BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE
Senator Jackie Speier, Chair
SB 1492 (Speier) Hearing Date: April
5, 2006
As Amended: March 27, 2006
Fiscal: No
Urgency: No
SUMMARY
Would create a rebuttable presumption that the
average of three written estimates of repair of a
vehicle presented by a claimant to an insurer is
fair and reasonable in a small claims court and/or
for purposes of a market conduct examination.
DIGEST
Existing law
1. Prohibits various claims settlement practices
generally deemed "unfair," including knowingly
not attempting to effectuate prompt, fair and
equitable settlement of a claim in which
liability has become reasonably clear;
2. Prohibits insurers from requiring auto body
repair dealers in the insurer's direct repair
program (DRP) to pay for rental vehicles of
claimants;
3. Allows auto body repair dealers to report to
the Department of Insurance (DOI) when the auto
body repair dealer is denied participation in a
DRP;
4. Does not mandate that a survey of hourly labor
rate for repair be completed by insurers in a
given zip code, but does require that any
completed surveys done by insurers be sent to
the DOI;
SB 1492 (Speier), Page
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5. Prohibits insurers from requiring that
claimants get their cars fixed at specific auto
body repair dealers;
6. Prohibits an insurer from suggesting an auto
body repair dealer, except if:
a. A referral is expressly requested by a
claimant;
b. The claimant has been informed in writing
of the right to select a repair dealer, and;
c. Written disclosure is made to claimants of
the right to have an auto body repair dealer
of their choice;
1. Prohibits an insurer from continuing to offer a
dealer of the insurer's choice to a claimant
once the claimant makes a choice;
2. Establishes an auto body repair mediation
program which may be used by a claimant when the
dispute with an insurer is over a repair that is
at least $7,500 in value and the amount in
dispute is at least $2,000.
This bill
1. Would create a rebuttable presumption in small
claims court that the average of three written
estimates presented by a claimant to an insurer
is an offer of settlement that is a fair and
equitable offer, if the offer is rejected by the
insurer;
2. Would create a rebuttable presumption that the
average is fair and equitable for purposes of
market conduct examinations conducted by the
DOI;
3. Would not require a claimant to obtain three
written estimates of repair;
4. Would stipulate that one or two estimates are
not granted a presumption.
SB 1492 (Speier), Page
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COMMENTS
1. Purpose of the bill . To give further statutory
guidance as to the way in which a fair and
reasonable settlement of an auto body repair
claim may be determined.
2. Background .
The history of insurance premiums and repair
costs.
The average premium for automobile insurance
coverage in California has remained relatively
stable over the past decade, but the components
of that overall premium have not remained stable
(see chart, below). While the liability portion
of the premium has gone down, the portion of the
premium that pays for collision repairs has
increased. California has a highly regulated
auto insurance system, and it is therefore
reasonable to conclude that the reason collision
premiums are increasing is because the costs of
repairs are increasing.
-------------------------------------------------
At least one inference that can be derived from
the shifting burden of premium from liability
costs to collision costs is that cars are
becoming more crashworthy as airbags, ABS
braking systems, and crumple zones become more
effective in preventing major injuries. The
flip side of the car taking the brunt of
collisions, or being more sophisticated in its
protection system, may also be that auto body
repairs become more expensive, more exacting in
their technical standards, or both. Insurers
may argue that fraud is at least part of the
explanation for increased costs. Approximately
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$33 million per year is spent by the State of
California, through its insurance fraud program,
to combat auto insurance fraud, and additional
sums are spent by insurers.
DOI regulations .
In August 2005, the DOI promulgated proposed
regulations in which it sought to clarify the
manner in which a labor rate survey (Insurance
Code Section 758 (c)) could be conducted by an
insurer, and when such a survey would be
considered valid by the DOI. Generally speaking,
the proposed regulations were not well-received.
The DOI withdrew its proposal and indicated that
it would make a new proposal. Committee staff
understands that a new proposal will be released
for public comment within the next 30 - 60 days.
In general, the new proposal will describe a
survey that satisfies the standard of Section
758 (c), as well as a second and more detailed
survey that, if conducted, might be granted some
deference by the DOI when the DOI determines, in
its market conduct examinations, if fair offers
of settlement are being made by an insurer. The
proposed regulation will not require the DOI to
grant deference to any survey.
November 21, 2005 committee hearing.
During this committee's November 21, 2005
oversight hearing of the DOI, auto body repair
shops complained that the DOI was ineffective in
enforcing the anti-steering law and in helping
consumers to obtain fair settlements involving
disputed claims. One repair shop had even
encouraged its customers to file small claims
actions against insurers. The issue before the
small claims court, generally speaking, has been
the labor rate per hour offered by the insurer
vs. the labor rate that the consumer was able to
obtain at a shop of the consumer's choice.
According to the testimony offered at the
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hearing, in more than 100 cases brought to small
claims court, few consumers lost.
The Insurance Commissioner testified at the
hearing that he felt he lacked adequate law to
ensure fair settlements in disputed auto repair
claims. He indicated that if the Chair wished
to propose changes to the law, he would probably
support those changes. Staff notes that
although the Commissioner felt that he lacked
adequate law, the small claims court was
interpreting the same law and rendering
judgments in individual cases.
During 2005 and through to the present, the
committee has received several hundred
complaints from consumers generally alleging
that the consumers were steered to auto body
shops or otherwise denied full reimbursement for
repairs at shops of their own choosing. While
most of the disputes involved the labor rate
being offered by insurers to repair the vehicle,
complaints also exist about whether certain auto
body parts can be repaired or must be replaced
(for example, a truck frame) and about whether
an insurer is offering aftermarket or used auto
body parts when new, original equipment
manufacturer parts might arguably be more
appropriate.
The perspective of insurers.
Insurers have generally stated that their claims
settlement practices are designed to deliver the
best value to all their customers and to ensure
that, in the case of direct repair programs, the
shops are subjected to the insurer's exacting
standards of practice. Insurers believe that
consumers are often best served by using a shop
that has been inspected by an insurer, and
insurers will generally offer a lifetime
guarantee on repair work done in
insurer-approved shops.
The path of a consumer complaint.
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The path of a disputed auto body repair through
the DOI begins at the Consumer Services
Division. After a consumer complains, the
division seeks information from the insurer.
When information is offered, the division
doesn't state that a consumer is correct or
incorrect.
Instead, it will determine if an insurer has
adequately supported its adjustment of the claim
or indicate that the insurer has not done so.
If the insurer did not adequately support the
adjustment of the claim, the division will send
another letter to an insurer indicating that the
insurer needs to provide better evidence.
An insurer then has a choice of paying the
disputed amount, offering further support or
refusing to do either. If a company offers
further evidence, this evidence may include
labor rate surveys conducted by the insurer, and
other body shop industry standards for
workmanship and repair, such as number of hours
needed to perform a repair or standard paint and
materials for a given repair.
If this additional evidence is adequate in the
opinion of the division, then the consumer and
insurer are informed, and the consumer is
informed of the option to go to small claims
court should he/she need further assistance. If
at any time the insurer refuses to pay or to
offer adequate support for its adjustment of the
claim, the division may allege violations,
compile these alleged violations throughout a
year, and refer insurers with significant
allegations to the DOI's legal department for
possible formal legal action before an
administrative law judge.
However, the division cannot order that an
individual's disputed claim be paid at a given
amount, and resource constraints in the legal
division make it highly unlikely that the DOI
would pursue a balky insurer through the courts
on behalf of an individual claimant (although it
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could, in theory). When committee staff
receives complaints from the public about the
DOI's dispute resolution process, it is often
from consumers who have reached the point at
which the insurer refuses to pay or to provide
more evidence, and the department still won't
order payment of the consumer's claim on terms
satisfactory to the consumer. From the
perspective of these consumers, they are at the
proverbial "dead end," and most are also
reluctant to file suit in order to obtain the
assistance of a court. They simply lack the
time and resources to do so.
Another DOI enforcement tool is the market
conduct examination-basically random samples of
claims according to nationally-recognized audit
standards. The DOI will sometimes find claims
that it determines were not settled in
compliance with the law and, if there is a
pattern of these claims, order that a penalty be
paid by an insurer. A pattern would also
typically prompt the DOI to order that an
insurer review all claims within a three year
period of time and pay consumers appropriately.
In this somewhat round-about manner, the DOI has
an additional way to obtain relief for an
individual consumer. However, this round-about
method is usually inadequate to address the
concerns of a single policyholder who filed a
complaint with the DOI. The bottom line is that
the DOI will not force a company to pay a claim,
although companies may settle individual
complaints to avoid fines rendered through the
administrative hearings process.
Auto body repair mediation program.
As part of its consumer services function, the
DOI also operates an automobile body repair
mediation program (Section 10089.70), but the
program isn't generally used by the public.
According to DOI staff, the size of the repair
(at least $7,500) and the amount in dispute (at
SB 1492 (Speier), Page
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least $2,000) may be a bit too high to be useful
for most auto body repair disputes. These
limits are identical to the limits that trigger
eligibility for mediation of a homeowner's
insurance claim, a class of claim also included
within the mediation statute. DOI staff
suggested to committee staff that the size of
the dispute be lowered to $5,000 and the amount
in dispute be set at $1,000. Most auto body
repairs are for amounts of $5,000 or less,
according to DOI staff.
Appraisal.
Automobile insurance policies also contain an
appraisal clause. Assuming the disputed amount
were large enough to merit each side paying the
costs of an appraisal, the process is
straightforward: each side selects an appraiser
and agrees on a third. The ruling of two out of
three appraisers is binding on all parties.
Ultimately, a consumer can file suit in court if
s/he desires in order to seek an order/judgment
that is enforceable. First party claimants can
seek recovery for damages and bad faith. Third
party claimants can seek recovery for damages,
but California law prohibits a bad faith action
by these claimants.
Major regulatory actions and lawsuits
surrounding auto body repair.
At least two significant legal actions are
pending on the subject of auto body repair, in
addition to pending regulations on the subject
of hourly labor rates:
On January 18, 2006, the DOI filed
an order to show cause why GEICO insurance
shouldn't be found to have violated several
provisions of the Unfair Claims Practices
Act and related regulations. Among other
alleged violations, the DOI alleged that
GEICO failed to perform the
statutorily-established, voluntary labor
rate survey, or to offer any other evidence
SB 1492 (Speier), Page
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to support its offers of hourly labor
rates, when settling with 20 specified
claimants.
At least one class action lawsuit
has been filed alleging conspiracy amongst
insurers to use "inferior" crash parts that
allegedly do not restore a car to its
pre-loss condition. Named in the suit
filed in the San Jose Division of the U.S.
District Court on March 14, 2006 are State
Farm, Allstate, GEICO and the Certified
Automotive Parts Association (CAPA).
3. Support . The author believes that ongoing
complaints from consumers about inadequate
settlements could be addressed through changes
in statute. The approach of the bill is to
create a mechanism that builds upon longstanding
practices (three estimates) and an existing
infrastructure (the small claims courts) to
offer consumers a chance at fair and timely
resolution of a dispute.
Assuming a small claims judgment was not
appealed by an insurer, consumers who won in
small claims court would have an enforceable
order. By offering the courts direction that
the average of three claims is presumed fair and
equitable, while allowing this presumption to be
rebutted, claimants who "do their homework" by
gathering evidence should be able to feel
comfortable taking disputes into small claims
courts. At the same time, insurers will be able
to offer their own evidence in rebuttal to the
evidence produced by the claimant, thereby
ensuring a fair settlement process on these
disputed claims.
In response to several questions from insurers,
noted below, the author makes these points:
The industry cannot deny that some
basis exists to determine fair and
equitable, short of going to Superior Court
to settle the issue. Using three estimates
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is not "going backwards" as the industry
alleges because using this technique would
simply be one option that a claimant would
have. It would presumably only be used by
claimants who have a serious problem with
the way in which a claim is being settled-
one who is therefore willing to spend the
time to prove that their perspective is
credible.
Nothing in the bill requires
insurers to pay for towing or auto rental
expenses in order to obtain three
estimates.
If the industry is concerned that
claimants may not know about the option of
obtaining three estimates to obtain an
average for settlement purposes, the author
would be willing to create an obligation
that consumers be informed. The author was
trying to keep the bill simple.
Hidden damage: A person who
accepts the average as a fair and
reasonable amount in full settlement of a
claim is doing just that- voluntarily
accepting that number as the right one. In
addition, insurers are free, under the
bill, to offer both the average and any
amount above it that the insurer feels is
also fair. Nothing requires such an offer,
of course.
The bill won't increase the costs of
claims unless the industry believes that
there is significant underpayment of claims
in the present system. Whatever the
systemwide phenomenon, the author believes
that individual claimants are sometimes not
being paid appropriately and that a simple
and fair way needs to be created to help
settle these disputes.
At least one insurer group seems to
be stating that the opinion of a single
SB 1492 (Speier), Page
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consumer based upon three estimates
deserves no more consideration by a court
or this Legislature than the insurance
company's estimate of a prevailing price.
The author believes that this point
illustrates the problem in the industry.
An insurer's estimate is often based upon
an insurer's own direct repair cost (DRP)
rates or rates steeply discounted for
commercial purposes. Claimants cannot
obtain those rates unless they work through
the insurer, but existing law grants the
claimant the right to use a body shop of
the claimant's choice. The presumption
granted to an average of three estimates is
therefore a simple way to illustrate the
prices confronted by claimants when those
claimants exercise their rights under law.
The author also believes that the people of
California could be better served if the DOI
carried out its regulatory duties by receiving
additional guidance from the Legislature about
what constitutes fair and reasonable settlement
of an auto body repair, at least for market
conduct examination purposes.
As noted above, the DOI filed an order to show
cause against one insurer that did not have a
labor rate survey on file with the DOI. In
essence, the DOI was alleging that a labor rate
survey is the evidence the DOI deems valid to
support an offer of settlement, at least in the
absence of other evidence. The author believes
that, even if a regulation is ultimately issued
that clarifies when a survey is valid and how
the DOI will use the survey in its exams, labor
rates are only a portion of the settlement
offer. Broader guidance from the Legislature
would therefore be advantageous to the public.
The author has also offered to continue the
discussion with all parties to determine if a
more streamlined and fairer approach to dispute
resolution can be created. Other approaches
already discussed with insurers and shops
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include the possibility of improving the
existing mediation program, and establishing a
working group (via statute) to make
recommendations to the IC about how to determine
a fair and equitable settlement offer. Other
options may exist. The author believes,
however, that SB 1492 is workable even in its
current form and asks that the bill move forward
to continue the negotiations, on behalf of
consumers, with all parties.
The DOI supports SB 1492, calling it good for
consumers, and requested a clarifying amendment.
The amendment is suggested at the end of this
analysis. The DOI supports any quantifiable
standard that would reduce disputes.
Byron Orris Autobody in Napa, G & C Autobody in
Santa Rosa, and Anthony's Autocraft in San
Rafael, also wrote in support of the bill. They
note that the bill, although not perfect, needs
to move forward.
4. Opposition . Insurers generally had these
questions about the current version of SB 1492:
a. If the car is inoperable, how will
three estimates be obtained?
b. Will the insurer be expected to pay
for towing the car to get three estimates?
Will it increase rental car expenses?
Could the claimant run out of coverage
while waiting for three estimates?
c. How will claimants know that three
estimates are available?
d. How will hidden damage, that increases
the estimate, be handled? Since the
claimant has accepted the average, are
they unable to claim for the hidden damage
once they accept the average?
e. Won't the bill have the effect of
increasing costs to policyholders?
SB 1492 (Speier), Page
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f. How does the bill benefit the claimant
and make the claims process faster and
simpler?
The American Insurance Association (AIA) also
stated that the proposal in SB 1492 is a
"backward step" by using a three-estimate rule
to establish fair and equitable, and states that
it is puzzled as to why going backwards is a
good idea. Progressive and Nationwide Insurance
believe that few offers of settlement are
disputed. Under the bill, Progressive and
Nationwide believe that bids could be submitted
based upon varying estimates of labor, parts and
repair procedures, and thus an inaccurate basis
from which to estimate a fair and equitable
settlement amount.
State Farm labels SB 1492 "price regulation"
and states that existing law essentially
requires insurers to conduct labor rate surveys,
thus ensuring that hourly rates used in
settlements are generally correct. State Farm
also echoes AIA's concern that the bill's method
of calculating a fair and reasonable rate is a
step backwards. State Farm asserts that the
bill requires consumers to drive to three shops
to obtain quotes and to gain the advantage of a
presumption. This "imposes an enormous burden"
on claimants. State Farm believes that
estimates are rarely a comparison of "apples to
apples" and are more often a comparison of
"seaweed to plastic containers." "In other
words, no body shop will reach the same
conclusion on an initial evaluation. Too much
uncertainty exits. Different assumptions will
be made."
The Association of California Insurance
Companies (ACIC) believes that the bill will
ultimately lead to an overall increase in both
the rates charged by body shops and the costs of
resolving disputes. Insurers receive few
complaints from consumers or from body shops, at
least those involved in the DRP process.
SB 1492 (Speier), Page
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This makes it unnecessary for the Legislature
to create a process whereby consumers would
again have to undertake the effort to obtain
three estimates in order to assure their fair
treatment. Existing law mandates such
treatment, and insurers comply. As mentioned by
other insurers, ACIC also believes that SB 1492
fails to recognize the operation of the free
marketplace.
The Personal Insurance Federation of California
believes, in brief, that there should be no
greater weight granted the evidence given by a
claimant than should be granted to an insurer's
evidence.
"SB 1492 would permit an insurance claimant
to secure three cost estimates from licensed
auto body repair dealers of their choice. The
average cost of these estimates would create
a rebuttable presumption in court that the
estimate is "reasonable." This is
particularly difficult to understand
considering the legal definition of a
presumption:
A rule of law that attaches definite
probative value to specific facts or draws a
particular inference as to the existence of
one fact, not actually known, arising from
its usual connection with other particular
facts which are known or proved. The
assumption or taking for granted of the
existence of a fact, permitted or required
under the law as a self evident result of
human reason and experience. An effect of an
evidentiary fact from which the trier of fact
must find the existence of another fact
unless and until evidence is introduced which
will support
a finding of its nonexistence.
We believe that as currently written, there
is no feasibility that the average cost of
three estimates, from any three body shops
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chosen by the claimant, should rise to the
level of "presumption." Furthermore, we
question how the average of three estimates
can be deemed by statute to be more credible
in court than an insurance company's
prevailing competitive price, which is
derived from an extensive, scientific, and
credible survey of scores of body shops in
any given marketplace."
5. Suggested amendments .
The DOI suggested these amendments to both
clarify SB 1492 and to ensure that the
rebuttable presumption of a fair and equitable
settlement based upon an average also applies
when the DOI investigates individual complaints
by consumers and seeks to help those consumers:
a. On page 2 at line 6, strike ", if accepted
by the insurer,"
b. On page 2 at line 9, strike "and" and
insert, ", consumer complaints investigated
pursuant to Section 12921.3" and strike "if
not accepted by the insurer" and on line 10
after the comma insert " and"
c. On page 3, starting at line 2, strike line
2 and strike line 3 and, at line 4, strike
through the word "claimant"
6. Prior/related legislation .
a. SB 1988 (Speier, Chapter 867, Statutes
of 2000): Among other provisions, required
insurers to provide surveys of auto body
repair labor rates to the DOI;
b. SB 551 (Speier, Chapter 791, Statutes of
2000): Created the prohibitions in law
generally explained in the section "Existing
law" numbers 5 - 7.
SB 1492 (Speier), Page
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c. SB 1648 (Speier, 2003): Would have
prohibited insurers from owning auto body
repair dealers.
d. AB 303 (Calderon): Would permit
"concierge" auto repair service to be offered
by insurers. The insurer would pick up a car
and replace it with a rental at the insurer's
expense, and then return the repaired car to
the owner. The insurer would warrant the
repairs and make various disclosures to
claimants.
e. AB 1852 (Yee): Would license certifiers
of aftermarket parts so that the
certification of these parts would result in
those parts being deemed equal to original
manufacturer parts.
POSITIONS
Support
Department of Insurance
Byron Orris Autobody, Napa
G & C Autobody, Santa Rosa
Anthony's Autocraft, San Rafael
Oppose
American Insurance Association
Progressive Insurance
Nationwide Insurance
State Farm
Association of California Insurance Companies
Personal Insurance Federation of California
Consultant: Brian Perkins, 651-4102