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Are Insurers Infringing Upon Consumers’ Rights in the Repair Process?

Some insurers have begun asserting that they have an “interest” in the repair. Others are “electing to repair” policyholders’ vehicles without their consent. A look at two court cases might shed some light on whether they’re in the right.

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Writer E. L. Eversman is the General Counsel for Vehicle Information Services, Inc., award-winning author of the AutoMuse® blog and a frequent speaker and author on automotive consumer and legal issues.

As if the line between insurers’ rights and consumers’ or shops’ rights relating to vehicle repair wasn’t already blurred by insurer actions, some recent cases have served to assist in confusing the issues even further.

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Insurance companies have begun asserting that they have an “interest in the repair” performed by a repair facility, but continue to maintain they have no liability for their activities that may negatively affect the relationship between the repairer and the consumer. Likewise, insurers continue to argue that they have “elected to repair” a consumer’s vehicle without alerting the insured to this decision and without complying with existing law that requires an election to be made.

Hibbs vs. Allstate

What constitutes an insurer’s “election to repair”? In Hibbs v. Allstate Ins. Co., 193 Cal. App. 4th 809, 123 Cal. Rptr. 3d 80 (Cal. App. 2d Dist. 2011), a California appellate court simply stated – without any analysis – that Allstate had “elected to repair” its insured’s vehicle, the insured being Mr. and Mrs. Hibbs.

In part, the dispute between the Hibbs and Allstate addressed the Hibbs’ claim that they had the absolute right to demand the money from Allstate under their insurance policy for the damage caused to their vehicle rather than having it repaired. The California appellate court held otherwise.

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The facts underlying the Hibbs decision are somewhat convoluted. The Hibbs’ vehicle had apparently been recently repaired when it was damaged again by a third party. They submitted the claim to their own insurer, Allstate, and asked that the vehicle be declared a total loss. To facilitate this, they took the vehicle to Body Tech, the same Allstate DRP shop that had previously repaired the vehicle. There is nothing in the decision to establish whether Allstate directed or required the Hibbs to take the vehicle to Body Tech.

According to the decision, the repair shop indicated to the Hibbs that it wouldn’t know what the total cost of repair would be until the vehicle had been “torn down.” Mrs. Hibbs signed a document allowing the shop to disassemble the vehicle to prepare a complete estimate.   She maintained, and the repairer corroborated, that she had only agreed to allow the disassembly and had not authorized repairs to be made.  The Hibbs continued to insist to Allstate that the vehicle be totaled.

Authorization

The evidence submitted by Mrs. Hibbs stated that she was told by the DRP shop that Allstate had “authorized repairs” to their vehicle. Unbeknownst to the Hibbs, the shop made repairs to their vehicle without obtaining the written authorization required by California statute. The Hibbs only discovered that their vehicle was under repair when the DRP shop called them to ask for authorization to engage in additional repairs resulting from more damage caused by a Sears employee returning the vehicle after performing an alignment.

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Allstate contended that the Hibbs implicitly authorized the repairs when they submitted a claim to the insurer, irrespective of the requirements of the California statute that the collision repairer obtain written authorization for repairs after providing the consumer with an estimate detailing the parts, labor and work to be performed. However, the court stated that:

“The Hibbs submitted a claim under the policy in the expectation that the van would be declared a total loss.  That Allstate elected to repair instead did not give it the power to proceed with the repairs without the Hibbs’ consent. The Hibbs owned the van, not Allstate.”
– Hibbs v. Allstate Ins. Co., 193 Cal. App. 4th at 819.

Intent to Repair

While the court discusses the terms of the policy and the options Allstate is entitled to exercise in paying in money or electing to repair, it fails to identify how Allstate manifested its election to repair. Legal decisions and treatises on insurance have consistently stated that an insurer must manifest its intent to repair in a “clear, positive, distinct and unambiguous” way.

The Hibbs had their vehicle towed to the repair shop that had previously performed work on the vehicle. Therefore, Allstate did not overtly demonstrate its election to repair by physically taking possession of the vehicle and selecting the repair facility – although the shop was a member of its DRP program.

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There is nothing in the opinion to suggest that Allstate informed the Hibbs it had elected the repair option. In fact, there is some contrary evidence in the opinion that Allstate’s adjuster told the Hibbs that they had the unconditional right to receive a money payment rather than have the vehicle repaired. This plainly questions whether Allstate ever manifested to the Hibbs its intent to elect to repair the vehicle as provided in the insurance policy, and if the insurer did so, exactly how it manifested that election. Allstate appears to have simply argued that it had elected to repair, and the court appears to have simply accepted the statement.

DRP Network

What’s interesting about this decision, however, is the suggestion that the insurer has “elected to repair” simply by virtue of the vehicle being at an insurer’s DRP shop for repairs, and that it’s unimportant whether the insurer or insured chose the shop. There’s nothing in the decision to suggest that Allstate engaged in any activity or provided notice to the Hibbs of its election to repair other than the mere fact that the vehicle was taken to an Allstate DRP shop and, as a result of that patronage, Allstate stated it would “guarantee” the shop’s work.

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This raises the question of whether consumers can now argue that an insurer has “elected to repair” when a vehicle is repaired by a shop in the insurer’s DRP network. While Allstate acknowledges that it told the Hibbs it would “guarantee” the shop’s work, the legal obligations imposed on a repair-electing insurer are much greater than any guarantee terms created by an insurer. This is why insurers have consistently avoided electing the repair option available in their insurance contracts.

Courts have long held that an insurer’s election to repair converts the insurance policy into a contract with the insured for repair of the vehicle. This imposes duties on the insurer to perform quality work and restore the vehicle to its pre-loss condition and value, which cannot be delegated to the entity actually performing the work – in this case, the shop. The insurer functions like a general contractor and is liable for the work and activities of its own or of its subcontractors. In this scenario, Allstate would be liable for its DRP shop’s failure to obtain authorization for repairs, just as a general contractor would be liable for its subcontractor’s failure to obtain necessary permits.

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The Hibbs’ court apparently did not consider the well-established law on this issue and appears not to have considered other California law findings that when “an insurer has agreed to ‘repair’ and actively takes the matter in hand, making all necessary arrangements, the reasonable conclusion is that the insurer assumes the duty of having repairs made with due care. It cannot be relieved of its duty merely because it chooses to select an independent contractor for the job and to exercise no supervision over his work.”
– Buerkle v. Superior Court of Los Angeles County, 59 Cal. 2d 370, 374 (Cal. 1963).

Had the court considered this law, it would likely have been forced to conclude that, once Allstate elected to repair, the DRP shop’s failure to obtain written authorization for repairs to the Hibbs’ vehicle (as required by California law) constituted a breach of duty owed to the Hibbs by Allstate.

To help alleviate confusion that may be caused by this or any other decision that fails to identify how an insurer informed its insured of the election to repair allowed by the policy, the Automotive Education & Policy Institute (AEPI) has developed a form repairers can direct consumers to that requires their insurers to make an election of remedy under the insurance policy and expressly inform them of that choice. That form can be located at: http://autoepi.org/consumer_ resources.html.

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Gunder’s vs. State Farm

When is an insurer not liable for making false or deceptive statements about a repair facility? That question might seem like a “no-brainer,” with the expected answer being “never.” A recent decision by the United States Eleventh Circuit Court of Appeals, however, gives a different answer.  

In Gunder’s Auto Center v. State Farm Mutual Auto. Ins. Co., 2011 U.S. App. LEXIS 7301, No. 10-11739 (11th Cir. April, 7, 2011), the Eleventh Circuit Court of Appeals affirmed a trial court’s decision granting State Farm summary judgment on Gunder’s slander claim and dismissing the body shop’s claim for tortious interference with business relations.

Gunder’s had sued State Farm for making false statements to its insureds about Gunder’s relating to charges about the quality and timeliness of repairs to discourage patronage of the body shop. Nonetheless, even when giving Gunder’s the benefit of accepting as true the allegations in the complaint that State Farm told its insureds that Gunder’s overcharged and that its repairers were untimely, inefficient and substandard, the court ruled that State Farm’s conduct as alleged in the complaint was not actionable.

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There are several important items to note at the outset. First, the court expressly identified that Gunder’s allegations related to statements State Farm made to insureds. The decision is clear that Gunder’s complaint does not contain any allegations that State Farm made false statements to any customer or prospective customer insured by a different carrier. As such, the court found that State Farm had a contractual obligation of indemnity for repair work on each insured’s vehicle that gave it an interest in fulfilling that obligation.

Second, the court ruled that on the basis of the specific facts plead in the complaint, Gunder’s had failed to state a claim entitling it to relief on the tortious interference issue. It did not say that insurers have free rein to make false statements about body shops. What it did say is that Gunder’s did not allege that the false statements made by State Farm about its charges and repair activities were made deliberately and with malice for the purpose of harming Gunder’s Auto Center.

Third, this ruling came about because of the application of Florida law to the specific allegations made by Gunder’s. It is not a blanket pass for insurers to make false statements to anyone about repair facilities.

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Because Gunder’s complaint alleged that State Farm had made false statements about it to insureds, the court found that State Farm had duties and obligations to those insureds making claims for property loss under the policies that gave it an interest in the business relationship between Gunder’s and its insureds.  It was this “interest” and a lack of supportable allegations that State Farm acted with malice that enabled State Farm to avoid further prosecution of the suit. As the court stated:

“Because all statements were made to State Farm insureds in the context of a claim under a State Farm insurance policy, and because all statements concerned a matter of mutual interest to the insureds and State Farm – the quality, timeliness and costs of vehicle repairs – the statements were privileged.”
– Gunder’s Auto Center v. State Farm Mutual Auto Ins. Co., 2011 U.S. App. LEXIS at 4.  

If State Farm’s statements, therefore, had been made to third parties or had not been made in relation to repair activities, they would probably not have been deemed to be privileged.

Even though the court ruled that State Farm’s comments were privileged, the false statements could still have been actionable if they were made with malice or if an improper method was used. The fact that the statements were untrue was not in itself enough to establish that they were made maliciously, which forfeits the privilege. The body shop’s failure to plead in its complaint and later offer evidence that State Farm made false statements to insureds about Gunder’s, and did so with malicious intent, prevented the repair shop from prevailing on its claims.

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Although the court did not give examples, it appears that if Gunder’s had alleged and been able to establish that State Farm made the false statements for the purpose of harming Gunder’s, rather than “assisting” its insureds in some way, the body shop would have avoided dismissal of its suit.

Important Lessons

There are some important lessons to be learned from these decisions. First, collision repairers must understand that every court decision rendered does not automatically apply to them. Only decisions that apply the law of the individual collision repairer’s state are capable of being binding on the repair shop. (Interpretations of federal laws can be binding as well, but those rarely relate to collision repair customer matters.) So, unless you’re a collision repairer in California (Hibbs) or Florida (Gunder’s Auto Center), these decisions are not applicable to you. Nonetheless, they can be used to persuade a court in your jurisdiction that it should rule similarly
if your state’s laws are the same as those interpreted by each of these courts.

Second, these decisions should persuade the collision repair industry to develop tools to assist repairers toward compliance with applicable laws and to stop insurers from making false statements about collision repair facilities.  The latter might be accomplished by establishing a mechanism for collecting, monitoring and retaining information demonstrative of malicious intent on the part of insurers that make false statements about shops.

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Last, the Hibbs decision is a warning to all shops, especially DRP shops, to remember that the insurer is not the customer and does not have the power to “authorize” repairs for a consumer’s vehicle. The entire DRP arrangement can make it too easy to forget exactly who the real customer is. So take heed. If your state’s law requires you to provide information about the intended repairs and obtain approval for them from the consumer, compliance is mandatory – and nothing an insurer says or does can alter that.


E. L. Eversman is the chief counsel for Vehicle Information Services, Inc., and the author of the Forbes.com “Best of the Web” award-winning blog, AutoMuse. She has served as the chair of the Cleveland Bar Association’s Unauthorized Practice of Law Committee, vice chair of that association’s International Law Section and is listed in the National Registry of Who’s Who. Eversman is a frequent speaker and author on automotive legal topics and has been quoted in such publications as The Wall Street Journal Online, USA Today, Kiplinger’s Personal Finance, Cars.com, Yahoo! News and numerous trade magazines. She was also honored as the 2006 All Auto Appraisal Industry Conference hall of fame inductee. She is recognized nationally as an authority on diminished value and collision repair issues, and she served as an industry resource for the National Conference of Commissioners on Uniform State Laws’ Uniform Certificate of Title Act drafting committee. Prior to launching the AutoMuse blog addressing automotive legal and consumer issues, Eversman wrote the legal column for the Web directory, AutoGuide.net.

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