Insurers writing auto policies in California seeking to keep repair costs down by encouraging their insureds to use preferred repair facilities, and encouraging the use of non-original equipment manufacturer (OEM) parts, now have a potential roadmap to follow from the California Court of Appeal.
In Ortega v. Topa Insurance Company, No. B228889, 2012 Cal. App. LEXIS 621 (Cal. Ct. App. 2d Dist. May 24, 2012), the policy provided that the insurer would pay all of the reasonable costs incurred (above the deductible) in repairing damage to the insured vehicle if the insured used a repair shop that participated in the insurer’s preferred repair facility program. If, however, the insured chose to use a non-preferred repair shop, the insurer would pay only 80% of the covered loss (minus the deductible). The issues before the court were: (1) whether the application for insurance satisfied a statutory requirement that the application “prominently disclose” the policy provision with respect to the use of preferred repair shops; and (2) whether the trial court properly struck the class allegations concerning the use of non-OEM parts.
The court of appeal described the application for insurance as follows:
Topa’s application for auto liability and physical damage insurance states in bold lettering on the first page: “This is a restricted policy.” In the boxed-off section entitled “CERTIFICATION OF APPLICANT,” the application states in the second paragraph: “I certify that I understand that this is a restricted policy with coverage limitations and that I am aware of the policy limitations. I understand that in exchange for reduced physical damage premiums this policy has limited physical damage coverages and that repairs must be effected by an approved Preferred Repair Facility. Should I decide to have repairs performed by an unapproved facility, coverage will be limited to 80% of the covered loss subject to all applicable deductibles.” This boxed-off section includes three other paragraphs, each one separated by spacing. This section also has a signature line for the applicant to “certify” his or her understanding of the terms of the restricted policy. Ortega‟s wife signed the application.
Id. at *3-4. The court concluded that this disclosure satisfied Cal. Ins. Code. § 758.5(d)(1), finding the application form sufficient to inform the insured of the limitations of the coverage and certify that he or she understood it. The court rejected arguments by the plaintiff that a particular typeface, bold font and specific heading should be required. The court also rejected an argument that this provision improperly “steered” policyholders to preferred repair shops. The court agreed with prior appellate authority that this type of limited coverage where a non-preferred shop is used is consistent with the California statutory requirements.
The plaintiff also sought certification of a class on theories that: (1) non-OEM parts were universally inferior and thus the use of those parts did not restore putative class members’ vehicles to pre-loss condition; and (2) the putative class members did not receive adequate notice that the preferred repair facilities would use non-OEM parts. The court of appeal affirmed the trial court’s order striking these class allegations on the pleadings, before discovery and before a motion for class certification was filed. The court held that common issues did not predominate on the face of the allegations because each putative class member would have to prove that the particular non-OEM parts involved in their repair were inferior, and the question of whether and when a putative class member received notice that non-OEM parts were used would require an individual inquiry. The court distinguished a case in which class certification was upheld, where the class allegations were narrowly tailored to only sheet metal parts (known as crash parts).
Insurers writing this type of coverage in California can now benefit from the availability of an application form that has the approval of a California Court of Appeal. Insurers that want to encourage the use of non-OEM parts where appropriate can also take some comfort in the court’s decision on the class allegations, although insurers may wish to remind preferred repair shops to make disclosures about the use of non-OEM parts in accordance with the California statutes and regulations cited in this opinion. States have taken a variety of different statutory and regulatory approaches on the issues presented by this case, so the approach outlined in this case may not be viable in some other jurisdictions. Attempting to avoid class action exposure in connection with the use of a preferred repair shop program and the use of non-OEM parts requires a careful analysis of applicable state law together with the insurer’s practices and proposed changes thereto.