Monday, 30 June 2003 17:00

CAA pushes for another bill banning tied shops

The California Autobody Association (CAA), which had been "patiently waiting this year," according to Executive Director David McClune, to see if Texas would be successful in passing legislation prohibiting insurers from owning collision repair shops, now says it may be ready to try again. 

"I think this is the good fight," said CAA President Peter Hurwicz (Sunnyvale). "It's a straight forward question - should insurance companies own body shops? And it's not just for the good of body shops. When you talk to your customers, you realize that the public gets it. Too much control by insurers isn't a good thing.

"Will we try again? I can't say for certain. But is it a worthwhile goal? Absolutely."

Victory in Texas
In mid-June, Republican Texas Governor Rick Perry signed into law House Bill 1131, the Insurer-Owned Repair Facility Legislation. A similar bill failed in California last year.

The Texas bill, which benefitted from a strong tide of anti-insurer sentiment in that state, outlaws new insurer-owned shops but was amended to allow insurer-owned facilities such as Allstate's Sterling Collision to keep both currently operating facilities and those under construction.

Last year, CAA sponsored SB1648, introduced by Sen Jackie Speier (D-San Francisco), which would have prohibited insurer-owned shops in California. It passed the State Senate but was defeated on the Assembly floor, largely by members who abstained from voting. Informed sources said at the time that Governor Gray Davis did not want the bill on his desk.

The failed California bill required divestiture by insurers of all owned shops. Sen. Jackie Speier and others supporting last year's bill had weighed making a similar concession in the California legislation, but decided that permitting some insurers to continue operating their own shops while shutting out others would likely face a constitutional challenge in the courts from insurance interests.

Texas acknowledges/protects DRPs

The Texas legislation goes a long way toward leveling the playing field between shops owned by an insurer and other "favored" (DRP) shops of that insurer. Interestingly enough, in protecting these non-owned DRP shops, the bill seems to give a polite nod towards DRP steering.

The insurer-owned shops could not receive referrals from the insurer, use the insurer's name, engage in joint-marketing or enjoy other advantages that are not also available to non-owned DRP shops affiliated with the insurer. So, taking Allstate as an example, its "PRO" DRP shops would be protected against unfair competition from the Allstate-owned Sterling Collision shops, but there is no similar protection for completely independent body shops, although the bill does prohibit an insurer from subsidizing the operations of its owned shops.

No Texas agency will enforce the bill - it's up to the courts. The legislation provides civil court penalties of $1,000 - $5,000 per day for violation of the law and independent shop owners can bring suit to enforce the law; if the shop bringing the suit wins, the insurer must pay attorneys fees, in order to encourage attorneys to take the cases.


Sacramento sources say that if a California bill is offered, it too would be "revenue neutral" with no enforcement costs for state taxpayers to bear and would likely contain an attorneys fees provision.

Another round?

The CAA indicated in a press release that it still has time this year to introduce similar legislation, and said in a June press release that it is seriously looking at its legislative options.

"The CAA continues to oppose insurers acquiring any ownership interest in auto body shops based on the inherent conflict of interest," said McClune. The CAA says that insurers have demonstrated a tendency to pressure shops to save money, cut corners and pursue the lowest cost of repair. "This zeal to save money and cut costs will only fuel practices that undermine the integrity and safety of the repair," said the CAA statement.

Allowing insurance companies to own repair shops raises concerns about whether consumers will receive the quality repairs necessary to restore their vehicles to a safe, quality and roadworthy condition, said CAA. Insurer ownership creates the "fox guarding the chicken coop scenario."

The CAA statement outlined further reasons for the legislation:

Anti-competitive behavior

The industry is a unique business where the shop looks to the insurer for payment of repairs. Allowing insurers to own shops would create an anti-competitive situation where the independent shop would be competing with its own customer, namely the insurance company. This creates unfair competition and monopolistic practices.

Consumers have less choice

Insurer-owned shops create anti-competitive behavior, which will eventually cause the insurer-owned shops to crush competitors (independent shops) in an unfair and monopolistic manner. It is common knowledge that monopolies lead to fewer choices and ultimately higher prices.

Preventing fraud

The insurance companies have demonstrated intent to save money and cut costs, which have resulted in situations where the insurer is dictating the method of the repair and have forced shops to perform inadequate and inferior repairs.

To support its point, CAA noted that, in 1999, an Illinois jury ordered State Farm to pay $1.2 billion for defrauding millions of its insureds by encouraging or requiring the use of non-OEM crash parts, which the jury found were not of like kind and quality to OEM replacement parts (now on appeal to the Illinois Supreme Court). "Insurer-owned shops would only foster and exacerbate the need to save money and cut corners to recoup losses for damage claims," concluded the CAA statement.