Allstate fights back limitation on insurer-owned shops

The law, Allstate claims, "stops dead in its tracks a promising, market-based mechanism for improving customer satisfaction, providing efficient, cost-effective auto collision repair services and eliminating incentives for waste and fraud in auto repair estimates and actual repair work."

Here's the latest in the battle - in Texas and elsewhere in the country - over insurer-owned collision repair shops.

The Texas law

The Texas law does not prohibit insurer-owned shops outright, allowing those facilities currently owned by insurance companies to remain in business if they meet certain criteria. However, the law does not allow the insurer to expand beyond the facilities in operation or under construction as of April 15, 2003.

In addition to Allstate and Sterling, the Texas law also impacts the California-based Caliber Collision Centers, which has 17 shops in Texas; two insurers, Zurich/Farmer's Group and the Interinsurance Exchange of the Automobile Club of Southern California, have minority ownership interests in Caliber.

The Texas law places some new restrictions on the operation of insurer-owned shops. An insurer may not, for example, share information with its repair facilities that is not made available on identical terms to its other direct repair program (DRP) facilities. It also may not provide its owned repair facilities a recommendation, referral, description, advantage, or access to its policyholders that is not provided on identical terms to other DRP repair facilities.

Insurer-owned shops must also post a notice in a prominent location that states, "This repair facility is owned in whole or in part by (name of insurer). You are hereby notified that you are entitled to seek repairs at any repair facility of your choice."

"This landmark legislation will most likely be mirrored in states across the nation," Bob Redding, the Automotive Service Association (ASA) Washington, D.C., representative, said after passage of the bill.

Efforts around the country

But similar efforts have not been as successful in other states. This past summer, North Carolina Governor Michael Easley signed into law a bill which requires disclosure to consumers of insurance ownership of a collision repair shop. It also requires written disclosure of the use of non-OEM crash parts in a repair, and allows insurers in that state to sell OEM-only policies.

California was actually the first state to launch a legislative effort to put the brakes on insurer ownership of collision repair shops. Early last year, SB 1648 was introduced by Senator Jackie Speier, D-San Francisco, and was quickly supported by the California Autobody Association and the ASA.

The bill would have made it unlawful for insurance companies to have a financial interest in collision repair facilities. Any insurance companies who had an interest in collision repair facilities in California when the law went into effect would have been required to divest themselves within eight years.

It was passed 29-7 by the California Senate, but Allstate voiced opposition to the bill, calling it "anti-competitive." The company also launched an advertising and public relations campaign, releasing the results of a poll it commissioned that found consumers were concerned about collision repair fraud. Allstate reported that 85 percent of Californians polled believe that cheating is a major reason repair costs are so high, and 74 percent feel they are often cheated by autobody shops that do poor quality work or charge for work that was not done. Almost 90 percent said consumers should have the choice of using shops owned by or associated with insurers.

The insurer's efforts paid off when the bill failed two attempts at passage by the California Assembly.

South Dakota legislation lacked support

Legislation banning insurer-owner shops also failed earlier this year in South Dakota when only one supporter showed up to testify in favor - Senator Frank Kloucek, the bill's primary sponsor. Lobbyists for an insurance association and for Allstate voiced opposition to it, saying it was unnecessary because there were no insurer-owned shops in the state, and because state law prohibits steering of work by insurers. The committee voted unanimously to defer the bill to "the 41st day;" since the state has only 40 legislative days on its calendar, moving a bill to the 41st day effectively kills it.

A similar bill in Missouri also failed to make much progress before that state's legislature adjourned this past spring.

Aside from legislation, Sterling's entry into some marketplaces has also been fought through other means - with mixed success.

Illinois shop owner Mark Pierson said he was one of about 20 collision industry representatives who attended a zoning board meeting late last year in Blue Island, Illinois, a suburb just south of Chicago. Their goal: To voice concern about a site permit being sought by Sterling to build a shop in that community. Pierson said he and the other shop representatives wanted to ensure, at the very least, that Blue Island wasn't granting Sterling any tax incentives for entering the market.

While Sterling got a thumbs-up from the zoning board, a subsequent hearing and vote before the Blue Island City Council earlier this year didn't go Sterling's way. The Council voted 11-3 to block the site permit.

But Sterling and its developer subsequently filed a suit against the City of Blue Island and the eight aldermen who voted against Sterling's permit - and eventually prevailed. A 16,000-square-foot Sterling Collision Center is now open in Blue Island.

Another Illinois shop owner has been more successful in halting Sterling's entry into her market - at least for now. Teresa Kostick, who owns All Line CARSTAR in Bolingbrook, Illinois, prevailed when township trustees voted this past June to not let Sterling build on a property in that town. The 5-0 vote reversed a May planning board decision, which had granted Sterling a special use permit.

Kostick, who has been in the business for 21 years, said she is glad her efforts were successful, but now wonders if Allstate-Sterling will file suit against her township's trustees as it did against the aldermen in Blue Island.

The Texas lawsuit

The limited success of halting the growth of insurer-owned shops is part of what made the Texas law a heartening success story for its supporters - and made the Allstate-Sterling lawsuit, filed August 29, a deflating disappointment.

"When you get into these political issues, state or federal, you hear rumors about different things during the process, but I think it would be an overstatement to say that [such a lawsuit] was expected," ASA's Redding said.

In its 43 page filing (which can be downloaded from the "Legislative" section of the ASA website, www.asashop.org), Allstate claims that they are the victims of a special interest law brought into existence by the powerful political voice of a coalition of 4,500 Texas shops whose "protectionist table-pounding and political muscle drowned out all efforts to educate legislators about the auto repair industry's persistent problems."

Because the law limits the ability of an insurer to steer claimants to shops owned by the insurer, Allstate says, it could have the inadvertent effect of actually misleading consumers. By requiring the insurer to recommend independent shops to the same extent they recommend Sterling facilities, Allstate says that "policyholders and claimants will be misled into believing that Sterling and local auto body shops are of equal quality." This lack of information, Allstate agues, could lead a policyholder to choose "a less efficient, or worse, fraudulent, local body shop."

Legislation a disservice to consumers

Consumers can be better served at insurer-owned shops, the lawsuit states, because the claims handling and repair processes are better integrated. The average repair time at Sterling shops this year was 10.5 days, according to the lawsuit, "compared to 18 days at certain non-insurer affiliated shops." The Sterling shops have an 83 percent on-time delivery rate compared to 74 percent for non-insurer affiliated shops, and a 94 percent customer satisfaction rate. The lawsuit says that even the legislation's supporters do not cite "any abuse or wrong-doing by insurer-affiliated collision repair shops."

"No evidence suggested that customers were cheated, received lower quality, or (were) otherwise harmed by insurer ownership of Sterling," the filing states.

The lawsuit also claims that the fact that the law allows anyone, including competing shops, to sue - with civil penalties of $1,000 to $5,000 per day per violation - if they are harmed by violations of the law is evidence that the law is designed more to protect local body shops than consumers.

One of the main arguments in the complaint is that the law violates the First and Fourteenth Amendments of the U.S. Constitution. The suit says that Sterling is engaging in legitimate commercial speech when it explains to its customers the problems associated with local body shops and the benefits of working with Sterling.

The Texas lawsuit is not the first time Allstate has used free speech arguments to successfully change state laws. In 1992, for example, South Dakota passed SB 220, which prevented insurers from requiring, recommending, coercing, intimidating, threatening or offering an incentive to consumers to use a particular auto glass replacement shop. Allstate sued, citing commercial free speech, and the law was overturned in 1994. The court held that where there is no harm to the policyholder, "the speech is not deceptive or misleading so as to be subject to a ban."

More recently, the Southern District of New York in 2000 held that a New York insurance statute prohibiting insurers from recommending collision repair shops to its insureds violates the First Amendment. The case was brought by Allstate and Geico, after they were fined by the New York Insurance Department for making such recommendations. As in the Texas case, the insurers asserted that the statute was an unjustified content-based restriction on free speech, thus violating the First and Fourteenth Amendments of the U.S. Constitution.

Supporters disappointed, but hopeful

Most Texas shop owners asked about the lawsuit expressed disappointment but not surprise - and didn't want to comment for the record.

ASA's Redding also declined to comment on the particular arguments in the Allstate lawsuit, but said ASA maintains its belief that insurer ownership of shops "is in direct conflict with a consumer's right to choose."

"That said, we appreciate that individuals and corporations have a right to challenge legislation in the courts," Redding said. "This process ensures that reasonable consideration and deliberation is given to all sides. If there were an issue that we were on another side of, it's an option that ASA would have to consider. So we appreciate that we have that right."

But he also said he remains optimistic about the outcome of the issue.

"We were on the front lines with the collision repairers in Texas in support of and securing passage of House Bill 1131," he said. "We believe it protects Texas motorists. We're just as strong in that belief today as we were the first day we met in Texas to discuss it with those repairers who were involved. We trust the courts will carefully weigh all the issues and give proper consideration to consumer implications arising from this insurance ownership of collision repair facilities."

John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988.