Are Insurer Direct Referrals Illegal?

by James A. Castleman, Esq.

Can an insurer legally attempt to convince their insured to take their car to a preferred shop when the law clearly appears to prohibit this conduct?

As an attorney who has represented collision repair shops in Massachusetts for many years, one of the issues that has disturbed me the most has been the approval by the Division of Insurance (DOI) and the Auto Damage Appraiser Licensing Board (ADALB) of insurer programs that allow the insurers to essentially steer claimants to individual repair shops. The issue recently came to my attention again, when I received a report of an insurer calling their insured who had chosen an independent repair shop and whose car was already on the floor of that shop, being prepped for repair.

The call’s purpose was to convince their insured to take their car out of that shop and to bring it to one of the insurer’s preferred “program” shops. The insurance representative told their insured that the insurer would guarantee the work of its preferred shop and that, while their preferred shop would not charge the claimant anything more than their deductible, the independent shop charged a higher hourly Labor Rate than their preferred shop, and the claimant could have to pay part of the cost of repair out of their own pocket.

This and similar incidents disturb me for several reasons: How does the insurer know what the independent shop will actually end up charging for repairs? How does the insurer know what their preferred shop will charge, since the preferred shop has not even seen the damaged car? What does the insurer know about the quality of repairs that will be made by the independent shop or at their preferred shop? And, from a legal perspective, how can the insurer attempt to convince their insured to take their car to an individually named preferred shop when the law clearly appears to prohibit this conduct?

It is just my opinion that direct referrals and the conduct engaged in by this insurer is illegal. And I am not the Commissioner of Insurance, a member of the ADALB or a judge sitting on a Massachusetts appellate court – or a judge of any kind. Yet, it is an opinion that I strongly hold, based on many years of dealing with laws affecting insurance-covered auto damage repairs in Massachusetts. And it is an opinion that the DOI, the ADALB and the Massachusetts Supreme Judicial Court apparently held until 2011, when the DOI first approved insurer Direct Payment Plans which, by their terms, openly allowed insurers to directly refer their claimants to individual preferred shops.

The Evolution of the Law
The following analysis contains some technical legal language. But take your time to read it carefully, and you will understand exactly what the law says and why I hold such a strong opinion.

In 1981, the statute establishing the ADALB was enacted. One of the provisions of that statute says: “No appraiser or insurer shall request or suggest that repairs be made in a specified repair shop.” That provision has never been repealed or amended, and it is still statutory law in Massachusetts.

The same statute established the ADALB and gave that Board the authority to issue regulations relating to the statute. In 1982, the ADALB did develop and adopt a regulation which, although it has been amended over the years, is still in existence. The original regulation interpreted the anti-referral provision of the governing statute and made it stronger, stating: “No staff or independent appraiser, insurer, representative of insurer or employer of an independent appraiser shall refer the claimant to or away from any specific repair shop or require that repairs be made by a specific repair shop or individual.”

Unhappy with these provisions of the statute and regulation, many insurers attempted to challenge it. They wanted to be able to disclose the names of preferred repair shops to their insureds. Allstate Insurance Company brought a lawsuit in an attempt to invalidate the anti-referral rule. That case went all the way to the Massachusetts Supreme Judicial Court (SJC), which issued an opinion in 1987.
The SJC did limit the scope of the statute and regulation to some degree, ruling that: “An insurer, on the request of a customer, may provide that customer with a LIST of repair shops or individuals which it believes can do quality repair work as long as the communication makes it clear that the choice of the repair shop or individual belongs to the customer.” Notably, the Court did NOT invalidate either the statute or the regulation. Further, the ruling was limited to situations where the customer requests the names of repair shops and then requires the insurer to give a list of shops, not just the name of one shop. The ruling affirmed that the statute and regulation legitimately prohibit insurers from “referring, sending or directing” their claimants to individual repair shops.

In 1988, the so-called Direct Payment statute was enacted, which significantly changed the way that first-party auto damage claims are settled in Massachusetts. With regard to repair shop referrals, the statute allowed the Commissioner of Insurance to require insurers to give all claimants “a list of at least five registered repair shops, geographically convenient for the insured, from which the insured may at his or her option select a shop, which will without undue delay complete the repair work for the amount of the payment to the insured, plus any applicable deductible, that the insurer will guarantee the quality of the materials and workmanship used in making repairs if the repairs are performed at one of the repair shops so listed.” The statute also requires, however, “that no insurer or appraiser shall require that repairs to any motor vehicle be made at any specific repair shop, or list of repair shops.”

Shortly after adoption of the statute, the DOI issued regulations in line with it. Those regulations required that claimants “receive a list of all registered repair shops,” which also includes a list of at least five insurer referral repair shops. The communication with the claimant must let the claimant know that “he or she may choose to have repairs made at any repair shop, whether or not the shop is an insurer’s referral shop.”

Soon thereafter, the ADALB amended their regulation. With regard to the provision in that regulation prohibiting referrals, the ADALB added that the section “shall not apply to any approved direct payment plan pursuant to [the DOI Direct Payment regulations]. This exception, however, was always interpreted to apply only to the degree that the Direct Payment regulations allowed referrals – and those regulations do NOT allow for referral to an individual repair shop, nor do they override the original anti-referral provisions of the ADALB statute or the existing anti-referral provision of the ADALB regulation.

In 1994, the DOI issued a bulletin that specified in detail how insurers are required to communicate their list of referral repair shops to claimants. That bulletin affirmed that insurers needed to give claimants a list of all registered shops in the county in which the claimant lives, on which the insurer could indicate which were its referral repair shops – and there still has to be at least five of them. The bulletin allows an insurer to tell a claimant that they may choose one of the listed referral shops but also that: “You may choose any other registered auto repair shop from the enclosed list.”

NOTE WELL: The original ADALB statute and the ADALB regulation prohibit insurers from directing an insured to any one repair shop, and the Direct Payment statute, the Direct Payment regulations and the 1994 bulletin do NOT change that prohibition.

The 2011 Changes
In 2011, the DOI approved new Direct Payment plans submitted by certain national insurers, several of which had not until then written auto insurance in Massachusetts. These plans blatantly state that the insurers will direct claimants to individual preferred repair shops. Despite such provisions in these plans, the DOI approved them, allowing insurers to direct claimants to individual preferred repair shops.

Some things should be noted about approval of these plans: (1) The particular Commissioner who was serving at the time let it be known that he wanted to attract more national insurers to Massachusetts, even though those insurers depended on direct referrals to their preferred shops. (2) The submitted Direct Payment plans were approved without public hearing, despite the Direct Payment regulations requiring that a hearing be held prior to approval – unless a submitted plan is substantially the same as other plans that already had been approved. NONE of the new plans were substantially the same as other plans that previously had been approved. (3) Records of the DOI show that DOI staff initially questioned the legality of the direct referral provisions of these plans, but that questioning terminated at some point – for no apparent reason – and the plans were approved with those provisions. (4) The ADALB initially questioned if insurers and appraisers working under the terms of the new plans would be in violation of the ADALB statute and regulation, but – apparently under pressure from the DOI – the Board dropped its questioning of those issues.

For the past decade, the Direct Payment plans approved in 2011 have continued, and many other Massachusetts insurers have developed their own “program” plans with individual preferred repair shops and have followed the lead of the national insurers by trying to direct their claimants to individual program shops.

Please note again: The anti-referral provisions of the ADALB statute and of the ADALB regulation are still the law in Massachusetts, and the validity of those laws were affirmed by the highest court in this state. Neither the Direct Payment statute nor the Direct Payment regulations change the anti-referral provisions of the ADALB statute and regulations. The law still prohibits an insurer from directing a claimant to an individual repair shop. Yet, somehow, many auto insurers writing policies in Massachusetts have had Direct Payment plans approved that allow them to refer claimants to individual repair shops, and those insurers do try to direct their claimants to individual shops.

As stated near the beginning of this article, it is my opinion that the direct individual referrals made by these insurers are illegal under Massachusetts law. But, again, that is just my opinion. What do you think?

Want more? Check out the March issue of New England Automotive Report!