Expert Commentary

Automobile Repair Claims: Cutting into

There is a private right of action against California insurers who violate California Insurance Code section 758.5.


Claims Practices
July 2011

In Moradi-Shalal v. Fireman's Fund Ins., 46 Cal. 3d 287 (1988), the California Supreme Court reversed its decision in Royal Globe Ins. Co. v. Superior Ct., 23 Cal. 3d 880 (1979), and held that the prohibitory provisions of insurance code section 790.03 (part of the Unfair Insurance Practices Act (UIPA) (insurance code section 790, et seq.)) did not create a private right of action under that statute against "insurers who commit unfair practices enumerated in that provision." A reason for the decision, among others, was a finding by the California Supreme Court that allowing third parties to sue the insurers of the tortfeasor for the tort of bad faith created abuses that were worse than the abuse Royal Globe was decided to cure.

The California Court of Appeal extended the holding and rationale of Moradi-Shalal to preclude claims under California's Unfair Competition Law (UCL) (Business and Professions Code, section 17200, et seq.) based directly on violations of the UIPA.

California Insurance Code section 758.5 prohibits an insurer from either requiring a specific automobile repair dealer to repair the automobile or suggesting or recommending that the insured use a specific automobile repair dealer unless it informs the insured in writing of its right to select another repair dealer. Although section 758.5 is not part of the UIPA section 758.5 subdivision (f), it provides that the powers of the insurance commissioner to enforce the section include those granted by the UIPA.

The California Court of Appeal was asked to determine whether Moradi-Shalal bars a cause of action by an insured against its insurer under the UCL based solely on allegations that the insurer violated section 758.5 in Hughes v. Progressive Direct Ins. Co., 2011 Cal. App. LEXIS 737 (June 15, 2011).

Progressive Direct's Practice of Steering Insureds to Approved Automobile Repair Facilities

Progressive Direct provides automobile insurance to California drivers. Progressive Direct's Direct Repair Program (DRP) certifies certain approved repair facilities that have agreed to repair vehicles referred by Progressive Direct under strict conditions set by the insurer.

Hughes, who at the time was a resident of California covered by an automobile insurance policy issued by Progressive Direct, was involved in an accident on August 15, 2005, which damaged his car. Hughes advised Progressive Direct of the accident and informed it that he wanted his automobile repaired by a specific repair shop that was not a DRP facility. Progressive Direct responded to Hughes's claim by telling him he should take his automobile to Champion Collision & Paint (Champion) in El Cajon, California, which was a DRP shop, explaining that his claim would be approved and the repairs on his car completed more quickly at Champion. Progressive Direct did not inform Hughes of his right under section 758.5 to select the facility that would repair his vehicle.

Hughes took his car to Champion for repairs. Champion repaired Hughes's car and returned it to him on November 21, 2005. Hughes was dissatisfied with Champion's work.

Hughes's Lawsuit for Violation of the Unfair Competition Law

On November 23, 2009, Hughes filed a complaint against Progressive Direct for violation of Business and Professions Code section 17200 on behalf of himself and a proposed class of Progressive insureds. The complaint alleged that Progressive Direct has a companywide policy and practice of steering its insureds to its DRP shops. The complaint asserted a single cause of action for violation of California's UCL (Business and Professions Code, section 17200), alleging that Progressive Direct's policy and practice of steering insureds to its DRP shops was unlawful, unfair, and deceptive. On behalf of himself and the members of the putative class he sought to represent, Hughes requested disgorgement of profits received, restitution, and/or injunctive relief, along with attorney fees.

Progressive Direct's Demurrer and the Trial Court's Order

Progressive Direct argued that Moradi-Shalal and appellate decisions following it prohibit private actions to enforce provisions of the insurance code, including claims under the UCL. Accordingly, its alleged violation of section 758.5 did not support a claim for violating Business and Professions Code section 17200.

The trial court sustained the demurrer without leave to amend.

Discussion of Section 758.5

Section 758.5 was enacted to prevent insurance companies from using coercive tactics to steer consumers to particular automobile repair shops or dissuade consumers from using a repair shop of their own choosing. California's UCL comprehensively prohibits any practices forbidden by law, be it civil or criminal; federal, state, or municipal; statutory, regulatory, or court-made. It is not necessary that the predicate law provide for private civil enforcement. The California Court of Appeal concluded that:

Given the breadth of the UCL, absent some competing principle of law, a violation of section 758.5 should be a proper basis for Hughes's UCL claim. Progressive Direct argues, and the trial court ruled, Moradi-Shalal and its progeny provide such a mandate barring this action.

Moradi-Shalal and Claims Based Solely on Violations of the Unfair Insurance Practices Act

The UIPA is intended to regulate trade practices in the business of insurance in accordance with the intent of Congress as expressed in the McCarran-Ferguson Act, 15 United States Code sections 1011–1015, by defining, or providing for the determination of, all such practices in California that constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined.

Moradi-Shalal's holding barring a third-party claimant from bringing a private action against an insurer for UIPA violations has been extended to include not only first-party claims under the UIPA but also UCL claims based directly on violations of the UIPA.

The Limits on Moradi-Shalal

Moradi-Shalal, the California Court of Appeal noted, does not bar all private actions against insurers for unfair or anticompetitive behavior. It concluded that UCL actions may be maintained against an insurer when the alleged conduct, even though violating the UIPA, also violates other statutes applicable to insurers.

A Violation of Section 758.5 May Serve as a Predicate Unlawful Business Practice for a UCL Claim

Hughes was not suing Progressive Direct for violating the UIPA. Rather, another express statutory provision, section 758.5, was the basis of the suit Hughes filed. The allegedly unlawful conduct at issue—the failure to provide a statutorily required notice that the insured could have his automobile repaired at a facility of his own choosing—approximates the bad faith refusal to settle insurance claims or other claims handling misconduct at the heart of Moradi-Shalal's analysis rejecting Royal Globe.

The court recognized that a violation of section 758.5 as a predicate unlawful business practice for a UCL claim did not conflict with the holding of Moradi-Shalal and the case law extending its holding to UCL causes of action based solely on alleged violations of the UIPA.

If a plaintiff relies on conduct that violates the UIPA but is not otherwise prohibited, the principles of Moradi-Shalal require that a civil action under the UCL be considered barred. An alleged violation of other statutes applicable to insurers, however, whether part of the insurance code, may serve as the predicate for a UCL claim absent an express legislative direction to the contrary.

According to the court, Hughes's allegations that Progressive Direct violated section 758.5 properly stated a cause of action for unfair competition, and the demurrer should have been overruled, since section 758.5 does not expressly bar such a claim.

Justice Woods, in a concurring opinion, had misgivings about the decision, stating that it is disturbing that inroads have been made into the policy articulated by the California Supreme Court in dealing with the social problems brought on in part by Royal Globe, in which the court commented that the case has reportedly caused multiple lawsuits or coerced settlements and has generated confusion and uncertainty. Justice Woods found allowing the unfair competition statute in Business and Professions Code section 17200 to proceed without any UIPA constraints to be most unfortunate.

The second problem stated by Justice Woods is the perverse use of Business and Professions Code section 17200 by unscrupulous counsel to harass business owners with questionable lawsuits hoping for and actually obtaining meritless settlements, thereby threatening business owners with extensive litigation expenses. Justice Woods was concerned that the decision will bring about marginal or superficially meritorious lawsuits.

Lessons

I am also concerned, as is Justice Woods, that the law of unintended consequences will come to the fore, and hundreds of marginal or only superficially meritorious lawsuits will be filed. It will provide a great deal of work for plaintiffs, and defense lawyers and will cure very little of the wrongs complained of by Hughes. Insurers like Progressive with a preferred provider system must train their personnel to advise their insureds in accordance with the law and not attempt to compel the insured to use the preferred provider.


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