replace these household systems and appliances are incentivized to

cut corners, delay repairs, and avoid providing the more costly, comprehensive fixes and replacements AHS

customers expect, according to company documents and both current and former contractors.

AHS conditions the amount of work assigned to its contractors on their ability to meet strict cost targets. Contractors

say these targets incentivize the behaviors at the heart of consumer complaints regarding delays, denied claims,

“band-Aid and bubble gum repairs”, and expensive, unexpected added billing. As we have previously reported,

these complaints have spiked in recent years.

According to legal experts, business incentives that intentionally or unintentionally drive unfair or deceptive

business practices could pose legal risk to AHS and ServiceMaster under both federal and state law prohibitions of

unfair, deceptive, or abusive trade practices.

In-Depth: Contractor Scoring Methodology

Interviews with 30 AHS contractors as well as our review of contractor documents reveal that AHS sets volume

and cost agreements with its contractors each year. The agreement provides the contractor a projected number of

jobs per year at an expected “budget cost”, or average cost-per-call.

For example, one AHS contractor’s document indicated an expected volume agreement for over 1,000 jobs at an

average cost of just under $400 per call for that year. These volume agreement and budgeted cost agreement

numbers vary from month to month, with the average cost falling in summer and winter months as the expected

volume of calls rises.

Each month, AHS issues a status report to contractors that tracks their business analytics against the prior work

volume and budget cost agreement targets. This data is then included as part of a report card that scores contractors

on fifteen different metrics: Customer Calls for Status, Net Promoter Score, Customer Renewals, Cycle Time,

Service Fee Collection, Customer Surveys, Status Update, Emergency Incidence, Recall Incidence, Emergency

Cost, Recall Cost, Cost vs. Target, Normalized Cost, Transfer Out Incidence, and Transfer Out Cost.

A full breakdown of this score can be reviewed here. Our analysis shows that close to half of all possible ‘points’

are derived from cost data.

Both the status report and the scorecard show contractor’s incentives to keep costs low. When costs are low, scores

are high, and AHS favors assigning work to low-cost vendors. When costs rise, however, assigned work falls, and

can even lead to termination.

Vol. 5 No. 354 October 23, 2017

Vol. 5 No. 4 January 4, 2017

Vol. 5 No. 329 October 1, 2017

Vol. 5 No. 159 May 15, 2017

Vol. 6 No. 61 February 15, 2018

The status report provides additional statistics detailing the general outcome of home warranty claims. It shows the

rates of claim denial and appliance replacement, as well as all associated costs in any given month. For instance, in

one month a former contractor who provided us with his scorecard denied around one out of every four claims,

while replacing appliances in just under 20% of all claims.

Average cost data—broken down by repair, replacement, and second opinion costs—are included within the context

of one previous year. This allows comparison of average repair cost in May of one year to average replacement cost

in May of the next year, for example.

Takeaways from Documents and Interviews

Higher costs, less work. Documents provided by one former contractor illustrate a clear relationship between

average cost and assigned work in the following month. The data suggests that the more a contractor’s average cost

rises above the agreed upon “budget cost agreement” in a given month, the less work that contractor will receive

the following month.

Our analysis found a moderately strong relationship between a contractor’s average cost and how many dispatches

AHS would assign in the following month. For example, in one month one contractor’s company spent an average

of $250 more per call than that month’s “budget cost agreement” allowed. In the following month, their company

received just 47% of the number of dispatches scheduled for that month in the report’s volume agreement.

This basic relationship matters because it incentivizes contractors to keep costs low. “Contractors will lie, cheat and

steal to keep their numbers down,” said one former contractor.

Delays. In order to lower their average ticket cost, contractors say they intentionally split up repairs into multiple

visits when possible. Multiple visits means longer waits for customers who, in the meantime, may be without heat,

air conditioning, electrical work, a working garage door opener, or whatever the needed repair may be. Delayed

repairs are a common complaint among AHS customers.

Repair vs. replacement. Contractor status reports break down several business statistics, including how often

contractors replace appliances. 14% of all calls in one year of data we reviewed, for instance, resulted in a replaced

appliance. Contractors say they try to avoid replacement of systems and appliances given the higher cost of

replacement. For instance, one contractor’s average cost of replacement was nearly four times higher than that of

their average repair cost.

Advertising and legal risk. The predetermined cost-per-call average assigned by AHS means big ticket repair and

replacements of items can pose problems for contractors trying to keep their costs down. Yet it is precisely these

sorts of big ticket items AHS often advertises to customers as the reason they need to purchase a home warranty.

One mailer advertising an AHS home warranty plan explicitly speaks about the costs associated with repairing an

air conditioning unit: “Help protect your budget if your A/C fails with an American Home Shield home warranty

plan.”

The mailer states that the average cost to repair and/or replace an A/C ranges from $172-$4,000, and includes

National Oceanic Atmospheric Climate Prediction Center data projecting above-average summer temperatures

across the country.

Another marketing brochure includes similar projections for other large ticket items. “Without a home warranty,”

the brochure claims, the average cost of repairs or replacements for a furnace can run from $150 to $4,180, a clothes

washer can cost between $200 and $700, and a refrigerator between $150 to $1,300.

“Sooner or later, things break,” states the brochure. “Whether it’s your heating system, plumbing or refrigerator,

the home systems and appliances you rely on eventually fail.” “Help protect your budget with an American Home

Shield Home Warranty.”

Yet, the contractor documents we have reviewed suggest that anything other than minor repairs to these big-ticket

items would likely push contractor’s “average cost” higher than their assigned target cost-per-call, threatening their

volume of work from AHS. Contractor incentives are at odds with the very interests AHS sells prospective

customers on.

Those incentives may also, as discussed earlier, result in service delays spread out over multiple visits, temporary

repairs, and other service issues. These sorts of results may be felt more acutely when involving big ticket items

like A/C or heating systems than with garbage disposals or garage door outages.

UDAP risk. Any potentially unfair or deceptive contractor practices could pose legal risks to AHS, according to

legal experts. Both federal and state regulators can crack down on broadly defined unfair, deceptive, or abusive

practices under Section 5 of the FTC Act and state UDAP laws, respectively.

Deceptive misrepresentations or omissions in advertising for a product or service could raise consumer

protection concerns at both the state and federal level, says Holly Melton, a partner at BakerHostetler focused in

advertising law. Melton said that companies are responsible for both claims they expressly make and claims fairly

implied by their advertising.

Material misrepresentations or omissions of important information could harm consumers, and could

draw regulatory scrutiny and, potentially, enforcement actions. Enforcement actions could result in injunctive

relief, consumer restitution, civil penalties, and more, either by way of settlement or litigation.

Though he declined to opine as to whether the described business practices constitute unfair or deceptive practices,

Robert M. Langer, a partner with Wiggin and Dana LLP who has written extensively on UDAP laws, including co-

authoring a treatise of almost 2000 pages, said that generally companies can be held liable for any unfair or

deceptive business practices performed by employees or agents of the companies acting on their behalf.

UDAP prohibitions could apply to incentive compensation structures, according to Valerie Hletko, a partner at

Buckley Sandler. Ms. Hletko pointed to federal regulators having engaged in an industry-wide horizontal review of

bank incentive compensation structures.

In one notable instance, for example, the CFPB and OCC brought an enforcement

action against Wells Fargo for

unfair and deceptive business practices driven by employer incentives. The FDIC currently advises banks to,

“Review compensation arrangements for bank employees as well as third-party vendors and servicers to ensure that

they do not create unintended incentives to engage in unfair or deceptive practices.”

Lawyers we spoke with say it is possible the FTC or state attorneys general could apply similar standards to non-

financial institutions. Any settlement, civil investigative demand, or enforcement action pertaining to potential

UDAP violations could result in monetary or behavioral remedies.

AHS did not respond to multiple requests for comments. Following previous Capitol Forum inquiries, AHS did

send warnings discouraging contractors from sharing company documents.