20 minute read
An Insurer’s Decision to Total a Car
Recently, it was reported to me that some insurers have become more aggressive in declaring damaged vehicles to be total losses. For collision repair shops, that may mean losing a job sometimes. But for the real party in interest - the vehicle owner - does it really make a difference? After all, the insurer is required to pay the claimant the full actual cash value (ACV) of a totaled vehicle, supposedly putting them in the same position that they had been in prior to their loss.
However, the reality is that a car owner is often not really put back into the same position when an insurer pays for a total loss.
First, once a car has been driven off of the showroom floor, the vehicle immediately decreases in value, no matter how recently it was purchased, and it is usually impossible to find a replacement that is exactly the same as the totaled vehicle. Even when a car has just been purchased, insurers are still likely to pay less than their insured paid for the car, since it is now a used car rather than a new one – or at least, the car is more used than when the insured purchased it.
Second, most car owners are familiar with the quirks of their particular vehicle and know the exact condition that it was in when it sustained damage; however, that can never be the case for the replacement vehicle. Whether or not you have a CARFAX report, you just never know exactly what you are buying, even if it is a new car or a dealer-certified used car.
Third, when someone buys a car, they usually finance it. When a loss occurs two years later, the amount of the outstanding car loan often exceeds what the insurer will pay out as the current ACV of the totaled vehicle. What is the insured supposed to do? Not only do they no longer have the car that they bought, they now are put in a position where they are looking for a replacement car, but they also still owe a balance to the finance company for the totaled car.
Does an insured have the right to challenge an insurer’s decision to total their car? Well, maybe, or maybe not, depending on the circumstances.
Some Background
Historically, Massachusetts insurers and the Division of Insurance (DOI) have taken the position that an insurer has the sole and exclusive right to make a determination of whether to declare a damaged vehicle a total loss. In fact, the standard Massachusetts private passenger auto insurance policy says, in regard to first party collision and comprehensive losses: “We will, at our option, repair the auto, repair or replace any of its parts, or declare the auto a total loss.” [emphasis added] Notably, another section of the policy also says: “If we pay for the total loss of your auto, we have the right, if we so choose, to take title to that auto.” [emphasis added]
Despite these statements in the insurance policy, it is not really true that an insurer always has absolute discretion as to whether to declare a vehicle to be a total loss, for a number of reasons:
First, the policy language does not apply to third-party property damage claims. For third-party claims, a claimant can always dispute a determination by the responsible party’s insurer that a car has been totaled. Further, even if an insurer does declare a vehicle to be a total loss on a third-party claim, the claimant may have a broader claim for damages, since what the claimant is entitled to be paid is not limited by the insurance contract. Rather, a third-party claimant is entitled to collect all reasonably foreseeable damages that result from the negligent actions of the person who caused the loss. In such a case, it may not be beyond the realm of possibilities to be able to collect damages beyond the ACV of the damaged vehicle – perhaps loss of use damages, perhaps additional costs related to buying a replacement vehicle while still needing to pay off an existing car loan, or perhaps other damages that the claimant can legitimately establish have been caused by their car being damaged. None of this is guaranteed, but it is at least a possibility on a third-party claim. Notably, on a third-party claim, the insurer never has the right to take title to a totaled vehicle, unless the claimant agrees. But if the claimant retains title, the salvage value of the vehicle must be considered in determining the value of the claimant’s loss.
Second, despite what the insurance policy says, there are legal standards that an insurer is required to meet in order to be able to declare a vehicle to be a total loss.
One major standard is set out in the Auto Damage Appraiser Licensing Board (ADALB) regulations at 212 CMR 2.04(1)(f): “Whenever the appraised cost of repair plus the estimated salvage may be reasonably expected to exceed the actual cash value of a vehicle, the insurer may deem that vehicle a total loss. No 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. A total loss shall not be determined by the use of any percentage formula.”
In other words, an insurer’s appraiser legally cannot arbitrarily declare a vehicle to be a total loss. They must determine that the cost of repair plus salvage value is likely to be more than the ACV of the damaged vehicle prior to the loss. Additionally, the insurer cannot legally declare a vehicle to be a total loss, unless a licensed appraiser has inspected the vehicle and determined that it meets the standard for a total loss as set out in the regulation.
Another major standard related to total losses is contained in DOI regulations that set out standards that insurers are required to use when determining repairs needed for damaged vehicles. In particular, under those regulations at 211 CMR 133.05, if a vehicle is likely to be a total loss, then the insurer in all cases MUST make a detailed analysis of the ACV and also must determine the salvage value of the vehicle. In determining ACV, the insurer is
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[LEGAL] PERSPECTIVE
continued from pg. 34
required to consider ALL of the following for the vehicle in its pre-loss condition: (1) the retail book value of the vehicle; (2) the price paid for the vehicle, plus the value of improvements made, less any applicable depreciation, (3) any decrease in value resulting from prior damage and (4) the actual cost of an available vehicle of like kind and quality. In determining salvage value, the insurer is required to prepare and file a total loss report with the DOI and show how it came to the conclusion that the car has been totaled.
Under the same regulation, if the claimant retains title to the vehicle, then the insurer’s appraiser is required to obtain bids from two geographically convenient licensed salvage companies, using the average of the two in making its determination of salvage value. (It is not clear why the regulation does not require this if the insurer takes title.) Additionally, “The appraiser shall provide to the claimant the names and addresses of the potential salvage buyers, the amount of each salvage estimate used by the appraiser in computing the salvage value and the expiration dates of offers, if any, made by potential salvage buyers.”
Another standard that Massachusetts insurers must follow is contained within the Performance Standards of Commonwealth Automobile Insurers (CAR), the insurance industry agency tasked with administering the state’s assigned pool of high risk drivers; however, their standards apply to all claims for all drivers. If insurers do not comply with the Performance Standards, they are subject to penalties assessed by CAR. The standards require that insurers “shall not declare any motor vehicle a total loss when a prudent appraisal evaluation would have shown that the motor vehicle could have been repaired at an overall cost less than the actual cash value minus the salvage value.” The standards then go on to mandate that insurers follow all of the requirements of the ADALB and DOI regulations cited above.
So, how can a claimant challenge an insurer’s decision to total a vehicle?
There is never any guarantee of success, but note the following when deciding whether to challenge an insurer’s total loss decision: (1) Choose your battles. If a car is damaged beyond repair, be realistic about the chances of success. A challenge should be made only when a vehicle truly may be repaired for less than the ACV of the car minus salvage value. What does the repairer say? Can the car really be properly fixed for less than ACV minus salvage value? Are you willing to perhaps accept LKQ parts rather than new OEM parts? What can the vehicle truly be repaired for? What is the real ACV and salvage value of the car, and how strong is the evidence of these values? (2) Consider whether the repairer and the insurer might be
able to agree upon a “contract repair” and whether such a repair
is going to be acceptable. Under DOI regulations for collision and comprehensive claims, if an insurer is declaring a vehicle to be a total loss, and if the insurer consents, the claimant can enter into an agreement with a registered repair shop to fix the vehicle, provided the insurer allows the claimant to retain the vehicle and the claimant obtains a “salvage title” for the vehicle after repairs are made. NOTE WELL: If the agreement is acceptable, then “the insurer shall not be required under any circumstance to pay more than the actual cash value less the actual salvage…There shall be no supplements paid by the insurer under this agreement. The claimant or the repair shop and not the insurer shall be responsible for any charges that may exceed the agreed contract price. The insurer shall make no payments to the registered repair shop until it receives a completed work claim form and the vehicle has been reinspected by the insurer.” (3) Consider requesting arbitration of the matter. Any time there is a disagreement as to the amount of money that an insurer owes on an auto damage claim, there is a statutory procedure that can be invoked by either the claimant or the insurer within 60 days of the claim being made. Each side chooses an appraiser, and the two chosen appraisers select a third person as an umpire. Each of the two appraisers conducts their own appraisal, and an agreement between either of the two appraisers and the umpire determines what is to be paid. There is no reason that this procedure cannot be used if a claimant is challenging a determination of a total loss. (4) In appropriate circumstances, consider filing a complaint
with the ADALB against the insurer’s appraiser, or with the DOI
or CAR against the insurer. If an appraiser has not followed the requirements of the ADALB regulations, then they have violated the terms of their license and are subject to being penalized by the ADALB. If an insurer violates a DOI regulation or if they violate CAR Performance Standards, then they are subject to being penalized by those agencies. This may not get you what you want in a timely manner, but it may make the appraiser and/or insurer change their ways in the future. (5) If you have a very strong case, consider suing the insurer
for violation of the Massachusetts Consumer Protection Act by
having engaged in unfair claims settlement practices. This avenue may take a lot of time and money, but if you succeed, you may be able to collect three times the amount of your damages, plus all of your legal fees. Again, this is something to consider only in the right circumstances where the insurer’s actions are egregious. But these types of cases tend to send a strong message when they succeed.
Conclusion
On its face, the standard Massachusetts auto policy seems to give an insurer the absolute right to declare any damaged vehicle to be a total loss. But in reality, this is not truly the case. Insurers are required to follow various regulations and standards in order to make a total loss determination. If you disagree that a vehicle should be totaled, make sure that you know what the governing regulations and standards say. And be aware that you actually may be able to challenge an insurer’s total loss decision and that you have avenues to follow to raise that challenge.
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.
PROTECTING CONSUMERS AND THE COLLISION INDUSTRY
MASSACHUSETTS
continued from pg. 29
So, shops can negotiate with appraisers, but some negotiations are obviously more successful than others. What’s the most effective way for shops to negotiate with insurance adjusters?
“Yelling doesn’t work,” stressed the Massachusetts appraiser. “I’ve had shops scream at me, so I’d leave and tell them to call me when they want to have a reasonable conversation. Write estimates fairly and accurately. Be reasonable and credible, and then stand your ground. In a lot of cases, the appraiser will agree with you as long as you explain and document it well.”
“The best weapon a shop has is the recommendation or requirement from I-CAR or the OEM,” according to the West Virginia appraiser, who offered a caveat, “But the shop needs to have supporting documentation and photos to negotiate successfully. Some are extremely aggressive and seem to go out of their way to drive up costs, but I can’t just give them carte blanche to do whatever they want without evidence of why it’s needed.”
The retired Missouri appraiser offered some unique insights.
“The time-honored way to negotiate is all about reasonableness. Bring it up, and discuss it. Why be bashful? I recently took my own vehicle into a shop, and when they told me the insurer wouldn’t pay for something, I questioned them, ‘Did you ask for it?’ They did three months ago. Well, if you need to get paid for it, you may have to fight for it. Adjusters don’t always understand because they’ve never been taught, but shops try to bill a procedure once, get told ‘no’ and never try again. Whose fault is that?
“Have the business decorum to step up and explain that the manufacturer says you need to do this,” he continued. “The adjuster may not believe it, but if you start laying the documentation on the counter, that’s all we can ask – you’re providing what we need to explain to our supervisor. If you don’t provide evidence, we won’t pay for it. If the stream flows downhill, you need to build a solid dam to hold water; it won’t hold anything if it’s not solid. Likewise, the adjuster needs solid documentation to protect themselves and justify their decisions.”
Suggesting that it’s important for shops to know what they’re doing and to stand their ground, the appraiser from New Jersey mentioned several shops in his area that are willing to “stick to their guns.”
“They have no problem telling an appraiser, ‘This is my Labor Rate, so this is the amount you’re going to pay me.’ I’ve watched appraisers take an estimate to their car, call their supervisor and then pay exactly what the shop asked. Insurers only allow one specific adjuster in many of these shops because they don’t want anyone else to know what they’re paying him. These are the guys who document, send pictures and provide a parts invoice when asking for anything. They meticulously repair vehicles the right way, and if a customer wants something done differently, they’ll tell that customer to take it somewhere else.”
“Shops should ensure that the people handling their insurance negotiations understand how the process works,” suggested the Virginia appraiser. “Many people deal with insurance repairs every day and don’t understand the first thing about the claims process, how it works and even who has the authority to do what they’re asking. If an insurer rejects a rate, the shop often takes it as a personal slight against them. It’s not my decision – a lot of insurance companies have set rates, and arguing for a higher rate might be a lost cause unless you talk to someone who has the authority to get you what you want. As appraisers, we’re the middlemen who communicate the insurer’s intent and rules, but we don’t make those rules.”
As the Pennsylvania appraiser already stressed, appraisers don’t always have the authority to negotiate as much as they’d like.
“Shop owners can call the large insurance carriers they work for and ask to talk to the manager, so you can share evidence that their estimates don’t align with your actual costs. If you have a reasonable relationship with the insurer, there may be an opportunity to make a change, but it takes time to contact them and provide that evidence. That’s frustrating for a guy who is just trying to run his shop, but it’s really the way to do it. Shops and insurers should come together to look at some of the challenges and identify possible ways to fix them. Both entities want cars fixed and returned to their clients. Communication and discussion builds relationships which can provide better solutions.”
Negotiations in Massachusetts are often particularly polarizing due to collision shops in the Commonwealth receiving the lowest labor reimbursement rates in the country, despite having one of the highest costs of living. New England Automotive Report asked appraisers one more question:
Do you believe that insurers’ insistence on paying Massachusetts shops a labor reimbursement rate of $40 an hour is sufficient for those shops to maintain a high level of repair?
“That’s really low, so I don’t see how they could,” admitted the West Virginia appraiser.
“That’s terrible! That’s so wrong!” exclaimed the appraiser from Pennsylvania. “I cannot believe they’re able to find competent shops at $40 an hour. My sense is that it’d probably take twice that…and that may still be too low, particularly given the workforce shortage that’s going on.”
The Massachusetts appraiser owned a collision shop in the late ‘80s and shared his remembrances of that time in relation to the question:
“The Labor Rate was $26 an hour then, but that was over 30 years ago. Based on the normal cost of living increases over that time period, the Labor Rate should be $65-70, but it’s only gone up $12 in 35 years. Everything else constantly increases by 12, 15 or 20 percent every year.”
“That’s a much wider-reaching problem in general in the sense that rates, wages and fees aren’t keeping up with inflation,” the Virginia appraiser pointed out. “Shops used to increase their rates regularly, but every extra cent is like trying to pull teeth with the insurance company who constantly battles to keep severity down and judges the appraiser by how much they pay out on each repair order. If your salary doesn’t increase yearly to keep up with inflation, you’re essentially taking a pay cut. Body repair has gotten more difficult, but shops shouldn’t be doing harder work for less money. Vehicles are getting more expensive, and more vehicles end up being total losses. That doesn’t benefit the shop, the insurer or the vehicle owner. It’s becoming impossible to repair any vehicle through the insurance process.”
He also expressed concern with the impact that low Labor Rates have on the ongoing technician shortage:
“If repair capacity falls below a certain threshold, that could fundamentally change what it means to own a car, so if you’re a vehicle owner, the tech shortage is your problem too. Insurers need to pay shops more so they can adequately compensate their technicians, but then it becomes more expensive to buy and insure a car. Where does it end? It’s a feedback loop that’s going to cause massive disruptions in the automotive and collision industries.”
“The quick easy answer is ‘NO’ based on today’s costs and complexity,” the Missouri appraiser hedged. “But the correct answer is a little harder. Why is the rate still that low? Honestly, the collision repair industry could make more progress in the right direction if they learned to work together, not as consolidators but as individual shops. Many shops are afraid to say they need something and have an insurance company get mad at them; they shy away from charging what they should for their business because they’re scared to be rebels. So, they’re at fault too.”
With a firm answer of “absolutely not,” the New Jersey appraiser challenged “anyone to tell me of another industry that works for $40 an hour…you can’t even get your lawnmower fixed for that. That’s ridiculous to charge such a low rate. Shops that buckle aren’t doing any favors for themselves – or for anyone else! If shops would only realize that they have all the power, this would be a completely different industry, but body shops are their own worst enemy.”
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