Auto Insurer Contracts Shed Light On A.B. 1200

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By Dan Aiello
California Progress Report

Opponents of Assembly Member Mary Hayashi’s (D-Hayward) auto insurance industry-sponsored legislation, A.B. 1200, released a set of documents today they claim show the intent of Hayashi’s bill is profit for insurers, not consumer information or safety.

A.B. 1200, sponsored by the Personal Insurance Federation of California, fell shy of the 21 votes necessary to pass the Senate on Monday when its passage was refused 19-17. The bill is on reconsideration and may be re-introduced as early as next week.

Doug Heller, Executive Director of Consumer Watchdog, a consumer advocacy group based in Santa Monica, California, has been leading the opposition to A.B. 1200. “The big lie (supporting the Hayashi legislation) is that insurance companies want to send people to their preferred shops to benefit the customer, when in fact they steer customers to insurance-controlled body shops as their way of controlling their loss payments. I don’t want a body shop cutting corners when they’re repairing a cracked axle on some family’s car,” said Heller.

Heller told California Progress Report that his organization will release a set of insurance industry documents today that support his claim that A.B. 1200 is not the consumer information bill the author claims, but rather a vehicle to allow insurers a way to save money by using less expensive auto body repair shops and after-market, not manufacturer’s, parts.

The first document is a contract between Mercury Insurance Company and its prospective network body shops. Heller points out that the contract is “At Will,” which pressures the auto body shop to keep costs low or risk termination without notice.

Heller claims such contracts create what he calls “reverse competition,” where body shops aren’t competing for customers based on the quality of their repairs, but instead compete with other network body shops for the insurer’s referrals based on the shop’s ability to cut its rates. “Cut rate prices lead to cut rate work,” said Heller.

The second document Consumer Watchdog will release is correspondence from AIG to a body shop in which the claims officer chastises the provider for using too many factory parts instead of the insurer’s preferred after-market parts.

The AIG document outlines a reimbursement plan that provides incentive for after-market part use while discouraging the use of manufacturer’s parts. The plan pays the repair shop “Cost + 20 percent” for after-market parts, but pays “95 percent of the cost of manufacturer’s parts,” according to Heller, ensuring the body shop loses money every time it uses a factory replacement part in repairing a vehicle.

“The question is whether preferred body shops will do as good, better or worse job than the independent body shop,” explained Heller.

“The Mercury Insurance contract with providers is an ‘at will and can be terminated at any time for any reason’ agreement. Companies understand that this contract is an ‘at will’ contract and they can be dropped at any time. They will want to stay on the insurer’s preferred list because once they begin doing the cut rate repairs the insurer demands they won’t get any other work,” Heller believes.

Heller also disputes Hayashi’s claim that the bill is a “consumer information” bill. “Current law already allows for insurers to provide consumers information, just read the law. It doesn’t say without insurance company information, just without insurance company pressure.”

Heller says fear is one of the tactics that has been used by insurance company claims officers once a consumer chooses an independent body shop over a preferred provider. According to Heller, claims officers question the quality of the work of the independent shop, and then promote a lifetime warranty on the work done by their network shop. “What the consumer doesn’t realize is that warranty is not the insurer’s, it’s the shop’s. Should it go out of business the warranty is lost. What they’re really offering the consumer to switch to their provider is no benefit at all,” claimed Heller.

“If the insurance industry would be honest, they would admit this is a bill about pressuring customers,” said Heller.

Earlier, Congresswoman Jackie Speier (D-San Mateo), published an OpEd in the San Francisco Chronicle blasting A.B. 1200 as a dismantling of the consumer rights she enacted with her 2003 legislation S.B. 551.

Hayashi responded.

On Tuesday, following the vote on A.B. 1200, Hayashi held a hearing on fraud in the auto repair industry. Collision Week Magazine, an industry publication, touted the low rate of reported fraud, which it claimed had not been Hayashi’s intended find. “The Insurance department and BAR testimony confirm that auto body fraud just isn't that prevalent,” the story concluded.

“What the hearing tells us is that the level of fraudulent activity coming out of the auto body repair shops is not staggering,” said Heller.

“I’m happy to expose whatever fraud exists,” Heller told CPR, “But Assembly Member Hayashi’s bill would only increase the problem by increasing the number of shoddy and fraudulent repair shops.”

“I would much rather the Assemblywoman spent more time looking into auto body repair fraud then taking away the rights of consumers [by authoring A.B. 1200].”

Click here to see the AB 1200 floor alert with the industry documentation cited above