Friday, 31 August 2007 17:00

Proposed Changes to Labor Rate Survey Regs Unacceptable

The Department of Insurance (DOI) has released its most recent notice concerning the conducting of an auto body repair labor rate survey. Insurance Commissioner Steve Poizner has proposed text changes to Sections 2698.91 and 2698.92.

        The California Autobody Association (CAA) has been working with the DOI since 2005 and has participated in all the regulatory hearings on revising the current regulations involving the process of labor rate surveys. Responding to the DOI’s request for comment, Executive Director David McClune, stated “if a labor rate survey is conducted, an unbiased third party should perform the labor rate survey.

        “There is an inherent conflict of interest for an insurance company to control the process and influence the prevailing auto body rate in a specific market area. Insurers benefit financially from paying lower auto body rates. This creates a conflict for some insurers to manipulate surveys to reflect lower labor rates. Hence, this creates an unfair business practice that harms shops and consumers.”  

        In addition, CAA supports that under Insurance Code Section 790 et al. (unfair trade practices) any insurer that conducts an auto body labor rate survey pursuant to Insurance Code Section 758.5 is presumed to have done so in an accurate, reasonable, and fair manner. Therefore, the CAA believes that a statement be included in the regulations, which specifically states that surveys, “shall be fair, accurate, and reasonable.”

DOI position inconsistent

In a June 2007 letter from a DOI counsel to Collision Repair Association (CRA) President Gene Crozat, the DOI asserted that “the determination of what is a reasonable cost of repair should include many factors and a labor rate survey by itself is not sufficient.” However, the latest amendments do not reflect this position.

        The CRA’s overall position is that the proposed rules should not be submitted to the Office of Administrative Law because the amendments harm both policyholders and collision repairers.

        Stated CRA executive director Allen Wood, “The bottom line is that the Department cannot and should not use an insurer-conducted labor rate survey to determine what is a reasonable cost of repair. The rules would only serve to sanction price capping and that would hurt both policyholders and repairers. The rules would undermine quality repairs while rewarding substandard work and that is bad for all California insured vehicle owners. “

Evaluation by CRA

In summary, the second set of amendments by DOI would harm policyholders by allowing insurers to legally place a cap on what they would pay to return a damaged vehicle to pre-loss condition. Additionally, the proposed rules, themselves, are offered without statutory foundation. The Insurance Code does not authorize the use of a labor rate survey to delineate the reasonable cost of repairing a vehicle and, as such, the proposed rules should be invalidated by the Office of Administrative Law.

        In a letter to DOI Staff Counsel  Teresa Campbell, CRA lays out its arguments against the proposed amendments.

Lack of statutory foundation

Amendments to 2698.91(a) lay claim to the Insurance Commissioner’s (IC) right to adopt rules to help with enforcement of 16 claim settlement practices, either individually or as a pattern of practice, that are considered unfair and illegal. The CRA supports the IC in his right to adopt appropriate clarifying rules.

        However, the amendments take an illegal leap of construction in (a)(2) when it is stated: To delineate the purpose, use and minimum standards of a survey, which the commissioner may consider to be reliable evidence that an insurer has settled or paid automobile repair insurance claims in a fair and equitable manner. [Bold italics indicate additions to existing text.] This new language says that the IC may use a survey to say an insurer has been fair in paying a claim. This section is contradicted by prior language in (c)(h) that says the primary purpose of a survey is “ to inform the public about the prevailing labor rates” and “ to provide insurers with a starting point in negotiating labor rates with auto body repair shops.”

        The new section (c) (l) which is misidentified and should be (c)(k) adds to the misconstruction by asserting that a labor rate survey that meets the standards of 2698.91 but fails to comply with Section 2698.92 will fail to qualify for use by the insurer as rebuttable presumption that the insurer has been reasonable in adjusting a claim. Again, this section infers that the proposed rules sanction the use – when done correctly – of a labor rate survey to be used to determine what is reasonable. There is no statutory authority that allows labor rate surveys to be used in this capacity.

        According to CRA’s analysis, Sub Section 2698.92 (a) is the underground regulation that harms policyholders. The sub section says that an insurer-conducted labor rate survey that follows the standards of2698.91 and 2698.92 may be used by the insurer to demonstrate it “has offered an adequate labor rate.”

        Although the repair contract is between the insured and the repairer, this subsection usurps this legal relationship by requiring the repairer, who is not regulated by the DOI, to prove that labor rate requested by a third party, the insurer “was inadequate.” In brief, vehicle owners pay premiums to have their damaged vehicles return to pre-loss condition. If an owner selects a repairer based on past experience, reputation, etc., and the selected shop, due to the quality of its work, charges a rate that is above the average sanctioned under these proposed rules, and the insurer states it will only pay the “ average “ rate, then one of four actions, all improper, will occur:

        1. The repairer will be forced to ask the policyholder to make up the difference between the cost of repairs and what the insurer will pay, even though the policy holder has paid premiums for the vehicle to be repaired properly.

        2. The repairer will absorb the reduced payment.

        3. The repairer will be forced to undergo additional expenses in providing documentation that the rate the repairer charged is necessary for the type of work done. To whom is this documentation to be presented? How long will it take to adjudicate the matter?

        4. The policyholder will be forced to go to court to fight the insurer’s underpayment.

        For the past eight months the DOI, under new executive leadership, has been sending letters to policyholders recommending that they go to court to seek reimbursement from insurers who have failed to pay for the return of their damaged vehicle to pre-loss condition. The DOI has indicated it doesn’t have the authority to adjudicate individual claims regarding collision repairs. Yet, the DOI is considering adopting rules that will significantly increase the likelihood that policyholders will be forced to seek legal remedies as the incidence of insurer price capping increases under the envisioned use of labor rate surveys.


The CRA continues to note that the proposed rules are full of loopholes that, if not closed, will harm consumers and repairers. For example, 2698.92(f) requires insurers to provide DOI with non-public information affecting a survey, including the labor rate reported by each shop that responded to the survey (f)(1). What proof will DOI have that every facility that responded is included in the data given to DOI? It would appear that (f)(2) requires insurers to identify repairers who didn’t respond. Will DOI contact each repairer who didn’t respond to find out if the insurer was accurate in filing its rate report?

        It would appear that an insurer may gather survey information by methods that are not defined in the rules. The rules appear to allow an insurer to call a repairer and ask survey questions. Could the response in the aforementioned example come from a person other than the owner or general manager? The method of gathering information should be standardized and well documented in the rules – and they are not. The surveys should be mailed and a specified amount of time should be allowed to respond. The person responding should be the owner or designated employee. Due to the monetary advantage gained by an understated survey, it would also be appropriate to include penalties for the submission of an inaccurate survey.

        More confusion is triggered by 2698.92(g) which defines the prevailing auto body rate as the greater of the “mean average” of facilities in a specific geographic area, or the rate, at or below, charged by most shops in the area in question. In practice this section says that an insurer only has to pay the most common rate charged in a specific area. Again, repairers with the highest standards will be penalized as will vehicle owners who want their vehicles repaired to pre-loss condition and quality.

        The CRA believes the greatest threat to consumers is the pressure placed by insurers on repairers to work cheaply and quickly without regard to the quality of work that needs to be done. These proposed rules will help make substandard work the accepted norm in collision repairs. California policyholders deserve better.

        The properly conducted labor rate survey has a limited role in determining the reasonable cost of repairing a vehicle. The CRA contends that the Insurance Code should be amended to provide the Insurance Commissioner with limited authority to set guidelines regarding claim disputes between an insurer and a collision repairer. These guidelines must acknowledge that the repair contract is between the vehicle owner and the repairer, not the insurer, and that actions by the insurer that harm the fulfillment of the contract are an unfair business practice.

        Wood, continuing for CRA, concludes that “in no instance should government rules restrict competition. Quality is not determined by the lowest common denominator, or a price the government labels as “adequate.” If the DOI wants to be fair to consumers, it has to recognize those repair elements integral to returning a vehicle to pre-loss condition. The DOI needs to get its hands dirty by going into the workplace to witness the skills and equipment needed in repairing vehicles of the 21st Century.”


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