One of the burning questions regarding self-driving cars isn’t technological but legal: Who gets sued when the system fails? Is it the human driver? The OEM? The…
The Second Circuit Court of Appeals on Wednesday reversed a lower court’s decision to grant summary judgement in favor of Progressive, ruling that a Syracuse, N.Y., collision repairer had presented a strong enough case on factors like parts decisions and labor rates that the litigation should continue.
The ruling in Nick’s Garage v. Progressive and an accompanying decision in Nick’s Garage v. Nationwide look at the specific language of policyholders’ contracts with the carriers and New York law, Vehicle Information Services attorney Erica Eversman observed Friday. She noted that the arguments might not apply to a different carrier’s policy or state’s law — though the appellate court relied in part on its Nick’s Garage v. Progressive ruling in its decision against Nationwide.
Nevertheless, the two opinions still provide a strong piece of ammunition for shops seeking to counter two key insurer arguments, Eversman wrote in an email.
“In essentials, the insurers brought issues that shops and insurers have been at odds over for years to a very influential court, and they have now been told that their self-determined labor rates are not what the prevailing market rate means,” Eversman wrote. “And they have been told that non-OEM parts/their prices cannot be used in all repair instances to show they are paying a ‘fair and reasonable amount’ as those parts cannot be presumed to be proper for every repair. This precedent can be used by repairers across the country to persuade judges that the insurers’ position on the topic is simply wrong.
“These are important decisions for the industry and will have an impact on how insurers do business in the future. Shops need to make certain they push to be paid proper rates and that they push to use the parts that are appropriate for the repair in all instances.”
Nick’s Garage sued Progressive on behalf of 26 first-party and 11 third-party customers who had assigned the collision repair facility their policy benefits. Progressive had refused to pay some of the shop’s charges — which would have left the customers on the hook for the difference — and for new OEM parts versus the alternatives permitted under the policy.
New York Northern District Court Judge Mae D’Agostino rejected many of Nick’s Garage’s arguments and declared summary judgment (an automatic win) in favor of Progressive. On Wednesday, she was smacked down by the appellate court, which declared she had the summary judgment law backwards (the burden temporarily switches to the petitioner, even if it’s the defendant) and had improperly given short shrift to what Nick’s Garage had to say.
Nick’s Garage still has to prove its points in trial and survive motions to dismiss. But the appellate court’s ruling demands that lower courts pay attention to what collision repairers have to say and reinforces the idea that the insurer must consider more factors than its own desires or what a DRP shop would do in interpreting its obligations to a customer.
Let’s look at the highlights from the decision delivered by Judge Pierre Leval (bold emphasis ours; italics Leval’s) for an appellate court panel made up of Leval, Judge Raymond Lohier Jr., and Eastern District of New York Judge Edward Korman.
‘Reasonable’ labor rates aren’t just what the insurer can obtain
The First‐Party Assignors’ insurance policies obligated Insurer to pay the amount necessary to repair the vehicle to its “pre‐loss condition,” subject to the proviso that Insurer would not pay more than the “prevailing competitive labor rate charged in the area where the property is to be repaired . . . , as reasonably determined by [Insurer].”
Insurer argues, as the district court found, that its method for determining the prevailing labor rates is reasonable so as to satisfy its contractual obligations. Insurer presented evidence that it determines the prevailing labor rates using its Labor Rate Reference Guide (“Reference Guide”), which was finalized in January 2008. According to its Reference Guide, Insurer “allow[s] the marketplace to determine what the prevailing rate is as indicated by [Insurer’s] ability to reach agreed prices for repair with shops in the marketplace.” Garage counters Insurer’s evidence with evidence of higher labor rates posted by repair shops in the area as constituting the rates they charge, plus evidence of higher rates paid to it by other insurers.
… There is a fundamental flaw in Insurer’s approach to demonstrating, for the purpose of summary judgment, that the labor rates it paid to Garage were the prevailing competitive labor rate as reasonably determined by Insurer.
Insurer’s evidence depends on the proposition that evidence of rates that repair shops are willing to accept from Insurer shows the prevailing competitive rate. But that is not necessarily so. An insurer such as Progressive may command a very large volume of business.
The fact that repair shops may accept a labor rate paid by a particular insurer that may bring the shop a large volume of business does not demonstrate that the shop, or shops generally, would accept the same rate in dealing with another insurer or a customer who has only one car to be repaired. In other words, Insurer’s evidence that it pays labor rates based on its own ability to get repair shops to agree to those rates does not demonstrate that it pays what it is contractually obligated to pay—the rates that actually prevail in the market in the area where the repairs are performed. Indeed, Insurer’s Reference Guide explicitly acknowledges that Insurer does not “conduct a formal market survey of rates in most states.”
Garage countered with two types of evidence: first, that higher labor rates than those paid by Insurer were posted by other repair shops; second, that other insurers have agreed to pay Garage higher rates. The evidence of rates posted at repair shops is of debatable persuasive value because it fails to show that the posted rates are actually paid, much less that the posted rates represent the prevailing labor rates. On the other hand, the fact that other insurers—and in some instances, even Insurer itself—paid rates higher than the rate typically paid by Insurer is sufficient to support a genuine dispute as to a relevant fact.
Garage succeeds in defeating Insurer’s motion for summary judgment if its evidence supports the existence of a genuine dispute as to a material fact on that question. Especially given the illogic of Insurer’s proposition that the rate it can regularly command demonstrates the prevailing rate in the market—including rates paid by other insurers and uninsured individuals—Garage’s evidence of higher rates paid to it is sufficient to show a genuine dispute.
“Strikingly, the court says in the Progressive case that the competitive market labor rate is not the rate that Progressive can convince a shop to accept with its market power and multiple jobs, but includes the rates for the entire marketplace,” Eversman wrote. “… (Progressive’s policy expressly said it would pay the competitive rate as determine ‘by us’, so part of this decision hinges on the language of the policy. Nonetheless the court noted that Progressive doesn’t perform labor rate surveys, so it essentially can’t say that what is was willing to pay accurately reflected the rate in the overall marketplace.)”
Just because the policy allows non-OEM parts doesn’t mean the carrier always gets to use them
According to Leval, Progressive’s policies state, “In determining the amount necessary to repair damaged property to its pre‐loss condition, the amount to be paid by [Insurer] . . . will be based on the cost of repair or replacement parts and equipment which may be new, reconditioned, remanufactured, or used, including, but not limited to: (a) original manufacturer parts or equipment; and (b) nonoriginal manufacturer parts or equipment.” The carrier cited this language to say it can put on any of these it chooses, and D’Agostino agreed.
The appellate court, however, declared Progressive’s argument “oversimplified.”
The fact that the policy permits basing the cost of repair on non‐OEM parts does not mean that non‐OEM parts will in all instances be sufficient to satisfy Insurer’s contractual obligations. Insurer is obligated to pay a sufficient sum to return the vehicle to its “pre‐loss condition.” This may or may not be possible using non‐OEM parts for a particular repair. The provision quoted above on which Insurer relies means that Insurer may limit its payment to the price of non‐OEM parts when the use of such parts will “repair the damaged property to its pre‐loss condition.” … It does not follow that Insurer may limit its payments to the cost of non‐OEM parts regardless of whether the use of such parts will, in the particular circumstance, repair the damaged property to its pre‐loss condition.
While New York State law permits insurers to use the cost of non‐OEM parts in their estimates, it requires that the part “shall equal or exceed the comparable OEM crash part in terms of fit, form, finish, quality and performance.” This state‐law requirement is “deemed to [be] part of the insurance contract as though written into it.” Insurer’s evidence failed to satisfy this requirement.
Leval also pointed out that just because Progressive paid for OEM parts sometimes, this “does not establish that Insurer always pays for OEM parts when they are necessary for a particular repair, and therefore does not negate breach for the times when Insurer did not pay for OEM parts.”
The Second Circuit also took D’Agostino to task for ignoring evidence that non-OEM parts might be insufficient to get the job done.
In its opposition to Insurer’s motion for summary judgment, Garage had offered affidavits of Michael Orso, Garage’s President, and Rocco Avellini, an expert in the automotive repair industry, explaining that the use of OEM parts was necessary. Reviewing this evidence, the district court characterized Orso’s declaration as amounting to the mere assertion that Garage’s customers are “people who care about their cars” who “would only accept a new OEM part.” Accordingly, the court granted summary judgment on the issue of payment for parts.
If it were true that those affidavits relied solely on customer preference, the court might have been correct to conclude that summary judgment in favor of Insurer was warranted. But in fact, Orso and Avellini pointed to numerous deficiencies in non‐OEM parts needed for the repairs, which would have prevented restoring the vehicles to pre‐loss condition. The district court overlooked this evidence. In addition to noting customer preference for OEM parts, Orso noted, for example, that non‐OEM fenders are made of lighter gauge sheet metal (which can affect the success of airbag deployment), that the lenses of non‐OEM headlamps are often distorted, that non‐OEM heaters and puddle lamps are prone to malfunction, and that certain non‐OEM parts do not fit correctly and leave gaps. He went on to provide examples of instances in which non‐OEM fog lamp bulbs and headlights did not fit. Avellini explained that non‐OEM bumpers have fewer fasteners, making it easier for them to become dislodged in an accident. The district court ignored this evidence, and further discredited Orso’s testimony by asserting that he had a “clear bias against the use of non‐OEM parts.” This was error. The district court was obligated to “draw all factual inferences in favor of the party against whom summary judgment is sought,” not the other way around.
“The court also noted that just because an insurance policy may state that an insurer can consider the price/use of non-OEM crashparts when writing an estimate, doesn’t mean it is appropriate to use them for pricing a repair cost because those parts are not appropriate for every repair,” Eversman wrote.
The act of negotiating doesn’t prove ‘good faith’
Just because the insurer attempted to negotiate some of the contested charges like OEM parts doesn’t get it off the hook for a potential “bad faith” complaint, according to the ruling.
Insurer argues that it satisfied its initial burden of production … by providing evidence that it engaged in good faith settlement negotiations with Garage. The argument fails. Insurers are statutorily required to make a good faith offer of settlement to the insured (or the insured’s representative) to return the vehicle to its pre‐loss condition. Good faith refers to the insurance company’s (or those acting on its behalf’s) honest and fair state of mind. … An Insurer’s good faith in making an offer of settlement does not necessarily mean that the amount offered is actually sufficient to cover the cost of repairing the vehicle to its pre‐loss condition. The statutory requirement to negotiate in good faith is an additional requirement, over and above the contractual requirement to pay the cost of repairing the vehicle to pre‐loss condition, not a substitute for it. Insurer’s evidence of good faith negotiation therefore does not negate the claim that the amounts Insurer paid failed to satisfy its contractual obligations.
Shop ALLDATA charges might be reasonable, not overhead
The Second Circuit also made an interesting point regarding ALLDATA access charges.
Progressive wrote that Nick’s Garage “not only charges to pull information from ALLDATA, but for the time it takes the shop to print the information,” giving an example of “$77.40 for ALLDATA access and printing.” It called the amount “overhead,” and not something it was obligated to cover.
However, the appellate court felt that Nick’s Garage had made enough of a case that its ALLDATA charges weren’t just an “overhead” item that the matter could survive a motion for summary judgement and be open to further deliberation in the lower court.
Drawing all reasonable inferences in favor of Garage, Zaleppa’s testimony could establish that, to repair properly a particular vehicle to its pre‐loss condition, a technician must review the specifications and procedures provided by the vehicle manufacturer for that specific make and model vehicle. If that is the case, a jury could conclude that a technician needs to expend time to access and familiarize herself with the information provided by the database for a specific vehicle to perform a particular repair. Such efforts and costs are potentially distinguishable from those that might need to be expended generally for the operation of a business or the performance of technician work, which might properly be considered overhead and not chargeable to a particular client. Resolving the issue of how ALLDATA costs should be treated under the policy thus turns on a factual assessment of how the database operates and is used in practice.
Just because the car is fixed doesn’t mean the insurer doesn’t still owe
The New York Northern District Court did get one crucial point right from a shop’s perspective. According to Leval’s opinion and the district court, there’s no merit to an insurer’s argument that a plaintiff whose vehicle was restored suffered no loss and couldn’t pursue damages for being underpaid for that repair. Leval also observed that the customer was on the hook anyway for the difference between what the shop charged and what the insurer was willing to pay.
“Insurer argues that the First‐Party Assignors (whose claims are asserted by Garage as their assignee) suffered no damages because their vehicles were repaired by Garage to their pre‐loss condition,” Leval wrote. “Insurer misunderstands the theory of this category of claim. Insurer was obligated to pay its insureds the ‘loss’ on a covered vehicle, i.e., the amount of money sufficient to return the vehicles to their pre‐loss condition. Thus, the difference between what Insurer paid to Garage and the amount necessary to return the vehicles to their pre-loss condition constitutes damages suffered by the insureds on which Garage, as assignee, can bring suit. There is no merit to Insurer’s contention that the First‐
Party Assignors suffered no damages regardless of whether Insurer paid less than the cost of returning the vehicles to pre‐accident condition. The District Court properly rejected Insurer’s contention on this issue.”
Steering, materials judgments stand
Two of Progressive’s summary judgments survived the appeal and are worth noting as well:
One involved Nick’s Garage’s allegation that Progressive had violated shop choice law because it “misleads them on that question by limiting payment to what Insurer could pay at other repair shops and refusing to pay Garage’s reasonable charges, effectively inducing consumers to use Insurer’s favored shops in order to secure full coverage.” The Second Circuit opinion said that since Progressive had clearly informed customers of their right to pick a shop, such steering allegations failed.
The other involved a dispute over paint and materials costs.
Nick’s Garage “did not dispute the reasonableness of Insurer’s use of estimating software, but rather pointed to its own use of different estimating software” when calculating paint and materials, according to the Second Circuit. However, Leval wrote that Progressive policy language describing it as responsible for “repair or replacement parts and equipment, as reasonably determined by [Insurer].”
“The relevant question under the policy is not whether Insurer reached the most accurate estimate but whether its method for determining its costs was reasonable,” Leval also wrote. “The mere fact of showing that another reasonable estimating method could produce a higher cost is insufficient, standing alone, to create a genuine dispute of material fact as to the unreasonableness of Insurer’s method.”
The Second Circuit Court of Appeals’ courtroom. (Provided by Second Circuit Court of Appeals)
The Second Circuit Court of Appeals’ Thurgood Marshall Courthouse.(SeanPavonePhoto/iStock)
The Second Circuit Court of Appeals’ Thurgood Marshall Courthouse. (Provided by Second Circuit Court of Appeals)