Weekly Law Resume - May 31, 2012: Automobile Insurance Coverage – Tiered Coverage

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Eric E. Ortega v. Topa Insurance Company, et al.
Court of Appeal, Third District (May 24, 2012)

With regard to automobile accident repairs, Insurance Code Section 758.5 allows an insurance carrier to “suggest or recommend” a specific repair facility under certain situations. This case considered whether a carrier’s use of a “Preferred Repair Facility” (PRF) met the section’s disclosure requirements.

Plaintiff Eric Ortega had a restricted policy of automobile insurance in which the insurer, defendant Topa Insurance Company (Topa), provided two tiers of physical damage coverage, paying all of the reasonable costs incurred at the insurer’s ‟preferred repair facility” or “PRF,” but only 80 percent of the reasonable costs incurred at an unapproved repair facility selected by the insured. The Topa application stated in bold letters “this is a restricted policy,” and contained a separate section entitled “certification of the applicant,” explaining the limited physical damage coverage and asking the applicant to certify his or her understanding of the restricted policy. The section explaining the limitations and requiring certification by the applicant was boxed and consisted of three paragraphs, each one separated by spacing. Ortega’s wife had signed off on the “certification” in the policy.

Additionally, the payment of loss provision in Topa’s policy provided that in determining the amount necessary to restore the vehicle to pre-loss condition, the estimate would use prevailing labor rates and “the cost of repair or replacement parts,” which could either be new, refurbished, restored, original manufacturer parts or non-original manufacturer parts.

Subsequently, Ortega’s 2003 Mercedes Benz was vandalized. Ortega had intended to select a repair facility, but a third party administrator for Topa informed him of the limited physical damage coverage on the policy, and he took the vehicle to a PRF for repairs. The facility made the repairs, using non-original manufacturer (non-OEM) parts. Ortega protested, alleging that the non-OEM parts did not restore his vehicle to pre-loss condition.

Ortega filed a class action complaint against Topa arising from the two-tier coverage alleging two statutory violations: Topa’s payment practice is unlawful under Insurance Code section 758.5, subdivision (d)(2), and the application for insurance did not prominently disclose the limited physical damage coverage in violation of subdivision (d)(1). The trial court ultimately held that the policy provisions did not violate Insurance Code Section 758.5, and thus could not support a class action or even Ortega’s own breach of contract and breach of the implied covenant of good faith causes of action. The court granted Topa’s motion to strike the class allegations. Ortega appealed.

The Court of Appeal upheld the trial court’s rulings. Insurance Code Section 758.5(d)(1) states that an insurer must “prominently disclose” in its application that the insurance contract applied for suggests or requires that an automobile be repaired at a particular automotive facility. However, the statute did not define what was meant by “prominently disclose.” The Court of Appeal noted that in Malek v. Blue Cross of California (2004) 121 Cal.App.4th 44, the legislature’s use of “prominently displayed” was understood to mean “standing out,” “readily noticeable,” or “conspicuous.”

The Court rejected Ortega’s contention that the statutory disclosure requirement could only be satisfied with larger typeface, bold font, and a specific heading. The Court noted that the section of the application here put the insured on notice that “this is a restricted policy.” Further, the section was boxed off, and required signature of the applicant. Reading the application as a whole, with special emphasis on the formatting of the certification section, the Court held that it met the statutory disclosure requirements of section 758.5(d)(1).

The Court also rejected Ortega’s argument that the Topa policy unlawfully “steered” policyholders to its PRF. Citing Maystruk v. Infinity Ins. Co. (2009) 175 Cal.App.4th 881, which dealt with an almost identical limited physical damage coverage provision, the Court concluded that section 758.5(d)(2) did not require that an insurer provide 100 percent coverage for vehicle repairs. Rather, the statute required that if the carrier had its insured utilize a PRF or other associated repair facility, the carrier must pay 100% of all repair costs. The statute did not require the carrier to pay 100% of all costs if the insured chose its own facility.

The Court of Appeal thus held that there were insufficient allegations of any statutory violations with regard to the use of the PRF, since the limits on coverage were “conspicuous” and stood out, and since the carrier continued to pay 100% of benefits when an insured agreed to use the PRF. The Court of Appeal thus affirmed the trial court order striking the class allegations.

COMMENT

An automobile repair policy may provide for tiered levels of reimbursement, based on the use of a preferred repair facility, as long as the application specifically and conspicuously advises the insured of this restricted coverage, and as long as the insured is still given the opportunity to receive 100% reimbursement if the preferred facility is used. Carriers need not specifically use a different font or type, but should “prominently disclose” such limited or restricted coverage.

For a copy of the complete decision see: http://www.courtinfo.ca.gov/opinions/documents/B228889.PDF