Your Source for Up-To-Date News and Research on the Collision Repair Industry 

 

click here to subscribe to the FREE INSIGHT Editor's Desk News Alert Email

SUBSCRIBERS-ONLY
Today's News
INSIGHT This Month
INSIGHT Archives
Survey Center
Letter to the Editor

Business Tools
Subscription Information
CSI Reporting
Financial Analysis
IRS Audit Guide

Management/
Technical Info
Market Watch Rates
INSIGHT Inside this month's issue...

Feedback
Letter to the Editor

Court Is in Session

What some legal outcomes in 2009 are likely to mean for the Collision Repair Industry in 2010

As the closing gavel banged down on 2009, the Collision Repair Industry finds itself entering 2010 with a variety of new legal precedents. Not all will have far-reaching consequences, given the courts in which they were decided. However, a number of cases from the past year stand out either for the drama of their outcomes or the likely impact they may have in 2010 and beyond.

Check the Steering?

The industry in California, for example, begins 2010 with far different rules regulating what insurers can and cannot tell those needing collision repair work. Part of that change, of course, is based on a law passed in 2009, which goes into effect this month, amending the state’s ban on shop recommendations by insurers without a request from the consumer. The new law amends this prohibition to say insurers may provide consumers "specific truthful and non-deceptive information regarding the services and benefits available to the claimant during the claims process.”

But even before this law was enacted, a Los Angeles County Appeals Court ruling last summer had already dealt a blow to those opposed to what they view as “steering” by insurers. Last July, Judge Rita Miller ruled that Infinity Insurance did not violate state law when it offered a policy that covers only 80 percent of the charges for collision repair if a policy-holder chooses a shop that is not part of the insurer's direct repair program. The policy covers 100 percent of repair costs (less deductible amount in either case) at a DRP shop.

Plaintiffs in the case argued that the 20 percent discount has "the effect of steering," but the judge stated that the California statute used in the plaintiffs' argument "specifically provides that the only time the insurer is required to pay 100 percent of the repair costs is when the insured accepts the insurer recommendation to take the vehicle to a specific shop...".

Judge Miller further stated, "If the Legislature had intended to require insurers to pay 100 percent of the vehicle's repair cost regardless of whether the insured took the vehicle to a recommended shop, it would have expressly said so."

Shop Lawsuits Dismissed

Two other legal decisions in 2009 may have broader legal implications for those who argue that some insurer direct repair program practices “tortiously interfere” with their business. In the first, a U.S. District Court in May granted State Farm's motion to dismiss a tortious interference suit brought against the insurer by Gunder's Auto Center in Florida. The insurer successfully argued that because some customers to whom the shop said State Farm made "slanderous and/or tortious statements" eventually submitted claims for work completed at Gunder's, the insurer is a party to the relationship and could not be found to have interfered with that relationship. (The rest of the shop's suit, alleging slander by the insurer, was not dismissed and is proceeding.)

Similarly, this past fall, another federal judge dismissed a bad faith and tortious interference class action lawsuit brought against State Farm by Hernandez Auto Painting and Body Works, Inc., in Savannah, Georgia. The suit charged that the insurer misrepresented "the nature and quality of services" and hourly rates of Hernandez Auto Painting and other shops, and violated Georgia law prohibiting insurers from requiring use of a particular shop by "continuously and systematically" steering customers to its direct repair shops.

But in dismissing the suit, U.S. District Court Judge William Moore said in order to prove tortious interference, the shops would have to show that State Farm is a "stranger to the business relationship" between the shop and vehicle-owner, having no "legitimate interest in either the contract or a party to the contract." The shops in the suit, the judge said, "cannot seriously contend that (State Farm) has no economic interest in this transaction or the parties to it (when State Farm) is financing the transaction."

Several attorneys familiar with the industry say such rulings indicate shops in 2010 and beyond may face an even steeper uphill battle in bringing tortious interference claims against an insurer.

Offering Less than Initially Paid

Two other recent court rulings – both against insurance companies – are also apt to continue to reverberate in 2010. The first brought to mind the research into “underwritten” initial estimates by a Collision Industry Conference (CIC) committee back in 2006. In an admittedly non-scientific study of about 700 claims, the committee found that initial insurer-prepared estimates averaged more than $2,400 than the actual final repair bill.

While the recent court case centered around claims payouts other than that for collision repair work, it similarly dealt with what some have called “low-ball” offers by insurers. Following a three-week trial, a judge in New Mexico in November found that Allstate Insurance violated state unfair claims and trade practices by forcing the consumer plaintiffs in the case to sue the insurer to receive what they are due under a policy. Allstate did this, the judge said, "by offering substantially less than the amounts (the plaintiffs) ultimately recovered when they went through trial."

Speaking from the bench, Judge Barbara Vigil said Allstate failed to attempt to provide "a prompt, fair and equitable settlement of...claims in which liability had become reasonably clear," and in a "malicious abuse of power," used the jury trial system as "an attempt to delay or extort each of the plaintiffs into accepting less than the full value of their benefits under their policy."

As a result, the judge said, the plaintiffs in the case are due actual and compensatory damages. She said she would also determine punitive damages against the insurer "to deter Allstate from the commission of this practice." In announcing her decision at the end of the last day of the trial, the judge said both sides in the case could perhaps reach a compromise before she formally entered her ruling.

Class Action Result Leaves Questions

Perhaps one of the largest court rulings impacting the industry in 2009 was also among the most recent: the nearly $15 million judgment against The Hartford in a class action lawsuit brought by shops and the Auto Body Association of Connecticut (ABAC). Much has already been written about the ruling, in which the jury agreed that unfair claims practices by the insurer led to suppressed shop labor rates. So what will be the ripple effects of the case in 2010, seven years after it was originally filed?

First, as The Hartford prepares its appeal of the verdict, the shops' attorneys are preparing to seek "injunctive relief," a court order to force the insurer to change its business practices.

"More important than the money, we want to change how they do business," attorney David Slossberg said, declining to provide details of what the shops would be asking the judge to order.

Second, there’s the question of how such a pool of money would eventually be divvied up among the 1,500 shops Slossberg estimates could be part of the class in the case.

"That's still down the road to figure out," shop owner Bob Skrip, president of the ABAC and one of the three shop owners named as plaintiffs in the suit, said. "But I can assure you of one thing: We are going to do our best to make sure that if there is a pot to pull out of, that it is distributed properly. In our opinion, the shops that decide to do all the DRP work are responsible for the suppression of labor rates. We don't want to see them get a raise because of this. If this all goes well and the labor rate is increased, it should be increased for the ones who fought the fight, not those who created the problem."

Third, one of the keys areas that will likely be argued in 2010 is exactly what the ruling means or says about the way insurers conduct business. The ABAC tended to view the suit as centered around steering by insurers through direct repair programs. The jury finding appeared to focus more on The Hartford’s use of in-house appraisers as a means to control rates.

“The jury clearly recognized the fact that the labor rates are suppressed and the fact that The Hartford is obviously controlling those rates,” Skrip said. “So they awarded us a labor rate increase, but it's kind of crazy how the steering issue and DRP portion are not in there at all."

So it may be well into 2010 before it’s clear what change, if any, the ruling will have on insurer behavior.

Lastly, and perhaps of most interest to those eying the year ahead, is the question of whether the Connecticut ruling will embolden other shops or associations to take similar actions. Skrip said the ABAC and its attorneys feel the jury award gives them "a great amount of momentum" in its similar lawsuit against Progressive Insurance, and a lawsuit against a third insurer could be filed.

"That may depend on the reaction out in the market," Skrip said as 2009 came to an end. "We are hoping the market adjusts accordingly so we don't have to go through all this again (with a third insurer). But if we need do, we're all ready."   o

Feedback

Have a comment about this article? Send Email to Charles Baker, INSIGHT's Publisher

©2010 Collision Repair Industry INSIGHT
All Rights Reserved

FEATURED
LINKS:

INSIGHT Supports the NABC!
Do You?