News: AAA Says Record Number of Americans Will Hit the Road Over July 4 Holiday
State Farm’s decision to move to a single Select Service direct-repair program has the collision world abuzz – so this is exactly the right time to talk about all DRPs and what a shop truly receives and incurs by joining an insurer’s repair network.
Is there a downside to signing a DRP contract?
There can be. Let’s take a look:
1. Beware when asked to indemnify the insurer One of the most significant and potentially dangerous provisions of any DRP agreement is the shop’s promise to indemnify the insurer for claims related to the repair. This requirement can have a devastating effect on your garagekeeper’s insurance, and you should NEVER sign one without obtaining the express written approval of your carrier. Don’t rely on the approval of your agent or some intermediary you need to get the approval from the company actually underwriting your risk as a repair facility.
Why is prior approval from your garage carrier important? Because your carrier accepted you as a risk based on what it knew about you and what you told it at the time it issued your policy. You’re now changing the risk scenario by committing yourself and your carrier to greater obligations than you had before you signed the document requiring indemnification. Those indemnification clauses have several potential pitfalls of which you need to be aware, and one of the best places to address those pitfalls is with your garage carrier.
It’s easy to tell you that you should involve your garage carriers in some of these vital business decisions that can have a material impact on your coverage, but, like anything else, it’s far more helpful to provide you with a ready-made mechanism for achieving that goal. As a result, we’ve included a Confirmation of Coverage form on the BSB Web site www.bodyshopbusiness.com that you can print out to assist you in getting the answers you need from your garage carrier on these DRP arrangements. You can also access a fillable version to print and fax or e-mail to your carrier by going to the Vehicle Information Services, Inc. Web site at
2. Beware of broad language In particular, beware of any language in the DRP documents that enables the paying auto carrier to demand reimbursement from you for claims that are unrelated to the workmanship or quality of your repair. Broad language like the shop “shall indemnify and hold harmless [insurer] against any loss, damages, claims or expenses of any kind whatsoever, including reasonable attorney fees, arising out of or related in any way to the repair …” encompasses far more responsibility than shops truly intend to undertake. Language like this can be construed as meaning that repair facilities are responsible for insurers’ payments of third-party inherent diminished value (DV) claims even though the quality of the repair is not at issue.
3. Beware of narrower language Narrower language can also create problems for collision repairers. Agreeing to indemnify the insurer for “negligent or intentional acts or omissions” can create unexpected liability. On the third-party diminished value issue, for example, it’s simple for insurers to assert that the DV occurred because of the repair, not because of any inherent loss. Unless your shop has the economic ability to fight and is willing to run the risk that the insurer might punish you by not including you on referral lists, shops can easily get stuck paying for all of an insurer’s third-party and in some states, first- party DV claims.
Worse yet, state law typically disallows insurance companies from agreeing to provide coverage or pay for any claims based on intentional acts or omissions. Therefore, shops automatically do not have garage coverage for any claims based on intentional acts or omissions of employees or subcontractors yet they remain liable for reimbursing the auto insurer, including payment of attorney fees, for any claims brought against it for such acts. Unless your shop has millions in assets that you can afford to lose, agreeing to an indemnification provision like this can be devastating for your business.
4. Beware of attorney fees On top of these issues, the indemnification provisions typically require shops to pay for any attorney fees the auto insurer incurs. As a general rule (absent the DRP document), an insurer could not recover attorney fees it incurred from the shop if it sued the repairer for payments made that truly were caused by the shop’s negligence. With the attorney fee payment provision, however, the shop is not only on the hook for the damages caused by its negligence, but is liable for any attorney fees the auto insurer incurred as a result.
With a guarantee that someone else will be footing the bill, just how frugal with your dollars do you expect the insurer or the attorneys to be? How about the insurance companies that have staff counsel handle claims? When you signed the DRP document, did you really intend to agree to pay a portion of their salaries in the a pay a portion of their salaries in the event of a claim?
These aren’t the type of risks your garagekeeper’s insurer intended to undertake when you became a policyholder. Therefore, the likelihood that your carrier will drop you as an insured when it comes time for renewal is high. If you’re fortunate and the insurer doesn’t drop you, you can lay odds that the insurer will dramatically increase your premiums because you’re asking your carrier to undertake significantly more risk than just insuring you against negligence.
Additionally, you may find yourself without garage coverage. Depending on the language of your policy and the attitude your garage carrier takes if asked to cover claims via the indemnification provision, your carrier may elect to fight coverage, which, if successful, leaves your repair facility completely exposed.
5. Beware of anti-trust violations Within a DRP agreement, an insurer can dictate which estimating provider or parts supplier you use. And that type of arrangement can violate antitrust law. In 1979, the United States Supreme Court pointedly said that agreements between insurance companies and businesses providing goods and services to policyholders are not exempt from the application of the federal antitrust laws as “the business of insurance” via the McCarran-Ferguson Act, 15 U. S. C. §§ 1011-1015:
“If agreements between an insurer and retail pharmacists are the ‘business of insurance’ because they reduce the insurer’s costs, then so are all other agreements insurers may make to keep their costs under control whether with automobile body repair shops or landlords. n40 Such agreements would be exempt from the antitrust laws if Congress had extended the coverage of the McCarran-Ferguson Act to the ‘business of insurance companies.’ n41 But that is precisely what Congress did not do.” Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 232-233 (U.S. 1979)
This position was reaffirmed last year in a Government Accountability Office report to the House of Representatives Committee on Financial Services, Legal Principles Defining the Scope of the Federal Antitrust Exemption for Insurance, B-304474 (March 4, 2005):
“For example, activities which do not constitute the business of insurance include insurer’s agreements with auto glass companies to fix the prices to be paid for glass replacement; agreements between insurers and auto repair shops to perform work at rates agreed upon in advance; …” B-304474, p. 5.
Therefore, allowing insurers to dictate suppliers of goods and services you use, as well as some other activities, may expose you to federal and state antitrust charges which aren’t likely to be covered by your garage insurer. These are some of the very reasons you want to involve your garage carrier before you sign on the dotted line.
Some of you might be thinking, “What are the odds of that happening? Wouldn’t the government rather go after the insurer than the shop?” Think again. The Attorneys General and local enforcement authorities are comfortable with and understand their jurisdiction relating to shops. Conversely, they’re extremely uncomfortable with insurer issues and worry about turf wars with the Departments of Insurance which are fairly touchy at the moment. If they go after anyone, it will be the shops first.
6. Beware of running afoul of consumer protection laws DRP arrangements sometimes make repairers forget who the customer really is: the vehicle owner or lessee. It’s not the insurance company with whom you have the DRP arrangement. This is important for several reasons, one of which is that some DRP shops no longer give the vehicle owner an estimate as is typically required by state consumer-protection laws. Failure to comply with those consumer-protection laws can land a collision repair shop in a good deal of trouble, not to mention liability for double and treble damages and the automatic payment of any attorney fees the customer has incurred.
Additionally, some insurers and some participating shops tell customers that the DRP documents are “confidential” and that they cannot be disclosed. This position can create serious problems for both shops and insurers, as it might not be permissible under state law to withhold information about arrangements affecting coverage or performance under the policy from insureds. Furthermore, to the extent any provision in the DRP document can be construed as the repair facility granting concessions on behalf of the customer, you may again have run afoul of consumer protection laws.
Determining If a DRP Is for You
No DRP document is a good one if it doesn’t provide a real, identifiable and enforceable promise or benefit to the shop. If it’s just one of those “maybe we’ll send customers to you” things, all a shop does by signing on to that network is allow the insurer to exert control without any responsibility.
Beware of any indemnification clause.
Clauses limiting liability to $50,000 or so may seem great, but they’re not. Insurer documents always carve out exceptions for the insurer like full indemnification for itself including payment of attorney fees that make the limitation clause entirely one-sided in favor of the insurer. These clauses typically require you to agree to forego punitive damages and anything other than compensatory damages. These liability limitations are BAD for shops.
Never sign any DRP document that an insurer insists is “confidential.” If the insurer feels the document couldn’t or shouldn’t be shown to customers or the Attorney General or posted on the shop’s wall next to any other postings, there’s something seriously wrong with the arrangement.
So what’s in it for your shop?
In every DRP “agreement” I’ve
ever read, the answer is: Nothing. The insurer doesn’t have any obligations to you. Read through them carefully, and you’ll find that you’re the only party agreeing to give up something, and the insurer is the only party benefiting.
There are no expressly stated terms the insurer promises to fulfill. These DRP documents say that the insurer may include your shop’s name in its local advertising about its DRP network, but it has no obligation to do so. It may give your shop’s name to a claimant, but it doesn’t have to. And the insurer can kick you out of its program at any time. Many even say they can require you to use or change estimating providers or parts suppliers.
Yet, to be a valid, binding contract, both parties to the agreement have to give or get something. It’s called “consideration” in the legal world, and there must be mutuality of consideration that is, both the insurer and the repair shop must benefit for any DRP arrangement to be called a contract.
Without an express obligation on the part of the insurer, to be legally binding, a court would look to see if there’s an implied obligation the document imposes on the insurer that benefits the shop. And the only implied term that can be read into these agreements that benefits shops is an implied promise that the insurer will direct large amounts of business to those repair facilities in its program. And therein lies the rub.
Many states, like Connecticut (Conn. Gen. Stat. § 38a-354), New York (NY CLS Ins § 2610), and Texas (Tex. Ins. Code § 5.07-1 (b)), for example, have laws prohibiting insurers from steering customers to repair facilities. In states that have enacted anti-steering laws, any implied obligation on the part of the insurer to direct business to network shops would be illegal and a violation of the public policy of that state. As a result, the DRP “agreement” in these states appears to be an attempt to create an illegal contract, which isn’t enforceable.
In states that haven’t enacted anti-steering statutes, insurers have some flexibility, although they don’t typically have the right to demand that insureds, and certainly not third parties, take their vehicles to a particular facility.
Nonetheless, insurers that recommend a collision repair facility may become contractually obligated to the insured for the quality of the repair. A recent Illinois decision reiterated that, “An insurer’s election to repair an insured’s 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 repair.” Gaston v. Founders Ins. Co., 2006 Ill. App. LEXIS 178 (Ill. App. Ct. 2006).
While an insurer may legally have some ability to direct business to preferred shops in those states that haven’t enacted anti-steering statutes, in doing so, the insurers can become responsible for the quality of your repair. Which brings us full circle to that indemnification provision for the payment of damages and the requirement that shops absorb not only their own attorney fees for defending an action for negligence but the insurer’s attorney fees as well.
However, the entire fabric of even implied promises to send business to network shops may be insufficient to form a binding contract; the nature of the insurers’ statements (that they may send business your way, but don’t have to) could be construed as illusory and, therefore, could render the DRP arrangement unenforceable.
That said, then what benefit is it to a shop to agree to follow all of the rules and restrictions only to discover that the insurer doesn’t send business its way or that it can’t enforce any of the terms of the DRP contract? Contracts have a “benefit of the bargain” requirement, and it’s never a good idea to be in a one-sided relationship.
To DRP or not to DRP?
This is a question that can best be answered only by collision repair facilities. Shops can have vastly different experiences with an insurer depending on the state, region, claims manager, and individual claims representatives and adjustors.
Entering into a DRP arrangement can create many potential problems for a shop. Finding out what those problems are and how to prevent them, if possible is necessary to make a sound business decision about whether to undertake or continue in any DRP. Obtaining coverage confirmation from your garage carrier for any terms a DRP document imposes on your collision repair facility is a great place to start that decision-making process.
Shops Need to Educate Attorneys
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. E. L. Eversman can be contacted at [email protected]
Fax them to (330) 670-0874
or e-mail them to BSB editor Georgina K. Carson at [email protected].