Body Shop Business
Cover Story
March 2005
Keep This Job
Insurers are illegally trying to control the cost of repairs by
steering consumers to particular shops, while at the same time, trying
to distance themselves from any liability associated with negligent
repairs.
by Patrick McGuire
"Let the games begin."
I can't be certain, but experience tells me that that phrase was on the
minds of a number of automobile insurance company executives on March
27, 1964.
Why on that date, you ask? Because that was the day after the Supreme
Court of Alabama ruled that State Farm Mutual Automobile Insurance
Company could be held directly liable for the death of a young man who
was killed in a car accident if, and only if, it could be proven that
State Farm had selected the body shop where the vehicle had been
negligently repaired a few months before the fatal accident.
The Alabama case set the stage for what most body shop owners would
consider to be the biggest problem facing the collision-repair industry
today: steering.
By the term "steering," I mean tactics or games insurance
companies use to pressure a policyholder to have his vehicle repaired at
a particular body shop, while at the same time, trying to avoid any
liability associated with the repairs performed by the insurer's
preferred shop.
To understand the game, you first have to understand that practically
every policy of property-damage insurance (e.g., automobile, homeowners,
commercial-property) sold in the United States for the past 150 years or
so contains what's commonly referred to as a "Payment of Loss"
provision (POL provision).
POL provisions essentially give an insurance company two options for
paying a claim to repair property that's been damaged but not destroyed.
The first option is to pay the policyholder's claim in money so the
consumer can have the repairs performed by an independent contractor of
his choice.
The second option is for the insurer to hire the contractor itself and
to exercise direct control over the scope, method and cost of repairs.
It's this second option that gave rise to direct-repair programs (DRPs).
But the fact that insurance companies generally do contain a POL
provision leads to a rather obvious question: If insurers have the right
to hire a body shop to fix one of their policyholder's cars and to
directly manage the cost of such repairs, why don't they just go ahead
and do it on every claim?
The answer is liability.
The Alabama case and others like it make it clear that if an insurance
company exercises its option to repair a damaged car by selecting the
body shop that will do the work, the insurer can be held directly liable
for the quality and safety of the repairs performed. In other words,
while an insurer may very well have the right to tell a consumer to take
his car to a particular body shop for repairs, the insurer would then
have to assume the liability for the quality and safety of the repairs
performed by that shop.
And apparently that's a risk most insurers are unwilling to take.
So what insurers decided to do instead was to try and "play both
sides of the fence" by developing word tracks and other schemes to
pressure policyholders to use their DRP shops or other shops that their
agents or adjusters have a "friendly" relationship with -
without creating a paper trail to prove that the insurer selected the
body shop that performed the repairs. That way, if a problem developed
with regard to the repairs or if someone was injured or killed as a
result of the shop's negligent work, the insurer could claim that it was
ultimately the consumer who chose the shop that performed the shoddy
work.
There can be no question that these tactics are working. According to
the 2004 BodyShop Business Industry Profile, for example, more than 76
percent of the owners of "non-DRP shops" surveyed said
steering was adversely affecting their businesses. Even more surprising
and disturbing is the fact that a full 80 percent of the owners of
"DRP shops" said steering was having a negative impact on
their businesses.
These statistics should send a chill down the spine of every body shop
owner who has a long-term interest in the success of his business, as
well as every consumer who finds himself in a situation where he's
feeling pressured to have his vehicle repaired at a body shop
recommended by an insurance company.
Why? Because these stats present compelling evidence that at least some
insurance companies are systematically steering consumers away from body
shops that perform quality work at a competitive price. You see, if one
accepts the premise that insurance companies truly care about the
quality of repairs performed to their policyholders' vehicles and
therefore select only those shops that perform quality repairs at the
most competitive price to participate in their DRPs, it makes absolutely
no sense that 80 percent of DRP shops are having work steered away from
their shops by other insurance companies.
Unfortunately, the most logical explanation for this situation is that
some body shops have obtained either the explicit or implicit approval
of insurance companies to cut corners and to otherwise compromise the
quality of the repairs they perform in order to undercut the competition
on price. And, common sense dictates that this is being done to secure
more referral work from those insurance companies that either actively
encourage the practice or, at the very least, turn a blind-eye to it in
order to save money on claims.
There is, of course, quite a bit of irony to the fact that DRP shops are
now complaining about steering in even greater numbers than non-DRP
shops. Nevertheless, it does send a loud and clear message that no body
shop - regardless of its size, its ability to perform quality repairs at
a competitive price, and its status as a DRP shop or non-DRP shop - is
immune from steering.
That's the bad news. The good news, however, is that there is something
that every shop and consumer can do to protect themselves, as much as
possible, from getting caught up in the game.
For this strategy to be truly effective, though, you must understand how
and why the rules regarding POL provisions developed. Accordingly, the
intent of this article is to give you a limited history of the law
regarding POL provisions so that you can use that knowledge to compete
more successfully in the future.
However, because policies are different and insurance laws vary from
state to state, this article shouldn't be construed as legal advice or
as a statement of the law in your state. It's intended only as a general
overview of the principles discussed and, therefore, you should always
seek the advice of a competent attorney who is knowledgeable about the
laws in your particular state.
The Strategy
Protect yourself, your shop and your prospective customers against
insurers games and tactics by implementing this straightforward
strategy:
The consumer should request that the insurer commit, in writing, as to
which payment option it's exercising. And, if the insurer decides to
exercise its option to repair, the consumer should insist that the
insurer specify the name of the one body shop where the insurer wants
the car repaired. That way, all of the parties involved in the
transaction - the consumer, the shop, and the insurer - will have a
better understanding of what their respective rights and obligations
are. It should also go a long way toward eliminating some of the
nonsense that characterizes the way claims are currently being adjusted
and handled.
Will it work? It has in the past and should continue to do so in the
future. The main reason is that the approach is based on solid rules of
law developed by our courts to protect consumers from efforts by
insurance companies to interpret POL provisions in an unfair manner.
Indeed, the decisions handed down by the courts in a number of
jurisdictions are so clear and make such good common sense that it's
surprising that the situation got so bad in the first place.
But, as I mentioned earlier, you need an understanding of POL provisions
to effectively use this strategy.
Insurers Have 3 Options
POL provisions are usually found in either the "Property
Damage" or "Conditions" section of a policy of
physical-damage insurance. A typical POL provision reads as follows:
Payment of Loss
"Physical Damage" Coverages
The Company may, at its option, pay for the loss in money; OR may repair
OR replace the damaged or stolen property.
As stated above, these provisions essentially give an insurance company
three options for settling a claim for damage to an automobile. The
insurer can:
- Pay the loss in money so that the policyholder can have the
vehicle repaired by an independent contractor;
- Repair the vehicle itself (i.e., exercise the "direct
repair" option); or,
- Deem the vehicle a total loss.
Courts have generally been quick to enforce POL provisions because, when
properly interpreted and applied, they strike a fair balance between the
interests an insurance company has in controlling claim costs while also
protecting the insured's interests in making sure that his property is
repaired safely and properly.
Not surprisingly, though, because courts have had experience dealing
with insurers that have tried to interpret POL provisions unfairly and
those that have tried to escape liability if the repairs they've
directed aren't performed properly, three rules have developed regarding
POL provisions that are pertinent to this article.
3 Rules Regarding POL Provisions
- The insurer must clearly and unambiguously notify the insured at
the outset of the claim as to which payment option it's exercising.
Howard v. Reserve Insurance Company, 117 Ill. App. 2d 390, 254 N.E.2d
631 (1st Dist. 1969). And if the insurer fails to do so, it will be
deemed to have waived its direct-repair option. Id.
The two repair options are mutually exclusive and, therefore, an
insurer generally cannot purport to pay a claim in money based on
the amount that it believes it could have had the property repaired
for if it had exercised its direct-repair option at the outset of
the claim.
Keystone Paper Mills v. Pennsylvania Fire Ins. Co. et al., 291 Pa.
119, 139 A. 627 (Pa. 1927).
If the insurer does exercise its option to repair the property, it
must accept direct responsibility for the quality and safety of
repairs performed by the contractors it hired.
Mockmore v. Stone, 143 Ill. App. 3d 916, 493 N.E.2d 746 (3rd Dist.
1986).
Insurers Must Be Clear
Perhaps the best way to explain how these rules could help you prevent
prospective customers from being steered away from your business is to
start with the case of Howard v. Reserve Insurance Company. The Howard
case involved a fire loss to a building located in Chicago. Following
the fire, the insurance company sent the policyholder a letter that
quoted the policy language setting forth the insurer's option to repair,
rebuild or replace the damaged property.
Thereafter, the parties discussed the value of the claim in terms of the
cost of necessary repairs. However, when the insurer later learned that
the insured was in the process of repairing the building, the insurer
attempted to deny all liability for the loss based on a contention that
the insured had breached the POL provision in the policy by depriving
the insurer of its option to repair or rebuild the property itself.
The insured subsequently sued the insurer for breach of contract and won
at both the trial court and on appeal. In reaching its decision, the
Illinois Appellate Court emphasized the importance of clear
communication of an insurer's election of its repair option to its
policyholder. For instance, the court stated:
"In insurance contracts, as in all other contracts, it is incumbent
upon the parties to deal with each other in a plain, simple and
straightforward manner, and, where an election is to be exercised under
a contract, notice should be made in such a manner as to leave no doubt
in the mind of the opposite party of an intention to exercise it."
What body shop owners might also find interesting is that the court
quoted the following statement that the trial judge made in rejecting
the insurance company's argument that it had adequately notified the
insured of its option to repair the property rather than pay the loss in
money:
"This letter [date] that was sent did not exercise the option [to
repair], and following that letter, negotiations were going on with the
adjusters for the companies with regard to amounts, and if the company
had taken the position that they would exercise that option, even if
that letter didn't so indicate it, it was the duty of these adjusters to
say, 'Why do we talk about money? We don't care what you're asking or
what the price is. We're going to do that ourselves.' "
The court in Howard then went on to adopt five criteria to make the
notice of election to repair or rebuild by an insurance company
effective:
- It must be made within a reasonable time after the damage or loss
has occurred to the insured;
- It must be clear, positive, distinct and unambiguous;
- The repairs or replacements must be made within a reasonable time;
- It cannot be coupled with an offer of compromise or be made for
the purpose of forcing a compromise, but it must be an election made
with no alternative; and,
- When the election is made, the repair or replacement must be
suitable and adequate.
It is, to say the least, interesting to consider some of the classic
statements by insurance companies, such as the one that, "You can
get your vehicle repaired anywhere you want, but the most we're going to
pay is the amount of our estimate," in light of the criteria set
forth in Howard.
Options Are Mutually Exclusive
Another case that didn't involve car repairs but that body shop owners
may find interesting is Keystone Paper Mills v. Pennsylvania Fire Ins.
Co. et al., 291 Pa. 119, 139 A. 627 (Pa. 1927).
In that case, the Pennsylvania Supreme Court examined the meaning and
effect of a typical POL provision and found that, not only is the
preparation of an estimate of repair costs inconsistent with an
insurer's election of the option to repair, but also that an insurer
cannot limit its payment of a claim based on a contention that some
repairman might be able to perform the necessary repairs for the amount
specified in the insurance company's estimate of repair costs.
In Keystone, a corporation that operated a paper mill filed suit against
five of its insurance companies after a fire severely damaged one of its
paper presses and the insurers vacillated about how they were going to
pay for the loss. The policies contained POL provisions that gave the
insurers the right to repair or rebuild the machinery themselves but,
rather than exercising that option, the insurers arranged for two
engineers to submit estimates of the cost of probable repairs. The
insurers then tried to limit their payment on the claim to the amount of
the engineers' estimates.
The Pennsylvania Supreme Court agreed with the trial court that such
conduct constituted a breach of the insurance contract. As a preliminary
matter, the court observed that, if an insurance company is going to
elect to repair or rebuild a piece of machinery, there would be no need
for an estimate of repair costs.
The court then went on to state that an insurer's preparation of an
estimate of repairs, coupled with an offer to either pay the estimated
amount or repair the machinery, would not amount to an exercise of the
insurer's option to repair. The court reasoned, as follows:
"Had the Keystone Paper Company accepted any of the offers by these
[engineers], depending on the insurer to make good in keeping with the
terms of the agreement, it would have faced a controversy of a nature
not covered by the policy. The insurance company's burden would have
been shifted to that of the repair company.
"There is nothing in the contract of insurance that required
the insured to accept the responsibility of the repair company, as
the court below has well observed. Had the insurance company wished to
take advantage of its option to repair, it could have made a contract
with [the engineers] and subjected itself to the full responsibility of
the policy - to furnish a machine as good and as serviceable as the one
that was in use.
"The [insurers] cannot seize upon offers made by others,
appropriate them to their use as an exercise of their right, and then
hold the [policyholder] to the submitted estimate... Had [the
insurers] elected to repair and it had been accepted, there would have
been no estimate. Had the companies estimated the cost of repair and
submitted the alternative proposition, either to pay the estimate or
repair, this would not amount to an acceptance of the option within the
policy. Persons unaccustomed to negotiations of this character are
not to be put to the hazard of such propositions by experienced dealers
in such transactions."
Note: I added the italics for emphasis.
Thus, the Pennsylvania Supreme Court recognized that the insurance
companies were essentially playing the same type of legally
sophisticated game with their insured back in 1927 that automobile
insurers play with their policyholders today. The object of the game is
for an insurer to strictly control the cost of repairs while at the same
time trying to distance itself from any liability associated with
inadequate or negligent repairs.
The telltale sign of the game in the Pennsylvania case was that, if the
insurance companies truly believed that the repair bids submitted by the
engineers would have allowed for the paper press to be restored to its
pre-loss condition, the insurers had every right to contract with the
engineers directly and assume the liability that those repairs would be
successful.
On the other hand, however, the insurers had no right to present the
engineers' repair bids to the insured and try to force the insured to
contract with the engineers since, by doing so, it would have made it
appear that the insurers had opted to pay the claim in money and that
the policyholder actually hired the engineers to perform the work.
Fortunately, the court recognized that what the insurers were really
trying to do was to shield themselves from liability in the event the
work their engineers were proposing to do didn't restore the machinery
to its pre-loss condition. As a result, the court concluded that an
insurer's offer of a third person to perform repairs to insured property
will not be considered an exercise of the option to repair by the
insurer unless the insurer directs the repairs and assumes
responsibility for the contractor's work.
With regard to modern-day collision repairs, it's clear that insurance
companies that engage in steering are trying to put their policyholders
into an even more precarious position than the insurers in Keystone
tried to put their policyholder in.
To begin with, cars today are more complex than ever, and consumers
generally would have no way of determining the extent of collision
damage or the scope of necessary repairs. Therefore, consumers shouldn't
be put to the hazard of having to choose between:
- Getting a vehicle repaired at a body shop recommended by the
insurance company without a written assurance that the insurer will
accept direct liability for the quality and safety of the repairs
performed by its preferred shop; or,
- Having the repairs performed at a body shop the policyholder
trusts but having to pay more than the deductible amount specified
in the policy because of an insurance company's claim that one of
its DRP shops could have performed the repairs for less money.
Either situation is completely untenable considering that, if an insurer
truly believes that it can get an automobile safely and properly
repaired for less than the policyholder can get the work done for, all
it would have to do is exercise its option to repair and assure the
policyholder that it will assume direct liability for the success of the
repairs.
"Repair" Option Makes Insurer Liable
The rules regarding POL provisions take on even greater meaning in the
context of claims to recover the necessary costs of repairs under an
automobile policy. The main reasons are that, not only is there a
greater likelihood of gamesmanship and outright abuse given the
disparity in the knowledge and bargaining power of the parties to this
type of contract, but also because there are genuine safety and
liability issues associated with cheap automobile repairs. Two cases
illustrate these points.
The first case is Mockmore v. Stone, 143 Ill. App. 3d 916, 493 N.E.2d
746 (3rd Dist. 1986). In Mockmore, the policyholder insured his
recreational vehicle under a policy of physical damage insurance issued
by State Farm. The vehicle was subsequently damaged in a collision, and
State Farm told the plaintiff to take it to a particular repair shop for
repairs. After the repairs were completed, however, the insured
discovered that the poor quality of the repairs allowed water to seep
into the vehicle causing further damage. Although the policyholder
brought the matter to State Farm's attention, State Farm refused to pay
the costs incurred by the policyholder to have the additional damage
repaired.
The policyholder subsequently filed a lawsuit against both the repair
shop and State Farm alleging, among other things, that State Farm's
refusal to pay for the necessary re-repairs constituted a breach of the
insurance contract.
Ultimately, the trial court dismissed the policyholder's fourth amended
complaint against State Farm after agreeing with the insurer that it
couldn't be held liable for the policyholder's damages because the body
shop that performed the work was an independent contractor.
On appeal, the Illinois Appellate Court noted that the issue of whether
an insurance company could be held responsible for the quality of
repairs performed by an independent contractor had not previously been
decided in Illinois. It therefore looked to numerous cases from other
jurisdictions where the courts had recognized a policyholder's right to
bring an action against an insurance company for negligent repairs
notwithstanding the fact that an independent contractor had performed
the repairs.
In reaching its decision to reverse the trial court and to reinstate the
policyholder's case against State Farm, the court focused on the meaning
and effect of language in State Farm's policy that was similar to POL
provisions found in other policies. It determined that the provision
gave State Farm the option to repair the vehicle at a shop of its choice
in lieu of paying the claim in money. However, it also determined that
the option to repair carried with it a contractual liability for damages
resulting from negligent repairs.
In support of this conclusion, the court quoted a well-respected
treatise on insurance law where it is stated:
"Where the insurer exercises its option to repair, it is in the
same legal position as any person making repairs, insofar as liability
to strangers is concerned. Consequently, where a collision insurer has
agreed to repair and actively takes the matter in hand, making all
necessary arrangements, the reasonable conclusion is that the insurer
thereby assumes the duty of having the repairs made with due care; and
it is not relieved of this duty merely because it chooses to select an
independent contractor to make the repairs, and refrains from exercising
any supervision over his work."
The court then analyzed cases from other jurisdictions illustrating the
application of that rule to circumstances wherein the insurer was held
liable for the results of the negligent repair of a motor vehicle and
concluded that, "The major thrust of the rule is that the insurer's
election to repair the vehicle together with its selection of the means
by which such repairs are to be accomplished imposes a contractual
liability for damages resulting from negligent repairs."
Consequently, it held that, because State Farm not only elected to
repair the vehicle but also directed that the repairs be undertaken by a
particular repair shop, State Farm's contractual responsibility included
the damages resulting from allegedly negligent repair.
The second, and even more compelling case with regard to an insurance
company's liability for negligent repairs, is the Alabama case mentioned
at the beginning of this article: State Farm v. Dodd, 276 Ala. 410, 162
So.2d 621 (1964).
In that case, a State Farm insured was involved in a collision that
caused damage to the front end of his vehicle. Following the loss, the
vehicle was taken to a repair shop chosen by the insured, but it was
later moved to two other repair shops, allegedly at the insistence of
State Farm representatives. The vehicle was eventually repaired at the
third shop and, shortly after the policyholder picked it up, he noticed
that it would occasionally dart to the left when driven.
The policyholder complained to the shop that performed the repairs on a
number of occasions, and each time, he followed the shop's
recommendation for fixing the problem. However, the problem persisted,
and one day when the policyholder's son was driving the vehicle, it
darted to the left and struck a bridge abutment, killing the boy.
The son's estate filed a lawsuit, alleging that both State Farm and the
third repair shop were liable for the son's death. As in the Mockmore
case discussed immediately above, State Farm defended the action on the
theory that the repair shop that performed the repairs was an
independent contractor and, therefore, the insurer could not be held
liable for the boy's death.
At trial, a verdict was returned against both State Farm and the repair
shop, and the insurer appealed the decision. When the case reached the
Alabama Supreme Court, the court agreed that if it could be proven that
State Farm had selected the repair facility that performed the negligent
work, the insurer could be held liable for the boy's death.
However, the court also determined that the evidence wasn't clear enough
on the issue of whether State Farm actually selected the repair facility
that performed the negligent work, so it sent the case back to the trial
court for that issue to be further investigated and decided.
Thus, Mockmore and Dodd provide valuable insight as to why certain
insurance companies engage in steering. Simply put, it forces
unsophisticated policyholders into the Catch-22 position of having to
pay sums above the deductible amounts stated in their policies to have a
shop of their choice perform the necessary repairs, or it forces the
insured to go to one of the shops on the insurance company's list
without there being any clear evidence, i.e., a paper trail,
establishing that the insurer effectively chose the body shop that
performed the repairs.
Failure to Notify
One question that logically follows from what's been said above is: What
happens if an insurance company fails or refuses to notify its insured
as to which payment option it's choosing?
In Illinois, for example, that question was put to rest long ago when
our Supreme Court stated in a case called The Insurance Company of North
America v. Hope, 58 Ill. 75 (1871) that, "The right of the company
to replace or repair the property insured, in case of loss, is created
by the provisions of the policy, and if the company does not make its
election in apt time, and give the assured notice, the right to so build
or repair does not exist."
In other words, the insurer will be deemed to have waived its right to
repair.
In addition to the Supreme Court of Illinois, the authorities that have
considered the scope of the repair-rebuild-replace clause are unanimous
in their findings that a failure by an insurer to notify its insured of
its election to exercise the option to repair by some unequivocal,
clear, positive, distinct and unambiguous act will be deemed a waiver of
the insurer's right to raise the option as grounds to reduce the
policyholder's claim or as a defense to an action on the policy. (See,
e.g., 12 Couch on Insurance §176:17-18 (3rd ed.); 6 Appleman Insurance
Law and Practice Ch. §171:4003).
The rationale is that, because an option to repair or rebuild is
inserted for the benefit of the insurer alone, the insurer is permitted
to waive its right to rebuild under the option clause so as to prevent
insistence thereon. 12 Couch on Insurance §176:7 (3rd ed.).
Implementing the Strategy
Based on the foregoing, a simple and straightforward letter such as the
following should prove effective in curbing the types of games and
tactics insurers use to steer customers to a particular body shop while
trying to avoid any liability associated with the repairs:
Dear Claims Handler:
This letter concerns my claim for damage to my insured vehicle. The
repair facility I have chosen to perform any necessary repairs, [Name of
Shop], has asked that I submit this letter to you in order to prevent
any misunderstandings as to the nature and extent of the loss and/or
payment for any services it provides.
To begin with, it is my understanding that my policy provides for a
$_____ deductible. If I am mistaken, please let me know so that I can
make sure that I have the funds available to cover my portion of the
loss if and when the necessary repairs are completed.
Secondly, I realize that your company probably has several options for
settling my claim. Therefore, please indicate your company's choice as
to its payment options and return this letter to me. I will share your
response with my preferred shop so that everybody involved understands
your company's position on the matter.
a. Vehicle is a total loss. b. Repairs performed by my preferred shop
will be paid for subject to the contractual limitations detailed below:
Deductible: $
Other (attach additional pages if necessary):
c. The company is opting to have my vehicle repaired at the shop named
below. It is understood that I will be responsible for my deductible,
but it is further agreed that your company will be responsible for the
quality and safety of repairs performed by this shop.
Name of Shop:
Address:
Phone #:
Contact:
d. Investigation continues. The company expects to know more in ____
days and will notify me promptly as to its determination of coverage and
its election of its payment option.
Authorized Signature:
Date:
As you can see, I fully respect your company's right to investigate my
claim and exercise any one of its payment options. However, I want to
know up front which option that is so that I can proceed accordingly.
The courtesy of a prompt response would be greatly appreciated.
Thank you for your time and I look forward to hearing from you soon.
"Game over?" That's up to you and your customers.
Writer Patrick J. McGuire is a Chicago attorney who practices
primarily in the area of civil litigation with special emphasis on cases
involving insurance coverage, unfair trade practices and consumer fraud.
In addition to his litigation practice, McGuire represents body shops
located throughout the state of Illinois as part of a consulting program
he developed to help shop owners better understand the laws affecting
the collision-repair and insurance industries. The program has been held
out as a model for shops in other states, and McGuire has been the
featured speaker at industry events around the country. He also performs
legislative consulting and serves as counsel to the boards of directors
of several professional groups and trade associations. He can be reached
at (312) 541-0500. |
