Re: Opposition to SB 1167 (Wiggins and Migden): Insurance: vehicle repair

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1 March 13, 2008 Honorable Michael Machado Chair Senate Banking, Finance and Insurance Committee State Capitol, Room 5066 Sacramento, CA Re: Opposition to SB 1167 (Wiggins and Migden): Insurance: vehicle repair Dear Senator Machado: Thank you for affording the National Association of Mutual Insurance Companies (NAMIC) and the Pacific Association of Domestic Insurance Companies (PADIC) an opportunity to share their concerns with you about SB 1167, Insurance: vehicle repair. NAMIC is a full service national trade association with more than 1,400 member companies that underwrite approximately 43 percent ($196 billion) of the property & casualty insurance premium in the United States. NAMIC membership includes four of the seven largest property/casualty insurance carriers in the nation, and every size regional, national and state specific property & casualty insurer, including hundreds of farm mutual insurance companies. NAMIC has 118 member insurance carriers doing business in the state of California, who write approximately 26% of the property/casualty insurance business in the state. PADIC members are small to mid sized California domestic insurers whose products are sold exclusively by independent agents and brokers. Members write close to $1 billion in premiums predominately here in California; approximately half is written in the automobile and homeowners insurance markets. On behalf of NAMIC s and PADIC s members, we respectfully request that you consider the following concerns: SB 1167 will hinder insurance carriers in their efforts to educate consumers about their auto repair options and assist them in securing quality auto repair services Consumers generally do not have experience selecting auto repair facilities and/or the expertise necessary to decide which shop is going to provide them with the best

2 warranties, customer service, and quality repair work. Thus, consumers typically rely upon their insurance carrier to educate them and assist them in selecting a shop. SB 1167 will hinder insurance carriers in their attempt to provide their policyholders with reasonable, necessary and lawful information that will assist the consumer in making an informed decision about selecting an auto repair shop that addresses their personal needs. SB 1167 could expose consumers to shoddy auto repair work Insurance carriers are committed to making sure that their consumers receive quality auto repair services. Consequently, carriers are regularly and continuously evaluating auto repair shops for quality control and customer service practices that promote the best interest of the insurance consumer. Policyholders benefit from being able to receive information from their insurance carrier about the professional reputation and experience of auto repair shops. Informed consumers are well protected consumers, whereas uninformed consumers are consumers at risk. SB 1167 will prevent policyholders from gathering information they need to protect themselves against shoddy and/or fraudulent auto repair services. SB 1167 will interfere with the contractual and professional relationship between a consumer and his/her insurance carrier Pursuant to many insurance contracts, consumers are entitled to receive certain claims adjusting and auto repair services as part of the professional relationship with their insurance carrier, e.g. concierge services and road side adjusting/repair. Many consumers select an insurance company, specifically because of the contractual claims adjusting services offered as part of the insurance policy. Policyholders want their automobile repair claim settled and their motor vehicle repaired in a timely manner, with as little inconvenience to them as possible. Current claims adjusting practices, including assisting insureds in selecting an auto repair shop and guiding them through the auto repair process, help make the consumer s auto repair experience less physically and emotionally taxing. SB 1167 would prevent carriers from honoring certain claims repair service terms and conditions of their insurance contract with the consumer, and will create new administrative burdens for policyholders. SB 1167 will eventually drive up insurance rates for all consumers Insurance carriers undertake extensive quality and cost control measures to make sure that insurance consumer rates are not needlessly impacted by price gouging of auto repair facilities. If repairs are completed swiftly and meet high quality standards consumers generally don t care which vendor repairs their motor vehicle, but they do care about their insurance rates going up. SB 1167 will hamper insurers in their efforts to control needless cost drivers, which ultimately impact insurance rates for the consumer.

3 California state law already protects a consumer s freedom to select the auto repair shop of his/her choice Under current state law, insurance carriers cannot force an insured to have their auto repair work done at a specific shop. Specifically, Insurance Code Section states that an insurance claimant has the legal right to choose any body shop he/she desires, including one not within an auto insurer s preferred network of repair shops. Further, current state law prohibits an auto insurer from suggesting or recommending a specific body shop unless a claimant requests a referral or the insurer informs the claimant in writing of his/her right to select an auto repair shop. Thus, a consumer s right to select an auto repair shop is clearly protected, and SB 1167 does not provide the consumer with any new legal protections. SB 1167 is an unlawful interference with constitutionally protected commercial free speech In the landmark U.S. Supreme Court case, Central Hudson Gas and Electric v. Public Service Commission, 447 U.S. 557 (1980), the Supreme Court set forth the legal test for determining whether a state law or regulation violates a party s constitutional right to engage in commercial free speech. In Central Hudson, the Court opined that commercial speech about a lawful activity, which is not misleading, is constitutionally protected free speech, unless the asserted governmental interest in prohibiting the speech is substantial, the proposed regulation advances a clear governmental interest, and the regulation is no more extensive than necessary to accomplish that government interest. The legislative intent and statutory language of SB 1167, does not satisfy the Central Hudson test for permissible restriction of commercial free speech. Specifically, an insurance carrier has a legal right and a contractual duty to provide lawful claims adjusting information, including educational information about how and where the policyholder may obtain auto repair services. Thus, in order for SB 1167 to be constitutionally permissible, the state would have to demonstrate that: 1) there is a substantial government interest in prohibiting the free speech; 2) that the regulation actually accomplishes that government interest; and 3) that the regulation is narrowly tailored so as not to be more restrictive on free speech than necessary to accomplish the government interest. In a recent United States Court of Appeals for the Fifth Circuit decision, Allstate v. Abbott, 485 F.3d 151 (2007), the Court of Appeals, citing Central Hudson, stated the First Amendment, as applied to the states through the Fourteenth Amendment, generally protects commercial speech from unwarranted governmental regulation where the speech is not false, deceptive, or misleading.

4 The Court of Appeals, in applying the Central Hudson test, held that [c]onsumers benefit from more, rather than less, information.... Thus, it is difficult to imagine how a law, like SB 1167, that would restrict consumer access to important auto repair information about an auto body shop s quality control service record, level of professional experience, customer service reputation and repair warranty information would promote a substantial government interest. Moreover, since state law already protects a consumer s right to select his/her own auto repair shop, and state administrative law prevents insurance carriers from contractually requiring a consumer to go to an insurer selected auto repair shop, the state would have a difficult time establishing that SB 1167 satisfies the Central Hudson requirements that the restriction on the commercial free speech is no more extensive than necessary to accomplish the government interest. In Allstate v. Abbott, the Court of Appeals asserted that [a]ttempting to control the outcome of the consumer decisions following such communications by restricting lawful commercial speech is not an appropriate way to advance a state interest in protecting consumers. Thus, NAMIC and PADIC believe that SB 1167 is an unconstitutional violation of an insurance carrier s commercial free speech, and would adversely impact insurance consumers, who reasonably rely upon their insurance carrier to assist them in making informed decisions about where to have their automobile repaired. For the aforementioned reasons, NAMIC and PADIC respectfully requests that you VOTE NO on SB 1167, and protect insurance consumers from being denied access to information they need to make a prudent auto repair shop selection. Thank you for your time and consideration. Please feel free to contact Christian J. Rataj of NAMIC at or at crataj@namic.org, and/or Milo Pearson of PADIC at or at milopearson@sbcglobal.net or PADIC s lobbyist, Shari McHugh, at (916) or at smchugh@mchughandassociates.com, if you have any questions about NAMIC s and PADIC s Letter of Opposition to SB Respectfully, (signature on file with state) Christian John Rataj, Esq. NAMIC Western State Affairs Manager (signature on file with state) Milo Pearson PADIC Executive Director

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