12 minute read
Is Your Referral Shop Contract Legal?
[COVER] STORY
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legislator out of 200 who is just going to happen to identify our two bills and be like, ‘Gee, these bills are great! They make sense’ […] It’s not going to happen that way; it never happens that way […] What I need to do – and what you need to do – is reach out to the people [with whom] you have a relationship in the Legislature and ask them to co-sponsor both of these bills.” Glodis’ words clearly had an impact. By the end of February, AASP/MA members were responsible for securing an additional 37 sponsors for “An Act Relative to the Licensure of Appraisers” – or anyone else, for that matter – but AASP/MA’s unprecedented (bringing the total to 46 when counting the two lead sponsors activity in the Legislature offers welcome good news and and seven co-sponsors already lined up prior to the February 23 demonstrates that progress is still possible. Glodis is one of many meeting). Similar AASP/MA member outreach greatly benefited who are inspired by what a unified and proactive AASP/MA has “An Act to Establish Minimum Reimbursement Rate to Insurance already accomplished in 2021. Claimants,” with 24 additional sponsors coming on board in only As he told the AASP/MA meeting attendees, “In a lot of three days’ time. Only two sponsors (including the lead sponsors) coalitions and associations that I represent, I tend to find one or had been in place prior to the association’s legislative contact two people who tend to be active. But AASP/MA has a really active campaign. These figures stand as proof that support, enthusiasm Board, and they’re very committed to change and reform within the and action from the AASP/MA community truly makes a difference. industry.” Additionally, several AASP/MA members used the legislator contact For more information on AASP/MA’s bills, please contact campaign to call their representatives for the very first time, thus AASP/MA Executive Director Evangelos “Lucky” Papageorg at 0420NEAR_Kia Group Ad.qxp_Layout 1 3/13/20 10:55 AM Page 1establishing the kind of relationships that are critical in moving bills along. (617) 574-0741, ext. 2 or lucky@aaspma.org. The past year has not been the smoothest ride for the industry The collision repair industry's efforts in this current legislative session are being strengthened by AASP/MA's new lobbyist, Guy Glodis.
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Is Your Referral Shop Contract Legal?
Every collision repair shop must make its own decision as to whether to become a referral shop for an insurer. Many shops in Massachusetts opt not to, but others do choose to participate in insurer referral programs.
In our state, there are actually two separate types of referral shops. The majority fall into the general category envisioned by governing regulations. Under those regulations, an insurer must accept a shop for its referral list if the shop meets certain relatively minimal criteria. A smaller number of shops participate in specialized insurer referral programs in which the insurers limit the number of eligible shops and generally take greater liberties in encouraging their insureds to use those facilities.
For either type of referral repair shop, there is one criterion that is universal: In order to participate in an insurer’s referral program, the shop must sign that insurer’s referral shop contract. If you want to be on an insurer’s regular referral shop list, then the governing regulations require that you enter into an agreement with that insurer. If you want to participate in an insurer’s specialized referral program, and if the insurer wants you, then the insurer will require that you sign its contract applicable to that program.
A requirement of all insurer referral contracts is that the repair shop obey applicable laws. As stated in one such contract, “The referral shop must comply with all Massachusetts [l]aws and [r] egulations pertaining to the appraisal and repair of damaged motor vehicles.” However, there may be a problem with this requirement, since most referral shop contracts contain clauses that appear to require a shop to act in ways that would violate the law. This article explores just a few examples of these clauses.
Requirements that a Shop Make Repairs in Accordance with the Insurer’s Appraisal
The nature of this clause may vary depending on the insurer and whether the contract is for the insurer’s regular referral shop program or its specialized program. But some variation of this requirement is in every referral shop contract that I have seen. For regular referral programs, here is a typical clause: “The referral shop agrees to perform repairs in accordance with the auto damage appraisal prepared by licensed representatives of [Insurer].” For the specialized programs, the clause is often more detailed, allowing for immediate removal from the program if repairs are not made in accordance with the insurer’s appraisal, and/or requiring the shop to make all repairs negotiated in a supplement in all cases and/or requiring the shop to reimburse the insurer for any moneys paid for repairs not listed in the insurer’s original appraisal or supplement. Despite almost universal use, there are significant problems with these clauses.
One major problem is that, according to regulations issued by the Massachusetts Attorney General and the “Direct Payment” regulations issued by the Commissioner of Insurance, a repair
shop’s obligation is to make repairs in accordance with what is authorized by the vehicle owner – NOT what is authorized
by their insurer. No matter what an insurance appraiser writes on their appraisal, and no matter what a repair shop negotiates – including on a supplement – it is solely the vehicle owner who has the choice of what repairs, if any, are to be made to a vehicle.
If an insured decides to make only partial repairs, they are entitled to retain the funds paid by their insurer for repairs not made. If an insured decides to make different repairs (such as asking that claim funds be used to repair old damage) and that certain written repairs not be made or be made in a different manner, then the insured is entitled to direct that the claim payment funds be used for these purposes. If a repair shop fails to follow what its insured customer directs and instead makes repairs in accordance with its referring insurer’s appraisal, then the shop is violating the law and is making itself potentially liable to its customer for punitive damages under the Massachusetts Consumer Protection Act.
Another major problem is that referral shop contracts generally require repairs to be made in accordance with the insurer’s appraisal and also require that repairs be made in accordance with “industry standards.” But what if the insurer’s appraisal does not allow for repairs that meet those standards? What if the insurance appraiser writes for a repair that differs from OEM-recommended procedures? What if the insurance appraisal allows for repairs that are going to cause a potential safety problem? What if the appraisal does not allow for certain procedures needed to restore the vehicle to pre-accident condition? In such cases, the repair shop is placed in an impossible position. The shop cannot possibly make repairs according to the insurer’s appraisal, while at the same time be in accord with industry standards.
Total Loss Vehicles Being Moved without Owner Consent
Particularly in specialized referral shop contracts, there is generally a clause that requires the shop to release a total loss vehicle to the insurer without needing the owner’s or anyone else’s consent. One example of such a clause is: “The Shop shall consider the motor vehicle to be released and cleared for pick up once it is determined to be a total loss. With the exception of a police release (if applicable), the Shop shall not require the execution of any additional release by the motor vehicle owner, insurer or tow
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[LEGAL]PERSPECTIVE
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company prior to pick up of the motor vehicle.”
The problem with these clauses is that the Auto Damage Appraiser Licensing Board (ADALB) regulations say that “[n]o motor vehicle may be deemed a total loss unless it has been inspected or appraised by a licensed appraiser nor shall any such
motor vehicle be moved to a holding area without the consent of
the owner.” [Emphasis added.] In other words, it is a violation of the ADALB to allow a totaled vehicle to be moved by an insurer to its holding area unless the vehicle owner has consented.
Appraisals Based on Digital Images or Appraisals Not Being Made at All
Referral shop contracts for insurer specialized programs almost always eliminate the necessity of one of their appraisers actually having to inspect a damaged vehicle in person. Typically, the contracts require the shop to take pictures, upload digital images and electronically submit an appraisal of damage. The insurer will then have an inside appraiser review the documentation and decide on what the authorized cost of repairs will be. Notably, no staff or independent appraiser physically inspects the vehicle, nor do they write their own appraisal. Despite the inclusion of these clauses in the contracts, the ADALB regulations would appear to make them illegal (notwithstanding expedited supplements and possible emergency pandemic related exceptions).
One portion of the regulations requires an insurer to assign a staff or independent appraiser to appraise a vehicle’s damage once a claim for damages is received. The regulation goes on to say that the appraiser “shall personally inspect the damaged motor vehicle and shall rely primarily on that personal inspection in making the appraisal. As part of the inspection, the appraiser shall also photograph each of the damaged areas.” [Emphasis added.] It does not allow the insurance appraiser to rely on photographs to make an appraisal; it requires personal inspection. It then requires the insurance appraiser to take photos of the damage; it does not allow them to rely on photos taken by a shop appraiser.
The regulations then specify at length everything that the appraiser must include in their appraisal, adding that they “shall mail, fax or electronically transmit the completed appraisal within five business days of the assignment, or at the discretion of the repair shop, shall leave a signed copy of field notes, with the completed appraisal to be mailed or faxed within five business days of the assignment. The repair shop may also require a completed appraisal at the time the vehicle is viewed.” In other words, an
insurer’s staff or independent appraiser is required to write their own appraisal and deliver it to a repair shop; they cannot simply rely on the repair shop’s appraisal.
Additionally, an earlier part of the regulations says that “[i]t shall be a conflict of interest for any appraiser employed by a repair shop to accept the assignment of an appraisal from an insurer unless that appraiser’s employment contract prohibits the repair shop from repairing damaged motor vehicles that have been so appraised. In addition, it shall be a conflict of interest for any appraiser who owns or has an interest in a repair shop to have a vehicle repaired at that shop if that appraiser has appraised that vehicle at the request of an insurer.” It appears to me that any shop that writes its own appraisal, uploads it to its referring insurer and then makes repairs based on that appraisal – all as “requested” by its referring insurer through the requirements of a referral contract – is violating this section of the regulations and is putting its appraiser’s license at risk.
Conclusion
Before agreeing to sign on to an insurer’s referral shop program, a repair shop should carefully review that insurer’s contract. Not only is it important to know what the insurer is requiring in terms of Labor Rates, parts prices, storage charges, etc., but it is also important to know whether the contract’s requirements are legal. If they are not, you have been forewarned.
Notably, this article does not address a separate overriding issue: Are insurers’ specialized referral shop programs legal at all under Massachusetts law? Perhaps that will be the subject of another Legal Perspective article.
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Attorney James Castleman is a managing member of Paster, Rice & Castleman, LLC in Quincy, MA. He can be reached at (617) 472-3424 or at jcastleman@prclawoffice.com.
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