Existing law makes certain business practices in insurance unlawful, including, but not limited to, an insurer requiring an auto body repair shop, as a condition of participation in the insurers direct repair program, to pay for the cost of an insureds rental vehicle that is replacing an insured vehicle damaged in an accident, or to pay for the towing charges of the insured with respect to that accident. Existing law also requires any insurer that conducts an auto body repair labor rate survey to determine and set a specified prevailing auto body repair labor rate in a specific geographic area to report the results of that survey to the Department of Insurance, which is required to make the information available upon request.

This bill would require an auto body repair shop participating in an auto body repair labor rate survey to declare specified information, including, among other things, that it meets specified equipment requirements and has proof of insurance, as specified. The bill would require an auto body repair labor rate survey to meet specified standards, including that it randomly surveys the number of shops necessary to obtain responses that achieve a minimum confidence level of 90% and a standard error of no more than 10%, and would provide for 10%. The bill would eliminate a rebuttable presumption that the insurer has attempted, in good faith, to effectuate a fair and equitable labor rate, rate or adjustment of the labor rate component of a written estimate, as specified, if the survey complies with the requirements of the bill. specified regulations. The bill would permit an insurer or auto body repair shop to negotiate a labor rate that is higher or lower than the prevailing auto body repair labor rate.

This bill would clarify its intent to supplement, and not to supersede, Department of Insurance regulations regarding methods for an insurer to conduct an auto body repair labor rate survey. The bill would also clarify that an insurer is not required to conduct an auto body repair labor rate survey, and that an insurer may use other methodologies to determine a prevailing auto body repair labor rate, as specified.

Existing law makes certain business practices in insurance unlawful, including, but not limited to, an insurer requiring an auto body repair shop, as a condition of participation in the insurers direct repair program, to pay for the cost of an insureds rental vehicle that is replacing an insured vehicle damaged in an accident, or to pay for the towing charges of the insured with respect to that accident. Existing law also requires any insurer that conducts an auto body repair labor rate survey to determine and set a specified prevailing auto body repair labor rate in a specific geographic area to report the results of that survey to the Department of Insurance, which is required to make the information available upon request.

This bill would delete the above-described provisions regarding an auto body repair labor rate survey and instead would require an insurer that conducts or uses a survey that establishes a prevailing auto body repair labor rate in a specific geographic area to report the results of the survey to the department at least every 12 months and would require an auto body repair shop participating in the an auto body repair labor rate survey to declare specified information, including, among other things, that it meets specified equipment requirements and has proof of insurance, as specified. The bill would require an auto body repair labor rate survey to meet specified standards, including surveying a minimum of 30 auto body repair shops or 30% of auto body repair shops, whichever is greater, in a geographical area, as defined. The bill would require the survey to ask specified questions, including what is the regular hourly rate an auto body repair shop charges for repair work, as specified. that it randomly surveys the number of shops necessary to obtain responses that achieve a minimum confidence level of 90% and a standard error of no more than 10%, and would provide for a rebuttable presumption that the insurer has attempted, in good faith, to effectuate a fair and equitable labor rate, as specified, if the survey complies with the requirements of the bill. The bill would permit an insurer or auto body repair shop to negotiate a labor rate that is higher or lower than the prevailing auto body repair labor rate, and permit an insurer to adjust the labor rate in a written estimate provided by a claimants chosen repair shop if specified criteria are met. rate.

This bill would also clarify its intent to supplement, and not to supersede, Department of Insurance regulations regarding methods for an insurer to conduct an auto body repair labor rate survey. The bill would also clarify that an insurer is not required to conduct an auto body repair labor rate survey, and that an insurer may use other methodologies to determine a prevailing auto body repair labor rate, as specified.

Existing law makes certain business practices in insurance unlawful, including, but not limited to, an insurer requiring an auto body repair shop, as a condition of participation in the insurers direct repair program, to pay for the cost of an insureds rental vehicle that is replacing an insured vehicle damaged in an accident, or to pay for the towing charges of the insured with respect to that accident. Existing law also requires any insurer that conducts an auto body repair labor rate survey to determine and set a specified prevailing auto body repair labor rate in a specific geographic area to report the results of that survey to the Department of Insurance, which is required to make the information available upon request.

This bill would delete the above-described provisions regarding an auto body repair labor rate survey and instead would require an insurer that conducts or uses a survey that establishes a prevailing auto body repair labor rate in a specific geographic area to report the results of the survey to the department at least every 12 months and would require an auto body repair shop participating in the survey to declare specified information, including, among other things, that it meets specified equipment requirements and has proof of insurance, as specified. The bill would require an auto body repair labor rate survey to meet specified standards, including surveying a minimum of 30 auto body repair shops or 30% of auto body repair shops, whichever is greater, in a geographical area, as defined. The bill would require the survey to ask specified questions, including what is the regular hourly rate an auto body repair shop charges for repair work, as specified. The bill would permit an insurer or auto body repair shop to negotiate a labor rate that is higher or lower than the prevailing auto body repair labor rate, and permit an insurer to adjust the labor rate in a written estimate provided by a claimants chosen repair shop if specified criteria are met.

This bill would also clarify its intent to supplement, and not to supersede, Department of Insurance regulations regarding methods for an insurer to conduct an auto body repair labor rate survey.

 THIRD READING  

Bill No: AB 2276

Author:

:

Vote:

SENATE INSURANCE COMMITTEE: 9-1, 6/27/18

AYES: Glazer, Gaines, Galgiani, Hernandez, Hertzberg, Lara, Mitchell, Morrell, Portantino

NOES: Hueso

NO VOTE RECORDED: Berryhill, Moorlach, Roth

SENATE APPROPRIATIONS COMMITTEE: 6-0, 8/16/18

AYES: Portantino, Beall, Bradford, Hill, Nielsen, Wiener

NO VOTE RECORDED: Bates

ASSEMBLY FLOOR: 75-0, 5/31/18 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill creates a statutory methodology for insurers to use in surveying auto body repair shops to determine the prevailing auto body repair labor rate in a particular geographic area, as specified.

ANALYSIS:

Existing law:

1. Prohibits an insurer from requiring that an automobile from being repaired at a specific auto repair dealer, as specified.
2. Prohibits an insurer from suggesting or recommending that an automobile be repaired at a specific auto repair dealer unless the referral is expressly requested by the claimant, or the claimant has been informed in writing of their right to select the auto repair dealer.
3. Provides that an insurer may provide the claimant with specific truthful and non-deceptive information regarding the services and benefits available to the claimant during the claims process, as specified.
4. Requires the insurer restore the vehicle to its condition prior to the loss at no extra cost to the claimant, subject to policy limits, if the claimant accepts the insurer’s recommended auto repair dealer.
5. Requires the insurer to provide a specified notice to the claimant in writing within five days of the claimant’s acceptance of the insurer’s recommendation of auto repair dealer.
6. Provides that after a claimant has selected an auto repair dealer, the insurer may not suggest or recommend that the claimant select a different auto repair dealer, as specified.
7. Provides that if a claimant chooses a repair shop of his or her choice, the insurer may not limit or discount the reasonable repair costs based on charges that would have been incurred if the vehicle had been repaired in the insurer’s chosen shop.
8. Specifies that these rights apply to both first party and third party claimants under an auto insurance policy.
9. Establishes the Unfair Practices Act, including not attempting in good faith to effectuate prompt, fair and equitable settlements of claims or attempting to settle a claim for less than the amount to which a reasonable person would have believed he or she was entitled.
10. Provides that if an insurer conducts an auto body labor rate survey (labor rate survey) to determine and set a specified prevailing auto body rate in a specific geographic area it must report the results of the survey to the California Department of Insurance (CDI), including the names and addresses and the total number of the shops surveyed, and that the CDI shall make the information available upon request.

Existing regulations:

1. Establishes a standardized labor rate survey insurers may use as a basis to settle or pay automobile repair insurance claims in a fair and equitable manner. (Section 2695.81 of Title 10, California Code of Regulations)
2. Provides that a survey that complies with the survey method described in the regulations is entitled to a rebuttable presumption that the insurer has attempted in good faith to effectuate a fair and equitable claim settlement.

This bill:

1. Contains findings and declarations to the effect that the bill is intended to complement existing CDI regulations by creating another method for an insurer to conduct a labor rate survey.
2. Repeals but reenacts with more detail the requirements governing insurers' duty to file labor rate survey data with the CDI.
3. Specifies that that there is no rebuttable presumption that an insurer has attempted, in good faith, to effectuate a fair and equitable labor rate if its labor rate survey complies with the standards and requirements of the bill or the existing regulations.
4. Specifies that an auto body repair labor rate shall be calculated as the labor rate at or below which a simple majority of the surveyed auto body repair shops charge in a specific geographic area, as defined, must be statistically valid, and reasonably consider market conditions in a specific geographic area.
5. Creates specified standards auto body repair shops must meet to be included in an insurer’s labor rate survey including the body shops surveyed meet certain standards and equipment requirements as required by the Bureau of Automotive Repair, and other requirements, as specified.
6. Establishes the geographic boundaries in a labor rate survey as the boundaries of local workforce development areas (LWDA) established by the Employment Development Department (EDD), but specifies it shall not be larger than a county for this purpose.
7. Requires a labor rate survey conducted pursuant to this bill to randomly survey the number of auto body repair shops in a geographic area necessary to obtain the number of qualified responses required to achieve a minimum confidence level of 90 % and standard error of no more than 10%.
8. Authorizes the Insurance Commissioner to ensure the methodology used by an insurer’s labor rate survey is statistically valid and achieves randomness in the selection of body shops surveyed.
9. Specifies the questions and sub-questions that may be included in a labor rate survey, and prohibits the inclusion of labor rates that includes a discounted rate negotiated or contracted for with members of an insurer’s direct repair program or any other direct repair program, as specified.
10. Includes questions for the specific labor rate for auto body/sheet metal labor, structural labor, frame labor, mechanical labor, and refinish labor.
11. Requires the survey response to include the name of the person who answered the survey, title, name of the shop, and the date.
12. Provides that specialty rates shall be handled on an individual basis.
13. Provides that an insurer is not required to include a survey response from an auto body repair shop that exceeds the shop’s posted labor rate for the work performed if it has evidence to substantiate the rate, that an insurer may request additional reasonable information to substantiate survey responses, and if a shop is not included the insurer must provide an explanation for why it was excluded.
14. Provides that an insurer may pay a rate lower than the prevailing rate if the auto body repair shop chosen by a claimant charges a lower rate.
15. Specifies that an insurer or an auto body repair shop may negotiate a higher or lower rate, and that the prevailing labor rate shall not be presumed to be the maximum or minimum that shall be paid to settle a specific claim.
16. Allows an insurer to maintain an open, rolling labor rate survey process consistent with the requirements of this bill, but requires survey information to be verified every 12 months, and if not verified the information must not be included in the calculation of the prevailing labor rate, as specified.
17. Provides that no insurer is required to conduct or use a labor rate survey, and nothing precludes an insurer from determining the prevailing labor rate using methods other than as authorized by this bill, or in current regulations, that reasonably consider market conditions, as defined, in a specific geographic area.
18. Grants the CDI authority to examine whether an insurer’s labor rate survey conducted by the method described in this bill or by such other methods the insurer may choose constitutes a good faith and prompt, fair and equitable settlement offer and is consistent with the insurer’s contractual obligation to its policyholders.

Background

Labor rate surveys are only one of many permitted ways for insurers to develop auto repair estimates and to pay claims. Many insurers develop repair estimates using other methods, such as previous interaction with a particular body shop. Nothing in this bill requires an insurer to use a labor rate survey or precludes them from continuing with their present systems to determine a fair rate. AB 2276 attempts to resolve a more than 15 year battle involving the details of labor rate surveys between auto body repair shops and insurers regarding what constitutes a “reasonable rate” for auto body repairs when using a labor rate survey to determine the prevailing wage in a geographic area.

Labor rate surveys for auto body repair shops were expressly allowed by legislation in 2000 to ensure that body shops that were not part of an insurer’s direct repair program were fairly paid. The statute states that insurers may conduct labor rate surveys to determine prevailing rates in a geographic region, and simply requires the insurer to provide the information to the CDI, which could then make the information public upon request. It did not specify how an insurer should conduct such a survey, or require prior CDI approval. Many insurers now operate direct repair programs (DRP) and attempt to persuade their customers and third party claimants to take their damaged vehicles to these auto body shops with whom the insurer has a contractual relationship—and usually discounted labor rates. Insurers have also sought to use these discounted labor rates in their labor rate surveys, leading to significant complaints by non-DRP auto body repair shops who complain that including DRP rates unfairly lowers the rates paid to shops that have not directly negotiated with the insurer for lower rates. According to complaints from body shops, some insurers treat the survey rate as the maximum they will pay for any work, even in cases of specialized repairs or repairs in a very high cost area where overhead and labor costs are out of the control of the auto body repair shop.

Some insurers have conducted labor rate surveys for years. According to CDI, many surveys submitted and used by insurers to pay claims produce inconsistent, inaccurate, and unreliable results, creating confusion when insurers seek to support their payments of automobile repair insurance claims or the adjustment of the body shop estimate as reasonable within the meaning of Fair Claims Settlement Practices regulations after a claimant or auto body shop complains. CDI reports it has received hundreds of complaints from consumers and auto body repair shops, alleging specific instances where consumers were forced to pay out of pocket costs, or shops were deprived of their reasonably charged rates due to outdated and unreliable surveys. For example, some insurers’ labor rate surveys relied on artificially large geographic areas or outdated survey data that did not reflect the current market rate.

The CDI has attempted to regulate labor rate surveys for more than 15 years, but in 2006 the Office of Administrative Law rejected CDI’s first proposed regulations. CDI then worked for more than 5 years on new regulations to set rules for labor rate surveys. The final regulation took effect in March of 2017. It sets out a very detailed method for conducting a labor rate survey that, if followed, grants the insurer a rebuttable presumption that they are paying a fair and reasonable rate. The method prescribed in the regulations is not intended to be mandatory, but after it became final insurers complained that many auto body shops interpreted it as being required of all insurers and started filing unfair payment complaints with CDI if an insurer did not follow the method provided in the regulation.

The language in AB 2276 has some requirements similar to the regulations, including the standards auto body shops need to meet to be included in a survey, the exclusion of DRP rates, currentness requirements, use of a simple majority of surveyed shops to determine the prevailing wage, and use of a standardized survey questionnaire. The geographic boundaries for determining a prevailing labor rate is one of the most contentious issues presented by this bill, however. The author has committed to further narrowing the geographic boundaries for labor rate surveys in Los Angeles and San Diego counties, although such amendments have not yet been adopted. It is important to note that there is no rebuttable presumption for any labor rate survey method, including that contained in AB 2276, and the CDI will retain full authority to ensure that all survey methods produce a fair and reasonable rate for auto body shops.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• Ongoing potential costs to the CDI in the hundreds of thousands of dollars per year to address consumer complaints, to analyze insurer labor rate surveys, and for legal costs associated with labor rate litigation. (Insurance Fund)

SUPPORT: (Verified 8/17/18)

None received

OPPOSITION: (Verified 8/17/18)

California Autobody Association

Consumer Watchdog

ARGUMENTS IN SUPPORT: ---

ARGUMENTS IN OPPOSITION: The California Autobody Association (CAA) opposes AB 2276 because it allows insurers to conduct an “alternative labor rate survey” but eliminates important standards set forth in the CDI regulations that produce consistent, accurate and reliable labor rate results and instead allows insurers to skew the results in a manner that will suppress market rates. Among CAA’s complaints about the bill are: the geographic areas are too large and do not reflect local markets; it does not recognize an auto body shop’s regularly charged rates; it ignores labor rates for more complex modern materials; and it will allow insurers to manipulate the survey and cherry pick the shops that are included in the survey.

ASSEMBLY FLOOR: 75-0, 5/31/18

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Rendon

NO VOTE RECORDED: Gallagher, Muratsuchi, Wood

Prepared by:

8/18/18 14:25:38

**** END ****

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2276 (Burke) - Motor vehicle insurance: auto body repair

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 2276 would create a statutory methodology for insurers to use in surveying auto body repair shops to determine the prevailing auto body repair labor rate in a particular geographic area.

Fiscal Impact:

Ongoing potential costs to the California Department of Insurance (CDI) in the hundreds of thousands of dollars per year to address consumer complaints, to analyze insurer labor rate surveys, and for legal costs associated with labor rate litigation. (Insurance Fund)

Background:

Labor rate surveys are only one of many permitted ways for insurers to develop auto repair estimates and to pay claims. Many insurers develop repair estimates using other methods, such as previous interaction with a particular body shop. Labor rate surveys for auto body repair shops were expressly allowed by legislation in 2000 to ensure that body shops that were not part of an insurer’s direct repair program were fairly paid. The statute states that insurers may conduct labor rate surveys to determine prevailing rates in a geographic region, and simply requires the insurer to provide the information to the CDI, which could then make the information public upon request. It did not specify how an insurer should conduct such a survey, or require prior CDI approval. Many insurers now operate direct repair programs (DRP) and attempt to persuade their customers and third party claimants to take their damaged vehicles to these auto body shops with whom the insurer has a contractual relationship, and usually discounted labor rates.

The CDI has attempted to regulate labor rate surveys for more than 15 years, but in 2006 the Office of Administrative Law rejected CDI’s first proposed regulations. CDI then worked for more than 5 years on new regulations to set rules for labor rate surveys, and the final regulation took effect in March of 2017. It sets out a very detailed method for conducting a labor rate survey that, if followed, grants the insurer a rebuttable presumption that they are paying a fair and reasonable rate. The method prescribed in the regulations is not intended to be mandatory, but after it became final insurers complained that many body shops interpreted it as being required by all insurers and started filing unfair payment complaints with CDI if an insurer did not follow the method provided in the regulation.

Proposed Law:

This bill would repeal and recast requirements governing insurers’ duty to file labor rate survey data with the CDI. Specifically, this bill would:

• Require an insurer that conducts or uses an auto body repair labor rate survey to comply with currentness standards and prohibit that survey from creating a rebuttable presumption by the commissioner that the insurer has attempted, in good faith, to effectuate a fair and equitable labor rate component of a claim settlement or adjustment of the labor rate component of a written estimate provided by a claimant;
• Require a prevailing auto body repair labor rate to be calculated as the labor rate at or below which a simple majority of the surveyed auto body repair shops charge in a specific geographic area;
• Require an auto body repair shop that participates in an auto body repair labor rate survey to declare in its response to the survey whether it meets specified standards;
• Require an auto body repair labor rate survey to cover the boundaries of local workforce development areas established by the Employment Development Department that are in effect on January 1 of the surveyed year, but a geographic area for this purpose shall not be larger than a county;
• Require an auto body repair labor rate survey to randomly survey the number of shops necessary to obtain the number of qualified responses required to achieve a minimum confidence level of 90% and standard error of no more than 10%;
• Require that the auto body repair labor rate survey questions be the only information used to determine the prevailing auto body repair labor rate in a geographic area, as defined;
• Specify what questions and information are required on an auto body repair labor rate survey;
• Specify what is not required of an insurer regarding an auto body labor rate survey;
• Authorize DBO to examine or investigate whether or not the prevailing auto body repair labor rates, as determined by an auto body repair labor rate survey or by other permitted methods effectuate good faith and prompt, fair, and equitable settlement offers and are consistent with an insurer’s contractual obligations to its policyholders.

Related Legislation:

AB 1679 (Burke, 2017) was similar in content to this bill. It died in the Assembly Appropriations Committee.

-- END --

SENATE COMMITTEE ON INSURANCE

Senator Steven Glazer, Chair

2017 - 2018 Regular

Bill No: AB 2276 Hearing Date: June 27, 2018

Subject: Motor vehicle insurance: auto body repair

SUMMARY

Creates a statutory methodology for insurers to use in surveying auto body repair shops to determine the prevailing auto body repair labor rate in a particular geographic area, as specified.

DIGEST

Existing law

1. Prohibits an insurer from requiring that an automobile from being repaired at a specific auto repair dealer, as specified.
2. Prohibits an insurer from suggesting or recommending that an automobile be repaired at a specific auto repair dealer unless the referral is expressly requested by the claimant, or the claimant has been informed in writing of their right to select the auto repair dealer.
3. Provides that an insurer may provide the claimant with specific truthful and non-deceptive information regarding the services and benefits available to the claimant during the claims process, as specified.
4. Requires the insurer restore the vehicle to its condition prior to the loss at no extra cost to the claimant, subject to policy limits, if the claimant accepts the insurer’s recommended auto repair dealer.
5. Requires the insurer to provide a specified notice to the claimant in writing within five days of the claimant’s acceptance of the insurer’s recommendation of auto repair dealer.
6. Provides that after a claimant has selected an auto repair dealer, the insurer may not suggest or recommend that the claimant select a different auto repair dealer, as specified.
7. Provides that if a claimant chooses a repair shop of his or her choice, the insurer may not limit or discount the reasonable repair costs based on charges that would have been incurred if the vehicle had been repaired in the insurer’s chosen shop.
8. Specifies that these rights apply to both first party and third party claimants under an auto insurance policy.
9. Establishes the Unfair Practices Act, including not attempting in good faith to effectuate prompt, fair and equitable settlements of claims or attempting to settle a claim for less than the amount to which a reasonable person would have believed he or she was entitled.
10. Provides that if an insurer conducts an auto body labor rate survey (labor rate survey) to determine and set a specified prevailing auto body rate in a specific geographic area it must report the results of the survey to the California Department of Insurance (CDI), including the names and addresses and the total number of the shops surveyed, and that the CDI shall make the information available upon request.

Regulations

1. Establish a standardized labor rate survey insurers may use as a basis to settle or pay automobile repair insurance claims in a fair and equitable manner. (Section 2695.81 of Title 10, California Code of Regulations)
2. Provide that a survey that complies with the survey method described in the regulations is entitled to a rebuttable presumption that the insurer has attempted in good faith to effectuate a fair and equitable claim settlement.

This bill

1. Contains findings and declarations to the effect that the bill is intended to complement existing CDI regulations by creating another method for an insurer to conduct a labor rate survey.
2. Repeals but reenacts with more detail the requirements governing insurers' duty to file labor rate survey data with the CDI.
3. Creates a rebuttable presumption that an insurer has attempted, in good faith, to effectuate a fair and equitable labor rate if its labor rate survey complies with the standards and requirements of the bill.
4. Specifies that an auto body repair labor rate shall be calculated as the labor rate at or below which a simple majority of the surveyed auto body repair shops charge in a specific geographic area, as defined, must be statistically valid, and reasonably consider market conditions in a specific geographic area.
5. Creates specified standards auto body repair shops must meet to be included in an insurer’s labor rate survey including the body shops surveyed meet certain standards and equipment requirements as required by the Bureau of Automotive repair, and other requirements, as specified.
6. Establishes the geographic boundaries in a labor rate survey as the boundaries of local workforce development areas (LWDA) established by the Employment Development Department (EDD), and states it is the intent of the Legislature to further refine local workforce development boundaries for this purpose.
7. Requires a labor rate survey conducted pursuant to this bill to randomly survey the number of auto body repair shops in a geographic area necessary to obtain the number of qualified responses required to achieve a minimum confidence level of 90 % and standard error of no more than 10%.
8. Authorizes the IC, using existing authorities, to ensure the methodology used by an insurer’s labor rate survey is statistically valid and achieves randomness in the selection of body shops surveyed.
9. Specifies the questions and sub-questions that may be included in a labor rate survey, and prohibits the inclusion of labor rates that includes a discounted rate negotiated or contracted for with members of an insurer’s direct repair program or any other direct repair program, as specified.
10. Includes questions for the specific labor rate for auto body/sheet metal labor, structural labor, frame labor, mechanical labor, and refinish labor.
11. Requires the survey response to include the name of the person who answered the survey, title, name of the shop, and the date.
12. Provides that specialty rates shall be handled on an individual basis.
13. Provides that an insurer is not required to include a survey response from an auto body repair shop that exceeds the shop’s posted labor rate for the work performed, and that an insurer may request additional reasonable information to substantiate survey responses.
14. Provides that an insurer may pay a rate lower than the prevailing rate if the auto body repair shop chosen by a claimant charges a lower rate.
15. Specifies that an insurer or an auto body repair shop may negotiate a higher or lower rate, and that the prevailing labor rate shall not be presumed to be the maximum or minimum that shall be paid to settle a specific claim.
16. Allows an insurer to maintain an open, rolling labor rate survey process consistent with the requirements of this bill, but requires survey information to be verified every 12 months, and if not verified the information must not be included in the calculation of the prevailing labor rate, as specified.
17. Provides that no insurer is required to conduct or use a labor rate survey, and nothing precludes an insurer from determining the prevailing labor rate using methods other than as authorized by this bill, or in current regulations, that reasonably consider market conditions in a specific geographic area.
18. Provides that the CDI may use existing authorities to examine whether such other methods are consistent with an insurer’s contractual obligation to its policyholders.
19. Grants the CDI authority to examine whether an insurer’s labor rate survey conducted by the method described in this bill constitutes a good faith and prompt, fair and equitable settlement offer consistent with its contractual obligation to its policyholders.

COMMENTS

1. Purpose of the bill According to the author, this bill creates an alternative method for an insurance company to conduct a labor rate survey that clearly outlines the rules that must be adhered to when an insurer chooses to do a labor rate survey in the statutorily provided model. In 2016, the CDI issued regulations outlining its preferred labor rate survey method and offered insurers a “rebuttable presumption” or “safe harbor” from complaints if they use it. However, even with the promised protection, the industry largely rejected the option because of concerns that the method departed from recognized market pricing and led to inflated repair costs that would, in turn, drive up auto insurance premiums.
   
2. Background Labor rate surveys are only one of many permitted ways for insurers to develop auto repair estimates and to pay claims. Many insurers develop repair estimates using other methods, such as previous interaction with a particular body shop. Nothing in this bill requires an insurer to use a labor rate survey or precludes them from continuing with their present systems to determine a fair rate. AB 2276 attempts to resolve a more than 15 year battle involving the details of labor rate surveys between auto body repair shops and insurers regarding what constitutes a “reasonable rate” for auto body repairs when using a labor rate survey to determine the prevailing wage in a geographic area.

Labor rate surveys for auto body repair shops were expressly allowed by legislation in 2000 to ensure that body shops that were not part of an insurer’s direct repair program were fairly paid. The statute states that insurers may conduct labor rate surveys to determine prevailing rates in a geographic region, and simply requires the insurer to provide the information to the CDI, which could then make the information public upon request. It did not specify how an insurer should conduct such a survey, or require prior CDI approval. Many insurers now operate direct repair programs (DRP) and attempt to persuade their customers and third party claimants to take their damaged vehicles to these auto body shops with whom the insurer has a contractual relationship—and usually discounted labor rates. Insurers have also sought to use these discounted labor rates in their labor rate surveys, leading to significant complaints by non-DRP auto body repair shops who complain that including DRP rates unfairly lowers the rates paid to shops that have not directly negotiated with the insurer for lower rates. According to complaints from body shops, some insurers treat the survey rate as the maximum they will pay for any work, even in cases of specialized repairs or repairs in a very high cost area where overhead and labor costs are out of the control of the auto body repair shop.

Many insurers have conducted labor rate surveys for years. According to CDI, many surveys submitted and used by insurers to pay claims produce inconsistent, inaccurate, and unreliable results, creating confusion when insurers seek to support their payments of automobile repair insurance claims or the adjustment of the body shop estimate as reasonable within the meaning of Fair Claims Settlement Practices regulations after a claimant or auto body shop complains. CDI reports it has received hundreds of complaints from consumers and auto body repair shops, alleging specific instances where consumers were forced to pay out of pocket costs, or shops were deprived of their reasonably charged rates due to outdated and unreliable surveys. For example, some insurers’ labor rate surveys relied on artificially large geographic areas or outdated survey data that did not reflect the current market rate.

The CDI has attempted to regulate labor rate surveys for more than 15 years, but in 2006 the Office of Administrative Law rejected CDI’s first proposed regulations. CDI then worked for more than 5 years on new regulations to set rules for labor rate surveys, and the final regulation took effect in March of 2017. It sets out a very detailed method for conducting a labor rate survey that, if followed, grants the insurer a rebuttable presumption that they are paying a fair and reasonable rate. The method prescribed in the regulations is not intended to be mandatory, but after it became final insurers complained that many body shops interpreted it as being required by all insurers and started filing unfair payment complaints with CDI if an insurer did not follow the method provided in the regulation.

The bill currently before the committee is the result of months of stakeholder meetings to find a fair and reasonable methodology for labor rate surveys other than the CDI regulations that many insurers find overly complicated and restrictive. The language in AB 2276 has some requirements similar to the regulations, including the standards auto body shops need to meet to be included in a survey, the exclusion of DRP rates, currentness requirements, use of a simple majority of surveyed shops to determine the prevailing wage, and use of a standardized survey questionnaire. Several key issues have been particularly difficult to reconcile among the various stakeholders however, including:

• Size of the geographic region to establish a prevailing wage;
• How to ensure randomness in the survey if not all shops are surveyed in the geographic region;
• Whether any survey method should carry a rebuttable presumption;
• Inclusion of specialized material labor components; and
• Authority granted to the CDI to review, and the standard to apply, to labor rate surveys.

Geographic region

The boundaries for determining a prevailing labor rate is one of the most contentious issues presented by this bill. When the CDI considered the issue as part of its regulatory process, it wound up with a process of geo-coding that is based on the longitude and latitude of the street address of each shop. In determining the rate for that shop, the insurer starts with a core area of 6 responding qualified auto body repair shops, and then moves outward in increments to obtain sufficient shop responses to determine the geographic area based on the core radius from the shop in question. Auto body repair shops like this method, but many insurers claim it allows for gaming by the auto body shops to inflate rates. At least one major California insurer has implemented this method.

Alternative geographic areas that were considered and then rejected by the stakeholder group included utilizing contiguous zip codes or Assembly districts. LWDAs developed by EDD form the basis of the geographic areas now included in the bill, although it expresses legislative intent to further refine these areas. LWDAs were chosen because they at least bear a relation to the economic and employment characteristics of the area. They also present a challenge in this context. Eight counties in northern California are included in one LWDA geographic area, as are Kern, Inyo and Mono counties in central and eastern parts of the state. San Bernardino, the largest county in the state is one LWDA, as are Riverside and San Diego counties. Los Angeles County, even though it is divided into 7 areas, presents one of the biggest obstacles given its population and geographic and economic diversity. Surveys used by many different insurers break LA County into geographic areas ranging from as many as 12 to as few as 3. According to the California New Car Dealers Association (CNCDA), there are more than 1,000 body shops in just one of the LA LWDA regions.

Randomness and statistical validity

The number of auto body shops that must be surveyed, and how they are to be chosen has been another difficult issue to address. Insurers have argued that the geo-coding method in the CDI regulations inflates rates because auto body shops can collude with each other to increase the rates they report or ensure that only the shops with the highest rates respond to the survey. Auto body shops, on the other hand argue that insurers “cherry pick” the shops with the lowest rates to participate in their surveys, and they include shops with whom they have negotiated lower rates to artificially lower the prevailing wage. To achieve a result that does not allow gaming of the results by either side, an effort was made to determine how many shops must be surveyed and how to guarantee they were chosen at random to be a statistically valid reflection of the geographic area’s prevailing wage. The Assembly Appropriations Committee, to address this issue, chose to add the current language in the bill that answers the question by requiring the number of responses from auto body shops to be sufficient to achieve a maximum confidence level of 90% and a standard of error of no more than 10%. This is a standard that apparently was provided and been used by CDI. The insurers believe the standard is too strict, and the California Autobody Association (CAA) and CNCDA believe the standard is too lax.

Rebuttable presumption

CDI, in establishing its recent labor rate survey regulations, included a rebuttable presumption as a way to incentivize insurers to use its preferred method. A rebuttable presumption was added to the methodology created by this bill in previous amendments at the request of CDI to ensure that the regulatory method would have equal standing with this new statutory method. This raises the question—should either method create a rebuttable presumption? Should it be assumed that an individual rate paid is fair and equitable to settle a claim when the method created by the bill states that the prevailing rate established by the labor rate survey “shall not be presumed to be a maximum or minimum that shall be paid to settle a specific claim”? There remains a wide divide between insurers and auto body repair shops on what constitutes a fair and equitable rate. The process spelled out by this bill is not perfect, and in particular the large size and economic variance in some of the geographic areas leaves open the real possibility that in some situations a prevailing rate is not deserving of such a presumption. It had been agreed by the stakeholders early in the process that no method, including the CDI regulations, would carry a rebuttable presumption, but it was also agreed that the methodology of this bill was not intended to supersede or in any way “outrank” the geo-coding methodology of the CDI regulations.

Inclusion of specialized component work labor rates

The labor rate survey required by the CDI regulations includes separate questions for 8 classes of auto body repair labor: the 5 currently included in this bill plus separate questions for aluminum, carbon fiber and fiberglass labor rates. According to CAA, knowing how to repair aluminum properly is no different than knowing how to perform structural steel repairs properly; both require specific training and equipment and because of this they should have separate labor rates. Insurers argue that there is no such thing as a “specialty” material. Some jobs with aluminum involve special training and others do not. It is the nature of the job, not the material that drives the labor rate. New materials can start off as requiring special skills and then, over time, repair of the material becomes commonplace. They note the bill already references the need to negotiate pricing for actual specialty jobs.

CDI authority over labor rate surveys

As noted above, labor rate surveys are not currently described or limited by statute. The only requirement is that results be reported to the CDI. The CDI does have broad authority to ensure that insurers act in good faith and resolve claims in a fair and equitable manner pursuant to the Unfair Practices Act. The most recent amendments to the bill added a new section and language not previously vetted by the stakeholders that affects, in different ways, the CDI’s authority over labor rate surveys. As was discussed, the language expressly allows insurers to use other methods than those spelled out in the bill or in the CDI regulations. It also, however, in section 758.2(b) contains what might be described as a loophole. The language only requires an insurer to “reasonably consider market conditions in a specific geographic area”, and then limits the CDI’s authority to examine that methodology to the contract between the insurer and the policyholder. In subparagraph (c) the CDI may examine whether a labor rate survey conducted pursuant to the methodology spelled out in the bill complies with the Unfair Practices Act. Subparagraph (b) essentially opens the door to any kind of methodology, and the higher standard of scrutiny would make it highly unlikely any insurer would utilize the method spelled out in the bill.

Many insurers simply pay a fair rate, or seek to work out a reasonable rate with the auto body shop. If an insurer seeks to lowball a body shop, the body shop can complain to the department, and the insurer may have to justify the rate paid under the Unfair Practices Act. Again, many insurers do not use surveys, and several larger insurers, including Farmers, Liberty Mutual and GEICO have implemented, or are in the process spelled out in the regulations. All labor rate survey methods should be held to the same fair and equitable test

1. Support A coalition of insurance trade organizations, the California Chamber of Commerce, the Black Chamber of Commerce and others supports AB 2276 because it provides a reasonable alternative approach to CDI’s sole methodology of conducting an auto labor rate survey. Insurers survey auto body shops to establish a reasonable market rate for car repair costs. It is critical for consumers that insurers can ensure these surveys reflect the actual prevailing market rate. When car repair costs go up, consumers’ insurance premiums are likely to increase. Flexibility in conducting such surveys will allow for healthy competition among insurers and for innovation.
2. Opposition The California Autobody Association opposes AB 2276 because it allows insurers to conduct an “alternative labor rate survey” but eliminates important standards set forth in the CDI regulations that produce consistent, accurate and reliable labor rate results and instead allows insurers to skew the results in a manner that will suppress market rates. Among CAA’s complaints about the bill are: the geographic areas are too large and do not reflect local markets; it does not recognize an auto body shop’s regularly charged rates; it creates a loophole allowing insurers to ignore the standards in the bill; it ignores labor rates for more complex modern materials; and it will allow insurers to manipulate the survey and cherry pick the shops that are included in the survey.

Consumer Watchdog sees AB 2276 as part of a 55 year effort by insurance companies to shortchange policyholders by presenting fraudulently low reimbursement rates for repairs so that consumers are forced to pay more out of their own pocket or accept shoddy repairs that endanger them.

1. Questions
2. The bill includes intent language to further refine the LWDA geographic areas established as the basis for geographic area determinations. Some LWDAs contain multiple counties, including the San Francisco Bay Area, northern California and areas of the central valley and Sierras. The simplest place to start is to specify that if a LWDA consists of multiple counties, the labor rate survey geographic will never be larger than a single county. In some cases, however, a labor rate survey in a single county could still produce unfair results because of the broad economic differences and distances involved. For example, San Diego County is one LWDA even though its coastal communities differ significantly from its inland communities as far as income and cost of living. Should the author commit to the committee that she will work with stakeholders to further refine the geographic areas in at least Los Angeles and San Diego counties as a condition of moving forward, and possibly carving out specified cities in other very large counties such as the City of Riverside from the broader Riverside County? (Proposed amendment (a))

1. Should we close the loophole in section 758.2 (b) by requiring that all methodologies for labor rate surveys comply with the Unfair Practices Act? (Proposed amendment (b)
2. Should it be assumed that an individual rate paid is fair and equitable to settle a claim when the method created by the bill states that the prevailing rate established by the labor rate survey “shall not be presumed to be a maximum or minimum that shall be paid to settle a specific claim”? Should the rebuttable presumption be removed from both the regulatory method and the method spelled out in this bill, but make clear that both methods have equal standing? (Proposed amendment (c))
3. Although it requires statistical validity, the bill currently requires the survey to “reasonably consider market conditions in a specific geographic area” without defining “market conditions”. Should this term be spelled out in more detail? (Proposed amendment (d))
4. The bill does not include specific questions for specialty repair labor rates, and instead requires insurers to handle such claims on an individual basis without providing any detail on what must be included. Should elements the insurer must consider be added? (Proposed amendment (h))
   
5. Suggested Amendments
6. On page 5, line 17, add after Department, that are in effect on January 1 of the surveyed year, but in no case shall a geographic area for this purpose be larger than a county. And DELETE: “It is the intent of the Legislature to further refine local workforce development area boundaries.”
7. On page 8, line 32, , after “labor rate” Amend as follows “in a specified geographic area using methods other than the auto body repair labor rate survey methodology authorized by Section 758.1, or other than the methodology in Section 2695.81 of Title 10 of the California Code of Regulations, that effectuates settlement offers that are fair and equitable reasonably consider market conditions in a specific geographic area. The department may use existing authorities to examine whether or not these other methods and that are consistent with an insurer’s contractual obligations to its policyholders.”

On page 9, line 4 after “758.1,” Amend as follows “or by other methods permitted by subdivision (b) of this section effectuate good faith and prompt, fair and equitable settlement offers and that are consistent with an insurer’s contractual obligations to its policyholders.”

1. Remove the rebuttable presumption on Page 4, lines 5-9, and add a clarification if needed that the survey method in new Section 758.1 and the CDI regulations have equal status as valid methods.
2. On page 4, line 18, after “(e), and” Amend as follows “the insurer shall reasonably consider market conditions in a specific geographic area. For purposes of this section, “market conditions” means various local economic factors including, but not limited to, labor costs, rent, land prices, and local laws and regulations.”
3. On page 5, line 14 after “survey” ADD “conducted pursuant to this section”
4. On page 6, lines 4 and 14 after “survey” ADD “conducted pursuant to this section”
5. On page 6, line 38, change “work” to “labor”
6. On page 7, line 6, Amend subsection (g) as follows “Specialty repair rates shall be handled on an individual basis may be negotiated on an individual basis by considering evidence of regularly charged rates, degree of specialty, training, equipment, local market, and other relevant factors.”
7. On page 7, line 10, after “performed” ADD “, provided the insurer has evidence on file showing the auto body shop posted labor rate.”
8. On page 7, line 11, after “survey.” ADD “The insurer shall notify the auto body repair shop when any response is not included in the calculation, including an explanation for the exclusion.”
9. On page 7, line 24 after “consistent with” ADD “the requirements of this”
10. On page 7, line 30, after “auto body repair shop” ADD “or verified by the insurer,”
11. On page 8, line 22, after “section” ADD “, section 758.1,”
    
12. Prior and Related Legislation . AB 1679 (Burke 2017), of the current session, addressed the same subject matter and was held in Assembly Appropriations in 2017.
    

POSITIONS

Support

American Insurance Association

BAPAC

Black Business Association

Black Chamber of Commerce

California Association of Black Pastors

California Black Chamber of Commerce

California Chamber of Commerce

CAPAC

Independent Insurance Agents and Brokers of California

kcbcc

Moreno Valley Black Chamber of Commerce

National Association of Mutual Insurance Companies

Pacific Association of Domestic Insurance Companies

Personal Insurance Federation of California

Property Casualty Insurers

Regional Black Chamber of Commerce

Sacramento Black Chamber

Oppose

California Autobody Association

Consumer Watchdog

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 2276

Author:(Burke)

As Amended Ver:May 25, 2018

Majority vote

SUMMARY: Adopts a statutory methodology that complements existing Department of Insurance (DOI) regulations for insurers to use in surveying auto body repair shops to determine the prevailing auto body repair labor rate in a particular geographic area. Specifically, this bill:

1. Contains findings and declarations to the effect that the bill is intended to complement existing DOI regulations by creating another method for an insurer to conduct an auto body repair labor rate survey.
2. Repeals but reenacts with more detail the requirements governing insurers' duty to file auto body repair labor rate survey data with the DOI.
3. Provides an alternative method from the DOI regulations for insurers to conduct an auto body repair labor rate survey. The elements of the bill's method include:
   1. A statistically credible sample of repair shops in a particular geographic area must be surveyed. DOI retains the ability based on its existing authority to ensure statistical validity in the survey methodology.
   2. Survey results must be filed with the DOI every 12 months, but can be used for an additional 12 months if the appropriate price index is used;
   3. The auto body repair shops included in the survey must meet specified equipment, insurance, and licensing requirements;
   4. The survey must include certain questions as specified in the bill, but may include other questions the insurer wishes to ask;
   5. A provision that the existence of a labor rate survey does not preclude an insurer from negotiating a rate that is either lower or higher than the survey's indicated prevailing rate; and
   6. Use of local workforce development areas as established by the Employment Development Department as the basis for defining the appropriate boundaries of the surveyed geographic area.
4. States the Legislature's intent that further work is needed to refine the geographic boundaries, as specified above.
5. Requires that auto body repair shops' responses to a survey shall contain the name of the person who answered the survey, his or her title, the name of the repair shop, and the date the response was made.
6. Provides that "specialty repair rates" shall be handled on an individual basis.
7. States that the bill does not require an insurer to pay the surveyed prevailing labor rate if the repair shop the consumer has chosen charges a rate lower than the surveyed rate.
8. Provides that the bill does not preclude the parties from negotiating a rate lower or higher than the surveyed prevailing labor rate, and states that the surveyed prevailing labor rate shall not be the minimum nor the maximum rate for any specific claim.
9. Provides that a survey that complies with the bill's requirements creates a rebuttable presumption that the insurer has attempted in good faith to effectuate a fair and equitable labor rate component of a claim settlement.
10. States that DOI may investigate whether the prevailing auto body labor rates, as determined by a survey that complies with the statute, effectuate good faith and prompt, fair, and equitable settlement offers consistent with an insurer's contractual obligations to its policyholders.

EXISTING LAW:

1. Contains an "Unfair Practices Act" that requires insurers to treat both first party and third party insurance claimants fairly.
2. Grants vehicle owners the right to select the repair shop of their choice in the event their vehicle is damaged, and the repairs are covered by an insurer.
3. Provides that, if an insurer conducts a survey of body shops in order to determine an appropriate labor rate to pay to body shops, the insurer must report the results of the survey to the DOI.
4. Provides, in regulations adopted by the DOI, a number of specific rules that govern labor rate surveys and so-called "steering" of claimants to DRP repair shops, including:
   1. A requirement that ALL licensed repair shops in a geographic area be sent a prescribed survey questionnaire;
   2. Limitations on the type of information that can be used to determine what any particular repair shop actually charges its customers;
   3. Provides that survey data is valid for a 12 month period, but allows a longer period subject to specified cost of living upgrades; and
   4. Specifies time periods during which various acts or responsibilities must be completed by insurers.

FISCAL EFFECT: According to the Assembly Appropriations Committee, minor costs to the California Department of Insurance (CDI) to amend internal policies and practices to adapt to the alternative survey methodology and to ensure compliance. It is unclear whether the new methodology will reduce or increase the number of complaints and disputes. If the former, it may streamline the current process of auto body labor rate surveys and have negligible effect on, or eventually reduce, administrative costs. If the latter, it could have significant costs to CDI, potentially in the hundreds of thousands of dollars (Insurance Fund).

COMMENTS:

1. Purpose. According to the author, AB 2276 was introduced to guard against predictable automobile insurance rate increases that are likely to result from the regulations recently adopted by the DOI. The author believes that the DOI regulations are poor public policy, contrary to the interests of automobile insurance ratepayers, and that these issues should be resolved legislatively.
2. Stakeholder process. After AB 1679 (Burke) of 2017 was held in the Assembly Appropriations Committee last year, the author's staff and Appropriations Committee staff convened a series of stakeholder meetings in an effort to work through the issues, and with a goal to achieve a stakeholder agreement. Those discussions continued throughout the Fall and Winter, and have continued this year. While complete agreement among all parties has not been achieved, substantial progress has occurred. For example, the California New Car Dealer Association, which was opposed to AB 1679, has not taken a position on this bill while working on fine-tuning amendments as the bill moves.
3. Auto body repair labor rate surveys. There is no mandate in either current law or the bill that an insurer conduct a labor rate survey to determine a prevailing auto body repair labor rate. In fact, many insurers do not conduct surveys, and the bill expressly acknowledges that it does not preclude insurers from continuing with their present systems. However, surveys have become a tool used by some insurers for two primary reasons: first, it is a way to figure out what a fair price to pay actually is in any given location, and second, it is a way to prove to the DOI that the insurer acted fairly in the event an auto body repair shop complains to the DOI about the insurer's actions. Current statutory regulation of labor rate surveys is minimal – there is a general data filing requirement, but no substantive rules to govern surveys. Nonetheless, the DOI for a number of years has sought to regulate the survey process, and that effort culminated in the adoption of regulations last year that proposed a survey methodology that insurers could rely on. However, most insurers viewed the regulation's method as unacceptable, and sought legislation to adopt alternative methods for surveying. (AB 1679 (Burke) of 2017 and this bill.)
4. Prior Office of Administrative Law (OAL) ruling, and current "safe harbor" approach to labor rate surveys. The current DOI regulation governing labor rate surveys is not couched as a mandate. Instead, the regulation proposes a safe harbor whereby an insurer that complies with the regulation's labor rate survey requirements is entitled to a rebuttable presumption that it "has attempted in good faith to effectuate a fair and equitable: 1) labor rate component of a claim settlement, or 2) adjustment of the labor rate component of a written estimate provided by a claimant." The DOI took this approach for a very good reason – in 2006, OAL rejected the DOI's proposed labor rate regulations that mandated a specific methodology to be used in determining a prevailing labor rate in an area.

Insurers' concerns with the safe harbor approach is that it is common regulatory legerdemain to couch de facto mandates as a safe harbor. This occurs because, having stated what the agency finds acceptable, anything else is functionally unacceptable. Insurers fear that the DOI's labor rate regulation could operate in just this manner. It bears noting, however, that in the past year DOI has, in fact, accepted other methodologies. The problem is that these regulatory decisions are not based on any law the insurers can predictably rely upon, and are subject to changing DOI regulatory discretion. This enforcement uncertainty is one of the reasons that the bill proposes an additional, statutory, survey method. But just like the DOI regulation, the bill does not propose a mandatory methodology. In fact, the bill expressly allows an insurer to use other methods for determining a prevailing auto body repair labor rate that use methods that reasonably consider market conditions in a specific geographic area. Opponents view this provision of the bill as a "loophole." Insurers view it as recognizing that a fair payment to an auto body repair shop can be determined in a variety of ways. For those insurers that do not want the certainty of a law that establishes rules they can confidently comply with, the bill (as well as the DOI regulation) allows other approaches.

1. Geographic areas. The appropriate price to pay for auto body repairs varies from place to place for a variety of legitimate reasons. As a result, determining the fair price to pay to a particular shop for a particular repair requires some evaluation of the local market. Defining that local market has been among the most difficult, and contentious, issues both in the DOI regulations and in discussions on the bill.

The DOI regulation's safe harbor method for determining the proper geographic area has been termed "geo-coding" and it involves, essentially, a unique geographic area for each individual repair shop. By using a software program, a specific number of shops immediately surrounding the repair shop selected by the consumer are surveyed, and that produces the prevailing labor rate. Insurers generally object to this methodology as being unreasonable, and subject to manipulation. It is the primary reason why most insurers have not embraced the regulation's safe harbor.

Auto body shops, on the other hand, object to geographic area definitions that include too much variation in sub-markets. In addition, they have their own concerns about insurer manipulation of geographic areas to force prices down. As a result, there was substantial discussion in the stakeholder process about what geographic boundaries that might be relevant. The primary focus of discussion concerned finding geographic regions that are established by governmental entities for other purposes, and that would prevent insurer manipulation. Not surprisingly, complete consensus was not reached, and the geographic areas specified in the bill currently include a Legislative intent proviso that further refinement may be necessary.

1. Balance billing? According to the California Autobody Association (CAA), the bill would allow insurers too much leeway to determine labor rates, and could result in the insurer paying such a low rate that auto body repair shops would resort to balance-billing of their customers. That is, the repair shop would determine the rate it desired, accept payment from the insurer, and then bill the claimant for the difference between the shop's desired rate and what the insurer paid. There has been no evidence presented at any time to suggest balance billing has occurred or is at risk of occurring. But more fundamentally, balance billing is contrary to the economic interests of body shops. Body shops aggressively advertise for customers on the basis that the law entitles consumers to select the body shop of their choice. It is hard to imagine how a marketing strategy would work if it has the effect of stating "please select us; you have the right; but watch out, we are probably going to bill you for the balance between what the insurer pays us and what we really want to be paid." Of course, the marketing campaign would not say this, but the market would pretty quickly operate to inform consumers that certain shops that threaten to balance bill are to be avoided. Since there is no evidence – even in the past year after this claim was publicly discussed with respect to AB 1679 – that balance billing is a genuine concern, it appears this fear is nothing more than a "Chicken Little" argument.
2. "Steering". AB 2276 does not address the issue of "steering" – which is a term used to describe efforts by insurers to "steer" a consumer away from the repair shop of their choice, and toward a direct repair program (DRP) shop. However, it is difficult to understand the issues posed by the bill without understanding how so-called steering and labor rate survey issues intersect.

There is no dispute that a consumer has the right to select the repair shop of his or her choice. However, that is not an absolute right. For example, if the going labor rate in an area is $95 per hour for the type of repairs necessary to fix the damaged vehicle, and the consumer selects a shop that purports to charge $300 per hour, no one claims that the consumer's right to choose forces the insurer to pay that $300 per hour labor rate. It is the negotiation over the proper price to pay for collision repairs that AB 2276 is attempting to address. And one way to address the "fair labor rate" question is a survey that comports with either the bill's requirements, the DOI regulation's requirements, or some other fair methodology for starting the negotiation.

1. Census vs survey. One element of the survey method proposed by the bill is a requirement that an insurer randomly survey at least 30, or 30% of the, whichever is greater, licensed repair shops in the geographic region. This random sample is designed to obtain a sufficiently statistically significant data base as to produce a reliable prevailing labor rate. The DOI regulation, on the other hand, mandates that the entire population of repair shops be sent the required Standardized Labor Rate Survey. The rationale for this complete census of repair shops, and whether it is necessary or cost-effective, is unclear.
2. Unfair Practices Act. The Unfair Practices Act requires insurers to treat both first and third party claimants in good faith. The Act says nothing about how insurers are to treat service providers that must be hired to carry out their duty to claimants. Thus, the question arises, if an insurer delivers a properly repaired vehicle to the owner of the damaged vehicle, what business is it of the DOI if the insurer drove a hard bargain with the repair shop? It is difficult to see where the DOI has authority to ensure any level of income to repair facilities, yet that appears to be one of the goals of the DOI's regulations. The Legislature, on the other hand, has plenary authority to adopt rules that govern commerce among competing businesses.

Analysis Prepared by: Mark Rakich / INS. / (916) 319-2086 FN: 0003437

Date of Hearing: May 16, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2276

Author:(Burke) – As Introduced Ver:February 13, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill adopts an optional statutory methodology for insurers to use in surveying auto body repair shops to determine the prevailing auto body repair labor rate in a particular geographic area.

FISCAL EFFECT:

Minor costs to the California Department of Insurance (CDI) to amend internal policies and practices to adapt to the alternative survey methodology and to ensure compliance. If the new rate methodology resulted in increased complaints and disputes, costs could potentially be significant, in the hundreds of thousands of dollars in legal and enforcement costs (Insurance Fund).

COMMENTS:

1. Purpose. This bill is intended to provide an alternative, statutory methodology to determine a fair and reasonable prevailing labor rate in a geographic area. This methodology is intended to complement, not replace, a "geocoding" methodology described in 2017 CDI regulations.
2. Background. Current law allows an auto insurance claimant to choose a repair shop, and prohibits insurers from requiring claimants to use a specific shop. However, insurers have an incentive to direct claimants to a repair shop with whom they have a contract, in order to ensure quality workmanship and take advantage of negotiated prices. Similar to negotiated contractual rates in the health insurance industry, insurers contract with repair shops for a negotiated price and volume of repairs through Direct Repair Programs (DRPs).

Under existing law, insurers may recommend shops— including those participating in a DRP— to a claimant, as long as it is clear that the claimant retains the right to choose their repair shop. Disputes sometimes arise between a non-DRP shop and a consumer's insurer about the cost of the repair. Because costs vary throughout the state, CDI's regulations as well as this bill address how labor rate surveys are conducted to ensure a fair rate is determined in a particular area, in absence of a DRP agreement between an insurer and a shop. If an auto body shop complains to CDI that a rate was unfair, an insurer may be required to defend their survey methodology to show the prevailing labor rate that resulted from the survey was indeed fair and reasonable.

1. CDI Regulations. In 2011, Insurance Commissioner Dave Jones determined regulations in this area were necessary to ensure consumers are protected, and undertook an effort to work with stakeholders, including consumer groups, collision repair shops, automobile dealers, and insurers to issue regulations. Specifically, the CDI cited a failure of some insurers to follow basic statistical best practices in conducting labor rate surveys, and numerous complaints from consumers and auto body repair shops. CDI indicates it has conducted an extensive rule-making process that has spanned six years and has offered numerous opportunities for stakeholder engagement. In addition, the department points to a list of concessions and changes made to the regulations to address stakeholder concerns. The department indicates the major industry concern that was not addressed was the use of DRP rates in the standardized surveys, which the department argues would have unilaterally imposed artificially low labor rates on work performed at body shops that have not agreed to take part in the insurer’s DRP. The regulations went into effect on January 1, 2017, with a delayed compliance date of March 12, 2017.
2. Stakeholder discussions. Stakeholders and CDI continue discussions with legislative staff and the bill's author on various outstanding issues, including the geographic areas to be surveyed and how to ensure a survey includes a random sample and is statistically valid.
3. Prior legislation. AB 1679 (Burke), of the current session, addressed the same subject matter and is essentially an earlier version of AB 2276. AB 1679 was referred to the Suspense File of this committee in 2017 and held in January 2018. The current bill, AB 2276, reflects the continuation of discussions started last year with AB 1679 and numerous refinements and compromises made since the final version of that bill.
4. Support. Numerous insurers and business groups, including several black chambers of Commerce, support this bill, noting it is fair, carefully crafted, and will keep premiums lower. They note the state should not limit insurers’ ability to innovate to keep costs down and to enhance the customer’s experience.
5. Opposition. California Autobody Association (CAA), California Conference of Machinists, Consumer Federation of California, and Consumer Watchdog oppose this bill. Auto body shops in particular support CDI's recent regulations and say although this bill is an improvement over last year's effort, it remains fundamentally flawed due to a number of issues including statistical validity of surveys, a lack of recognition of regularly charged rates, the exclusion of questions about rates for specialty materials, and too-large geographic areas.

Analysis Prepared by: Lisa Murawski / APPR. / (916) 319-2081

Date of Hearing: April 18, 2018

ASSEMBLY COMMITTEE ON INSURANCE

Tom Daly, Chair

ABPCA Bill Id:AB 2276 (

Author:Burke) – As Introduced Ver:February 13, 2018

SUBJECT: Motor vehicle insurance: auto body repair

SUMMARY: Adopts a statutory methodology that complements existing Department of Insurance (DOI) regulations for insurers to use in surveying auto body repair shops to determine the prevailing auto body repair labor rate in a particular geographic area. Specifically, this bill:

1. Contains findings and declarations to the effect that the bill is intended to complement existing DOI regulations by creating another method for an insurer to conduct an auto body repair labor rate survey.
2. Repeals but reenacts with more detail the requirements governing insurers’ duty to file auto body repair labor rate survey data with the DOI.
3. Provides an alternative method from the DOI regulations for insurers to conduct an auto body repair labor rate survey. The elements of the bill’s method include:
   1. A random sample of at least 30, or 30% of, whichever is greater, repair shops in a particular geographic area must be surveyed. DOI retains the ability based on its existing authority to ensure randomness in the survey methodology.
   2. Survey results must be filed with the DOI every 12 months, but can be used for an additional 12 months if the appropriate price index is used;
   3. The auto body repair shops included in the survey must meet specified equipment, insurance, and licensing requirements;
   4. The survey must include certain questions as specified in the bill, but may include other questions the insurer wishes to ask;
   5. A provision that the existence of a labor rate survey does not preclude an insurer from negotiating a rate that is either lower or higher than the survey’s indicated prevailing rate; and
   6. A specification of three options to define the relevant geographic area to be surveyed. The three options are:
      1. Assembly district boundaries;
      2. The geographic areas as defined in the DOI regulations; and
      3. Contiguous Zip Codes within boundaries of local workforce development areas as established by the Employment Development Department.
4. Provides that “specialty repair rates” shall be handled on an individual basis.
5. States that the bill does not require an insurer to pay the surveyed prevailing labor rate if the repair shop the consumer has chosen charges a rate lower than the surveyed rate.
6. Provides that the bill does not preclude the parties from negotiating a rate lower or higher than the surveyed prevailing labor rate, and states that the surveyed prevailing labor rate shall not be the minimum nor the maximum rate for any specific claim.

EXISTING LAW:

1. Contains an “Unfair Practices Act” that requires insurers to treat both first party and third party insurance claimants fairly.
2. Grants vehicle owners the right to select the repair shop of their choice in the event their vehicle is damaged, and the repairs are covered by an insurer.
3. Provides that, if an insurer conducts a survey of body shops in order to determine an appropriate labor rate to pay to body shops, the insurer must report the results of the survey to the DOI.
4. Provides, in regulations adopted by the DOI, a number of specific rules that govern labor rate surveys and so-called “steering” of claimants to DRP repair shops, including:
   1. A requirement that ALL licensed repair shops in a geographic area be sent a prescribed survey questionnaire;
   2. Limitations on the type of information that can be used to determine what any particular repair shop actually charges its customers;
   3. Provides that survey data is valid for a 12 month period, but allows a longer period subject to specified cost of living upgrades; and
   4. Specifies time periods during which various acts or responsibilities must be completed by insurers.

FISCAL EFFECT: Undetermined.

COMMENTS:

1. Purpose. According to the author, AB 2276 was introduced to guard against predictable automobile insurance rate increases that are likely to result from the regulations recently adopted by the DOI. The author believes that the DOI regulations are poor public policy, contrary to the interests of automobile insurance ratepayers, and that these issues should be resolved legislatively.
2. Stakeholder process. After AB 1679 (Burke) of 2017 was held in the Assembly Appropriations Committee last year, the author’s staff and Appropriations Committee staff convened a series of stakeholder meetings in an effort to work through the issues, and with a goal to achieve a stakeholder agreement. Those discussions continued throughout the Fall and Winter, and have continued as the hearing on AB 2276 has approached. While complete agreement among all parties has not been achieved, substantial progress has occurred. For example, the California New Car Dealer Association, which was opposed to AB 1679, has not taken a position on AB 2276 while working on fine-tuning amendments as the bill moves. In addition, a number of agreements in principle have been reached through this stakeholder process, and language is still being fine-tuned to effectuate those agreements.
3. Auto body repair labor rate surveys. There is no mandate in either current law or the bill that an insurer conduct a labor rate survey to determine a prevailing auto body repair labor rate. In fact, many insurers do not conduct surveys, and the bill expressly acknowledges that it does not preclude insurers from continuing with their present systems. However, surveys have become a tool used by some insurers for two primary reasons: first, it is a way to figure out what a fair price to pay actually is in any given location, and second, it is a way to prove to the DOI that the insurer acted fairly in the event an auto body repair shop complains to the DOI about the insurer’s actions. Current statutory regulation of labor rate surveys is minimal – there is a general data filing requirement, but no substantive rules to govern surveys. Nonetheless, the DOI for a number of years has sought to regulate the survey process, and that effort culminated in the adoption of regulations last year that proposed a survey methodology that insurers could rely on. However, most insurers viewed the regulation’s method as unacceptable, and sought legislation to adopt alternative methods for surveying. (AB 1679 (Burke) of 2017 and this bill.)
4. Prior Office of Administrative Law (OAL) ruling, and current “safe harbor” approach to labor rate surveys. The current DOI regulation governing labor rate surveys is not couched as a mandate. Instead, the regulation proposes a safe harbor whereby an insurer that complies with the regulation’s labor rate survey requirements is entitled to a rebuttable presumption that it “has attempted in good faith to effectuate a fair and equitable: 1) labor rate component of a claim settlement, or 2) adjustment of the labor rate component of a written estimate provided by a claimant.” The DOI took this approach for a very good reason – in 2006, OAL rejected the DOI’s proposed labor rate regulations that mandated a specific methodology to be used in determining a prevailing labor rate in an area.
   
   Insurers’ concerns with the safe harbor approach is that it is common regulatory legerdemain to couch de facto mandates as a safe harbor. This occurs because, having stated what the agency finds acceptable, anything else is functionally unacceptable. Insurers fear that the DOI’s labor rate regulation could operate in just this manner. It bears noting, however, that in the past year DOI has, in fact, accepted other methodologies. The problem is that these regulatory decisions are not based on any law the insurers can predictably rely upon, and are subject to changing DOI regulatory discretion. This enforcement uncertainty is one of the reasons that the bill proposes an additional, statutory, survey method. But just like the DOI regulation, the bill does not propose a mandatory methodology. In fact, the bill expressly allows an insurer to use other methods for determining a prevailing auto body repair labor rate that use methods that reasonably consider market conditions in a specific geographic area. Opponents view this provision of the bill as a “loophole.” Insurers view it as recognizing that a fair payment to an auto body repair shop can be determined in a variety of ways. For those insurers that do not want the certainty of a law that establishes rules they can confidently comply with, the bill (as well as the DOI regulation) allows other approaches.
5. Geographic areas. The appropriate price to pay for auto body repairs varies from place to place for a variety of legitimate reasons. As a result, determining the fair price to pay to a particular shop for a particular repair requires some evaluation of the local market. Defining that local market has been among the most difficult, and contentious, issues both in the DOI regulations and in discussions on the bill.
   
   The DOI regulation’s safe harbor method for determining the proper geographic area has been termed “geo-coding” and it involves, essentially, a unique geographic area for each individual repair shop. By using a software program, a specific number of shops immediately surrounding the repair shop selected by the consumer are surveyed, and that produces the prevailing labor rate. Insurers generally object to this methodology as being unreasonable, and subject to manipulation. It is the primary reason why most insurers have not embraced the regulation’s safe harbor.
   
   Auto body shops, on the other hand, object to geographic area definitions that include too much variation in sub-markets. In addition, they have their own concerns about insurer manipulation of geographic areas to force prices down. As a result, there was substantial discussion in the stakeholder process about what geographic boundaries that might be relevant. The primary focus of discussion concerned finding geographic regions that are established by governmental entities for other purposes, and that would prevent insurer manipulation. Not surprisingly, complete consensus was not reached. Repair shops complained that most of these boundary ideas generated geographic areas that were too large, and asked for boundaries that insurers argued were too small or otherwise unmanageable.
   
   With respect to size of geographic areas, the 80 Assembly district option in the bill compares favorably from a repair shop perspective to many of the surveys actually accepted by DOI, where the number of geographic areas used by insurers typically ranges from the high 20’s to the high 30’s.
6. Balance billing? According to the California Autobody Association (CAA), the bill would allow insurers too much leeway to determine labor rates, and could result in the insurer paying such a low rate that auto body repair shops would resort to balance-billing of their customers. That is, the repair shop would determine the rate it desired, accept payment from the insurer, and then bill the claimant for the difference between the shop’s desired rate and what the insurer paid. There has been no evidence presented at any time to suggest balance billing has occurred or is at risk of occurring. But more fundamentally, balance billing is contrary to the economic interests of body shops. Body shops aggressively advertise for customers on the basis that the law entitles consumers to select the body shop of their choice. It is hard to imagine how a marketing strategy would work if it has the effect of stating “please select us; you have the right; but watch out, we are probably going to bill you for the balance between what the insurer pays us and what we really want to be paid.” Of course, the marketing campaign would not say this, but the market would pretty quickly operate to inform consumers that certain shops that threaten to balance bill are to be avoided. Since there is no evidence – even in the past year after this claim was publicly discussed with respect to AB 1679 – that balance billing is a genuine concern, it appears this fear is nothing more than a “Chicken Little” argument.
7. “Steering”. AB 2276 does not address the issue of “steering” – which is a term used to describe efforts by insurers to “steer” a consumer away from the repair shop of their choice, and toward a direct repair program (DRP) shop. However, it is difficult to understand the issues posed by the bill without understanding how so-called steering and labor rate survey issues intersect.
   
   There is no dispute that a consumer has the right to select the repair shop of his or her choice. However, that is not an absolute right. For example, if the going labor rate in an area is $95 per hour for the type of repairs necessary to fix the damaged vehicle, and the consumer selects a shop that purports to charge $300 per hour, no one claims that the consumer’s right to choose forces the insurer to pay that $300 per hour labor rate. Just as a consumer has the right to select a shop, a shop has the right to decline business if it insists on standing on its $300 labor rate. If the price that the insurer payor is willing to pay for the repair is too low, “balance billing” is not the only option – declining the business is an option as well. It is the negotiation over the proper price to pay for collision repairs that AB 2276 is attempting to address. And one way to address the “fair labor rate” question is a survey that comports with either the bill’s requirements, the DOI regulation’s requirements, or some other fair methodology for starting the negotiation.
8. DOI labor rate regulations will INCREASE automobile insurance premiums. It is difficult to read the DOI’s labor rate regulation and not come away with the conclusion that it will inevitably raise the price for automobile body repairs paid by insurers, thereby increasing insurance rates as these increased costs are passed on to policyholders. At best, this is an unintended consequence. A number of small business, ethnic chambers of commerce, and community organizations have expressed support for the bill for this very reason, and it is one of the author’s expressed concerns that have caused her to pursue the legislation.
   
   In virtually any insurance context one can imagine, public policy suggests that insurers make every effort to control costs in order to keep premiums as low as possible. For example, it is difficult to imagine health insurance regulators making it difficult for health insurers to negotiate the best prices possible with doctors, hospitals, pharmacies, medical device manufacturers, and other providers of necessary services. Yet the labor rate regulations operate functionally to enhance the ability of repair shops to charge, and be paid, higher rates. Some specific examples of this upward price pressure caused by the regulations include:
   1. The regulation mandates that THE ONLY data an insurer may use in determining a prevailing labor rate are “direct responses provided by an auto repair shop on a survey questionnaire.” (Title 10, California Code of Regulations, Section 2695.81, subdivision (d), paragraph (7).) Consider the analogy of hospital billing. It has been established that the actual prices charged by hospitals to a range of different classes of payors varies widely, and the quoted or “rack-rates” that hospitals publish bear no resemblance to the prices actually paid. Yet the automobile body repair regulations actually mandate that the analogous auto body “rack rate” be used.
   2. An insurer’s labor rate survey can only use data submitted by repair shops that have responded to a survey – and there is no requirement that a repair shop respond. In addition, the insurer must use the responses of all of the shops that do respond. (Title 10, California Code of Regulations, Section 2695.81, subdivision (d), paragraphs (2) and (3).) A natural upward pressure on the calculated prevailing rate will occur as the lower price repair shops realize, which they certainly will, that by simply declining to respond to the survey, the remaining data will result in a prevailing labor rate that is higher than their current price, and which the insurer will now have to pay to all repair shops, in order to obtain the benefit of the regulation’s safe harbor.

This upward pressure on rates is not merely theoretical. One major market share insurer conducted a labor rate survey in the past year using the criteria outlined in the regulation’s safe harbor. That survey was filed with the DOI, and available for review by the public. According to another major market share insurer, the results of the regulation-compliant survey would increase its vehicle repair costs by 30%. One of the primary purposes of the bill is to provide a methodology that an insurer can reliably comply with that does not have this rate inflationary tendency.

1. Repair shops support the DOI labor rate survey requirements. Not surprisingly, repair shops argue that the DOI regulation’s labor rate survey’s restrictions are appropriate. They also criticize the alternative proposed by the bill. Specifically, some repair shops argue that DOI’s efforts are combatting insurers’ abusive use of labor rate surveys. Other repair shops are less critical, but point out that the bill may allow inappropriate geographic areas to be treated the same – such as where there is a substantial urban center in a geographic region, yet there are also substantial and very different rural communities significant distances away. The same labor rate should not apply in these functionally different geographic areas, but opponents claim they would be authorized by the bill. These repair shops argue that local wage laws and other cost-of-living factors should be part of any determination of the appropriate regional labor rate.
2. Census vs survey. One element of the survey method proposed by the bill is a requirement that an insurer randomly survey at least 30, or 30% of the, whichever is greater, licensed repair shops in the geographic region. This random sample is designed to obtain a sufficiently statistically significant data base as to produce a reliable prevailing labor rate. The DOI regulation, on the other hand, mandates that the entire population of repair shops be sent the required Standardized Labor Rate Survey. The rationale for this complete census of repair shops, and whether it is necessary or cost-effective, is unclear.
3. Unfair Practices Act. The Unfair Practices Act requires insurers to treat both first and third party claimants in good faith. The Act says nothing about how insurers are to treat service providers that must be hired to carry out their duty to claimants. Thus, the question arises, if an insurer delivers a properly repaired vehicle to the owner of the damaged vehicle, what business is it of the DOI if the insurer drove a hard bargain with the repair shop? It is difficult to see where the DOI has authority to ensure any level of income to repair facilities, yet that appears to be one of the goals of the DOI’s regulations. The Legislature, on the other hand, has plenary authority to adopt rules that govern commerce among competing businesses.

REGISTERED SUPPORT / OPPOSITION:

Support

Personal Insurance Federation of California

Property Casualty Insurers

American Insurance Association

BAPAC

Black Business Association

Black Chamber of Commerce

California Association of Black Pastors

California Chamber of Commerce

CAPAC

kcbcc

Moreno Valley Black Chamber of Commerce

National Association of Mutual Insurance Companies

Pacific Association of Domestic Insurance Companies

Regional Black Chamber of Commerce

Sacramento Black Chamber

The California Black Chamber of Commerce

Opposition

California Autobody Association (CAA)

California Conference of Machinists

Consumer Federation of California

Consumer Watchdog

Analysis Prepared by: Mark Rakich / INS. / (916) 319-2086