Appellate Term Establishes New Burden of Proof in Body Shop Litigation

June 30, 2012 | Appeals | Insurance Coverage

In recent years, there has been uncertainty as to the standards to be applied when automobile repair shops challenge the conduct of automobile insurers in regard to the negotiation and payment of collision repair costs.  In Nadel v. Allstate Insurance Company, 2012 N.Y. Misc. LEXIS 1527 (N.Y. App. Term 2d Dep’t 2012), the Appellate Term, Second Department clarified the obligations of the parties.  Paying deference to the Insurance Department’s interpretation of its own regulations, as set forth in a series of Opinion letters, the Appellate Term stated that if an insurer makes a “good faith offer” to the insured to pay for the cost of repair and identifies a facility that will repair the damage at the cost estimated by the insurer, the insurer is not obligated to pay for any repair cost that exceeds the amount of the insurer’s “good faith offer” if the insured elects to repair his vehicle at another facility at a higher cost.  The decision is significant in demonstrating what a carrier must do to comply with the regulations and eliminate its financial responsibility for excess repair costs.

The insurance regulation (11 N.Y.C.R.R. § 216.7) states that where, following a loss, an insurer decides to inspect the car prior to repair, negotiations shall commence and a “good faith offer” of settlement shall be made.  The negotiations must be conducted in good faith with the basic goal of promptly arriving at an “agreed price” with the insured or the insured’s designated representative (usually, the body shop).  If, after negotiations, the parties cannot reach an agreed price, the insurer must furnish the insured with a prescribed notice of rights letter.  The notice of rights letter indicates the insurer’s offer and provides that upon the insured’s request, the insurer can recommend a repair shop that will make repairs for the amount stated in the insurer’s estimate.  However, by statute, the insurer cannot require that repairs be performed by a particular facility, and cannot recommend a facility to the insured without the insured’s request. 

The regulation does not speak to an insurer’s obligation to pay excess repair costs when the parties do not reach an agreed price.  Nor does the regulation define what is meant by a “good faith offer.”  The Consumer Guide to Automobile Insurance, which is published annually by the New York State Department of Financial Services (formerly the Department of Insurance), defines a “good faith offer” as “one that can be backed up with the name of a Department of Motor Vehicles-registered repair shop that will perform the repairs at the insurer’s offer.” 

In an earlier case, Rizzo v. Merchants & Businessmen’s Mut. Ins. Co., 188 Misc. 2d 180, 727 N.Y.S.2d 250 (N.Y. App. Term 2d Dep’t 2001), the Appellate Term stated that an insured is not automatically entitled to reimbursement for the full amount charged by the repair shop authorized by the insured to make repairs.  The court held that where the parties cannot reach an agreed price, the burden is on the insured to establish the reasonable cost of the repairs necessary to return the vehicle to its pre-loss condition. 

Relying upon Rizzo, the plaintiff in Nadel argued that all disputes involving excess repair costs must be evaluated on a “case-by-case” basis.  The lower court agreed and held that Allstate failed to present proof establishing that the amount it offered was “fair and reasonable” as a matter of law.  Instead of focusing on the insurer’s conduct—and whether Allstate breached the policy or provided a good faith estimate under the regulations—the lower court in Nadel, like many other lower courts in the wake of Rizzo, focused on the amount charged by the insured’s chosen repair shop to determine whether it was “fair and reasonable.”  On appeal, Allstate argued that once an insurer sends an insured a notice of rights letter, and has otherwise complied with its regulatory obligations, the insurer is not financially responsible for excess repair costs over the repair costs stated in its good faith estimate.  Allstate relied upon a series of Opinion letters issued by the Insurance Department following Rizzo.  Allstate argued that the burden was on the insured to establish that the insurer could not have had the vehicle repaired and restored to its pre-loss condition for the cost stated in its estimate, thus failing to make a good faith offer.

The Nadel Court held that in order to establish a prima facie case for summary judgment, Allstate was required to comply with the regulatory mandate by demonstrating that it had undertaken good faith negotiations with plaintiff or his designated representative.  In doing so, Allstate had to establish that a facility “reasonably convenient” to the insured existed, and that such facility would be able to repair the vehicle “to its condition immediately prior to the loss” for the amount of Allstate’s offer.  The court noted that while Allstate was statutorily prohibited from recommending a repair facility if the insured did not request a recommendation, it was not barred from identifying that facility in the litigation.  Notably, the Nadel Court did not mention Rizzo, and implicitly rejected plaintiff’s argument that all disputes must be evaluated on a case-by-case basis.

Nadel has clarified an insurer’s responsibility in the claims stage and provided a road map for defending it in litigation.  If an insurer can identify a DMV-registered facility that would have done the work for the amount stated in its estimate, and establish that such was sufficient to restore the vehicle to its pre-loss condition, it will have satisfied its regulatory obligations and will not be responsible for paying any excess charges.  The insurer must, of course, negotiate in good faith and send out the prescribed notice of rights letter.  But the insured’s burden of proof is higher than simply establishing that its designated repair shop’s charges were fair and reasonable.  If the insurer can establish that it complied with the regulations, it will not be obligated to pay the excess repair costs charged by the insured’s chosen shop – unless the insured can establish that the insurer did not make a “good faith offer,” meaning that it could not have had the vehicle repaired and restored to its pre-loss condition for the cost stated in the insurer’s estimate.

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