Monday, 04 June 2007 15:24

Weak enforcement of paint capping regulations drives the issue to court

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 Judy Chu, Calif. BOE
    The issue of paint capping has been making its way through the courtrooms and into the offices of the California Board of Equalization in a fight for regulation of this illegal act. Paint capping is interfering with a customer’s right to choose a body shop and as a result, driving lawsuits from small claims court to Superior Court. The act of capping is also cheating the state out of an estimated $50 million in sales tax based on the paint and materials that are used, but not credited.
    In a report released by the SCRS, the practice of capping is defined as the setting of arbitrary limits on what an insurer will allow as reimbursement for paint and materials. The most widely accepted means of calculating paint and materials on an estimate is multiplying the number of refinish hours on an estimate by a specified hourly rate. Insurers will use this formula, or something similar in scope, to determine how much they will reimburse the repair facility until a threshold—the cap—is reached. Once the threshold is reached, the insurer will not reimburse any additional amount.
    “They count on the fact that the shop will deliver the car in a successful condition,” said Allen Wood, director of Collision Repair Association of California. “What happens is they prey on this concept, the customer is going to be taken care of by the repair facility, and the inability of the repairer to say no to the insurer. That is where small claims court comes in.”
    The Collision Repair Association of California has taken up the case and their current mission is to crack down on this illegal act. CRA executives and members are documenting instances of capping and taking up the issue in court as well as reporting their findings to the proper governing bodies.
Shop owner takes the issue to court
    G&C AutoBody owner Gene Crozat decided to take matters into his own hands and seek justice after insurers repeatedly refused to pay him the full amount of paint and materials used in his shop. Over the past two years, nearly 300 customers, all third-party insureds, have sued the person that hit them in small claims court after the at-fault party’s insurance company refused full payment for paint and materials.
    All the clients whose cars were hit chose to have their vehicles repaired at one of Crozat’s three shop locations. Crozat chose small claims court as the solution to gain full payment for his services since it is not possible to sue the insurance company directly. If the insurer attempted to cap the amount for paint and material used, Crozat explained the issue to each customer and proceeded with a small claims court case at their consent.
    In small claims court, the proceedings are handled without a lawyer. If the case is granted in favor of the body shop, the insurer appeals the decision. At that point it goes to Superior Court. When the liability of the insurance company is clear, such as their responsibility to pay for reasonable paint and material costs, they are required to pay the full amount.
    Crozat provided three copies of judgements handed down by Superior Court after the cases were appealed in small claims court. In all cases, the defendant was required to pay the plaintiff the full disputed amount, in addition to attorney fees. In one case, the plaintiff was awarded $438.99 plus administrative costs of $79.50 and $150 for attorney’s fees.{mospagebreak}
State of California cheated out of sales tax
    Because the shops bill for less paint materials than what is used, the state gets less sales tax. Judy Chu, vice chair of the California State Board of Equalization has taken notice of this issue. She first heard of the issue through her local body shop in Alhambra, and then from Richard Steffen through his work for the CRA.
    “I was just shocked and dismayed that there would be an arbitrary cap,” she said. This inspired her to research the issue further.
    “As an elected constitutional officer responsible for administration of the sales and use tax, I naturally have an interest in addressing insurance industry practices that appear to be illegal, and may be costing the state in excess of $50 million in lost sales tax revenue annually.”
    Chu recently met with Crozat and Wood to discuss the issue. She said she was impressed with the documentation that Crozat provided through his own experiences at his shop. After the meeting, Chu met with the legal department of the Board of Equalization to analyze ways to proceed with this matter.
    “The key legal issue with respect to the sales and use tax is that the sales tax is imposed on the gross receipts from the retail sale of tangible personal property – in this case, paint and materials. Once a body shop accepts payment, the amount of that payment constitutes the gross receipts upon which the sales tax is due - even if the body shop believes that the amount of payment was arbitrarily capped by an insurance company.”
    Therefore, once the body shop accepts the payment, the tax is calculated using the agreed-upon payment.
    “So price capping does not constitute sales tax fraud that can be prosecuted by the BOE. The Board’s options, at this juncture, appear to be limited to working with the Insurance Commissioner and trying to persuade him to take more aggressive action, and possibly pursuing legislation.”
    Crozat and Wood have urged CRA members to record incidents of capping and provide documentation to the BOE.  “I think if there is a more accurate amount of documentation on the sales tax revenue that is lost, the case would be more compelling,” Chu said. “Also a more accurate record of how much sales tax we would be losing.”
    “If an industry association such as the CRA is able to document the extent of price capping statewide through survey methods or statistical sampling, and we have asked them to do this, then extrapolating the amount of lost sales tax revenue is a fairly simple calculation,” Chu added.
Ultimate goal
    The CRA has taken a stand against the issue of paint capping and they want the insurance industry to pay a fair and reasonable rate for the entire time worked and materials used when painting.
    “If you look at the law, there’s sufficient law. The law is very clear. When you consider that, the legislators that we’ve talked to say, hey, we don’t need a new law, we just need people to enforce it.”
    This is an issue that has been debated  for years. In a letter to Crozat dated November 2, 1995 from Cindy Ossias, Senior Staff Counsel of the Department of Insurance, she quoted the law as it pertains to paint capping. She wrote:
    “The Department’s position is this: the practice of arbitrarily capping or limiting costs is illegal.” The reasons outlined include, “attempting to settle claims by an insured for less than the amount to which a reasonable person would have herself entitled.” Ossias wrote that there is nothing in the section related to this law, “which would permit an insurer to arbitrarily cap costs of either paint, material or labor used in the repair process.”
    Ultimately, the CRA is working to make sure these laws are enforced.
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