Auto insurers control the cost of collision repairs with direct repair programs, featuring networks of repair shops that agree to discount labor rates and other charges as a trade-off for customer referrals and streamlined adjustment procedures. Recently, body shop owners have filed lawsuits that challenged DRPs,–or the rates they help establish—in several different ways: (1) by claiming, on their own behalf, that the networks violate state unfair competition laws; (2) by alleging, as assignees of their customers, that the amounts paid by insurers violate the terms of their policies; or, (3) most recently, by asserting claims, assigned by their customers, against third-party tortfeasors and their insurers. (Regular readers will recall this blog’s first report about third-party cases from last January.) The theories behind these claims are not always clear, or even coherent, but a few of them have been gaining traction in New York and Connecticut.
The Case Against Networks: “Public Policy”
Repair Shops have come up with different theories about why insurers shouldn’t be allowed to create networks. One of them is based on a Consent Decree between Bobby Kennedy’s Justice Department and three trade associations representing property-casualty insurers. The DOJ filed an action against the associations in 1963, alleging that they had formulated an “Independent Appraisal Plan” in 1947 “to depress and control automobile material damage repair cost.” The heart of the plan was a scheme to control the work of independent appraisers who prepared estimates of repair costs and got body shops to agree to them.
Under the plan, committees appointed by the trade groups would sponsor individuals or partnerships to act as appraisers in assigned territories for all association members. In return for the insurers’ agreement to use them exclusively, the appraisers would agree to depress and control repair costs by arranging (when possible) for shops to agree to estimates before they had examined the damaged vehicles, by “establish[ing] strict labor time allowances,” and by “obtain[ing] the lowest possible hourly labor rate.” The DOJ alleged that the plan violated the Sherman Act. In November 1963 (less than a week after the President’s death), the Government’s case was dismissed, pursuant to an agreed order under which the defendant associations were enjoined from pursuing any program that had the purpose or effect of “exercising any control over the activities of any appraiser.”
The Independent Appraisal Plan has never been revived. In Connecticut, motor vehicle physical damage appraisers are licensed and regulated by the state, and the regulations permit insurers to employ them directly. But in A & R Body Specialty v. Progressive Cas. Ins. Co., No. 3:07-cv-0929 (WWE) (D. Conn. Feb. 27, 2013), the body shop plaintiffs allege that Progressive’s DRP violates the public policy that is expressed in the 1963 Consent Decree, because it allegedly has the effect of inducing the licensed appraisers to depress labor rates and to favor repair shops in the insurer’s network.
The A & R case asserts claims under Connecticut’s Unfair Trade Practices Act, Conn. Gen. Stat. § 42-110a et seq. Applying the so-called “cigarette rule,” the court in A & R found that a plaintiff can establish a CUTPA claim by demonstrating that a defendant’s practice, “without . . . having been previously considered unlawful, offends public policy.” On that basis, the court held that the plaintiffs had stated a valid claim against Progressive under CUTPA. The court also sustained a CUTPA claim based on the insurer’s allegedly having made false statements to its insureds to discourage them from using non-DRP repair shops.
Some of the attorneys for the plaintiffs in A&R asserted similar claims in a state-court action against The Hartford, Artie’s Auto Body, Inc. v. Hartford Fire Ins. Co., No. X08CV030196141S (Conn. Super. Ct.). The jury in Artie’s accepted a slightly different version of the CUTPA/public policy argument, based on allegations that The Hartford’s DRP induces appraisers employed by the company to act in ways that violate certain state regulations, known as a “Code of Ethics.” Conn. Agencies Regs. § 38a-790-8. The Hartford has, however, moved for judgment NOV, citing previously-unavailable evidence that the state’s Insurance Commissioner (whose office promulgated the Code of Ethics) does not believe it creates a duty to repair shops. More than two years after the verdict, that motion is still sub judice.*
In New York, the theory is more direct. In North State Autobahn, Inc. v. Progressive Ins. Group Co., 102 A.D.3d 5 (2d Dept. 2012), the plaintiff body shop alleged that the insurer systematically deceived insureds—who were the plaintiff’s customers—into believing “that they must have their vehicles repaired” by members of the DRP. In October 2012, an intermediate appellate court ruled that these allegations establish materially misleading, consumer-oriented conduct that is prohibited by New York’s law against unfair trade practices, N.Y. Gen. Bus. Law § 349.
The Requirements of the Policies
A second line of attack asserts that using DRPs to control the cost of auto repairs violates insurers’ obligations to their insureds. In these cases, the body shops accept assignments of their customers’ rights against their insurers and then assert claims for breach of contract and unfair trade practices. (A few months ago, in M.V.B. Collision, Inc. v. Allstate Ins. Co., 2012 N.Y. Slip Op. 22394 (N.Y. Appellate Term, Dec. 20, 2012), an appellate court in New York ruled that the assignments don’t violate the state’s law against champerty.)
This theory was recently addressed in a trio of decisions in related cases now pending in the U.S. District Court for the Northern District of New York: Nick’s Garage v. State Farm Gen. Ins. Co., No. 5-12-cv-633 (MAD/DEP) (N.D.N.Y. Feb. 27, 2013); Nick’s Garage v. Progressive Cas. Ins. Co., No. No. 5-12-cv-77 (MAD/DEP) (N.D.N.Y. Feb. 27, 2013); and Jeffrey’s Auto Body v. State Farm Gen. Ins. Co., No. 5-12-cv-635 (MAD/DEP) (N.D.N.Y. Feb. 27, 2013).
Under the regulations governing auto claims in New York, insurers must negotiate with either the insured or the insured’s “designated representative” over the cost of repairs. 11 N.Y.C.R.R. § 216.7. The “designated representative” may be a repair shop, and the plaintiffs in these cases claim to have been appointed as the designated representative of all the assigning insureds. If the mandatory negotiations do not result in agreement, the insurer must furnish a notice of rights letter to the insured, and the letter must state that, upon the insured’s request, the insurer can recommend a repair shop that will make the repairs at the price the insurer has offered. In most cases, the recommended shop will be a participant in the DRP, since those shops have agreed to perform repairs at discounted rates.
That’s what happened to the insureds in Nick’s and Jeffrey’s. The plaintiff body shops then performed the repairs anyway, accepted payments in the amounts the insurers had offered and sued the insurers for the additional amounts they had charged. The complaints assert claims for breach of contract, based on allegations that the relevant policies all require the insurers to restore the insured vehicles to the “condition they were in immediately prior to the [a]ccidents.” The body shops maintain that the amounts paid to the plaintiffs was inadequate for that purpose.
The complaints also assert claims under New York’s GBL § 349. That statute regulates “consumer-oriented conduct,” and the body shops argued that they satisfy this requirement by alleging that the insurers “frequently” make low-ball offers to the designated representatives of insured. Plaintiffs argued that this practice is “materially misleading,” within the meaning of the statute, because the insurers “purported to be negotiating in good faith,” but “in fact dictated prices, set price caps, and refused to negotiate labor rates.” A “reasonable customer,” the plaintiffs contended, “would likely be deceived into thinking (erroneously) that [the insurers were] acting in good faith and providing a reasonable estimate.”
In late February, the district court accepted these arguments and denied the defendants’ motions to dismiss.
The most intriguing aspect of the Nick’s and Jeffrey’s cases is that they also involve claims that were assigned by customers whom the defendants did not insure.
These so-called “Third-Party Assignors” (“TPAs”) were customers whose cars were damaged by other (negligent) drivers, and those drivers were insured by State Farm or Progressive: The insurers paid to repair the TPAs’ vehicles as part of the resolution of the TPAs’ claims against the insured tortfeasors. Once again, the insurers couldn’t reach agreement with the body shops on the cost of the repairs, so they offered payment based on DRP rates. The body shops accepted the payments and then sued for the difference.
The TPAs could not assert claims for breach of contract, because they had no contracts with the defendants. Claims based on quantum meruit were dismissed, because the shops had repaired the cars at the request of their customers, not the insurers, and because the insurers’ written offers left the repair shops without any reasonable expectation of additional payment.
That left the claims under GBL § 349, and, insofar as they relate to the TPAs, it is difficult to say what the basis of those claims is supposed to be. As the insurers pointed out, it is hard to identify what injury the TPAs could have suffered as a result of the insurers’ alleged conduct, since the body shops expressly asserted that—notwithstanding the insurers’ allegedly inadequate payment—they restored the TPAs’ vehicles “to the same condition they were in immediately prior to the loss.”
The plaintiffs also alleged that they themselves had been injured, because they had “not been paid the full cost of the repairs.” They asserted, in other words, that the defendant insurers had engaged in “materially misleading” conduct by offering to pay them an unreasonably low amount, and then permitting them to accept the offer. In this connection, it is important to recall that the TPAs were not the defendants’ insureds. The body shops alleged that they were the “Designated Representatives” of the TPAs, but, under the regulations they cite, the defendants were not obligated to negotiate with them. See 11 N.Y.C.R.R. § 216.7(a)(2) (defining “Designated Representative” as “an insured’s intended repair shop”).
The district court denied the insurers’ motions to dismiss these claims in Nick’s and Jefferey’s without any discussion of these issues. The potential significance of that ruling is far greater than that of the Connecticut cases this blog has previously discussed, which held only that public policy did not prevent body shops from accepting assignments of their customers’ tort claims against other drivers.
The ruling in the Nick’s and Jeffrey’s cases, on the other hand, suggests that insurers owe some kind of duty to repair shops not to press for the lowest possible rates—even in third-party cases, where the insurers might be negotiating on behalf of their own insureds. If the repair shops could put some coherent authority behind that claim, it could be an important development.