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Thursday, 21 April 2011 16:03

The Curious Case of Hibbs vs Allstate— Does An Insurer Have the Right to Repair?

Let’s say your car is damaged in an accident and you’re properly insured. Most policies say that an insurer can either pay for the repair or fix the vehicle. You feel that the vehicle is too badly damaged and you want the money so you expect your insurer to total the vehicle and give you a check.

But instead, the insurer says it will pay a shop to fix the vehicle. No other compensation is offered or given. In fact the vehicle is ultimately fixed against your will even though you refuse to explicitly authorize it or pick it up. It’s eventually sold at auction—to the body shop owner holding the deductible lien on the repair.

The California Court of Appeal, ruling in this situation (Hibbs vs Allstate), explained that there’s an 1867 case from New York pertaining to a building, in which the insurer opted to repair it but the insured refused to allow the repairs to his building. The appellate court held that the insured could not recover the cost of repairs. It reasoned that when the insurer opted to repair, its insurance policy was converted to a binding contract. So, according to this case, the insurer can do whatever it wants.

However, the court also noted that “modern cases,” including cases in the last century from Missouri (1957) and Colorado (1940), hold that the insured has a right to get the money if she prefers, notwithstanding the policy language. In the Missouri case, the insurer exercised its option to repair a damaged vehicle. The insured refused to allow the repairs. Instead, she demanded payment of the cost. The court recognized that a rule relieving the insurer of liability where the insured refuses to allow repairs might be supported by "cold logic." But, the court stated (in 1957) that such a rule "would neither comport with our conception of substantial justice nor be consonant with the primary purpose of all insurance coverage, i.e., indemnification against loss."

Similarly, in the Colorado case, the court wrote "[t]hat plaintiff should be penalized by a refusal to grant him any reparation under the policy, for which he paid a premium, would not meet with our conception of justice."

The appeals court in California continued: "In most cases an insurer should have no objection to paying its insured the cost of repair. But nothing in Allstate's policy gives the insured such a right."

 

In Hibbs v. Allstate Insurance Company the Insurer was found to have Properly Elected To Repair Insured’s Vehicle (against the insured’s wishes) and thereby Satisfied Obligations Under Policy By Electing To Repair Damaged Vehicle Instead Of Tendering Costs Of Repair To Insured

 

In February this year, the California Court of Appeal for the Second Appellate District issued a decision reversing the trial court’s summary judgment ruling in favor of the insurer and holding that when an automobile insurance policy provides the insurer with the option to pay for damages to or repair an insured vehicle, the insurer satisfies its contractual obligation by electing to repair damages even though the insured refused to authorize repairs.

However, the Court of Appeal also held that the insurer can be liable in bad faith if it pays for repairs not authorized by the insured and then recovers from the tortfeasor (civil wrongdoer) in subrogation because the subrogation action may be prejudicial to the insured’s direct action against the wrongdoer.

The basic facts of the case are these:

Harry and Jessica Hibbs’ van was insured by Allstate Insurance Company. On April 13, 2004, the van was struck by a vehicle driven by Jerome Brooks and the front was substantially damaged. The van was taken to a repair shop where Jessica Hibbs signed an authorization to repair the van. The repair shop later estimated the cost to repair the van was $6,500. Jessica Hibbs contacted Allstate and advised that she believed the van was a total loss and refused to authorize the repairs.

On April 22, 2004, Allstate was advised by the repair shop that Jessica Hibbs had authorized the repairs, and that the repairs were substantially complete. On May 3, 2004, after the van had been repaired it was driven into another car by a repair man and again suffered front end damage. The Hibbs refused to authorize repairs and refused to pick up the van. Allstate paid the repair shop the cost to repair the van less the Hibbs’ deductible. Allstate eventually recovered the cost to repair plus the Hibbs’ deductible from Brooks’ insurer in a subrogation action and sent the deductible to Hibbs, which they never cashed.

The Hibbs filed a complaint against Allstate alleging, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court granted Allstate’s motion for summary adjudication as to the breach of contract and breach of the covenant of good faith and fair dealing claims and denied Allstate’s motion for costs. Both sides timely appealed.

The Court of Appeals first affirmed the trial court’s determination that a triable issue of fact existed as to whether or not the Hibbs authorized the repair of their van. The Court of Appeals cited to Business & Professions Code section 9984.9 which requires, among other things, that an automotive repair dealer give the customer a “written estimated price for labor and parts necessary for a specific job... before authorization to proceed is obtained from the customer.” The Court of Appeal found that the authorization to repair the van signed by Jessica Hibbs was void under section 9984.9 because the repair shop failed to provide Jessica Hibbs with a written estimate prior to obtaining her written or verbal approval for the repairs.

The Court of Appeal next addressed an issue of first impression in California – whether an insurer that has elected to repair a vehicle under an automobile insurance policy that provides it with an option to repair or pay the costs of repair, is relieved of its obligation under the policy by its insured’s refusal to authorize repairs. After considering decisions from other jurisdictions, the Court of Appeal held that where the policy clearly and unequivocally provides the insurer with the option to repair and the insurer chooses that option, the insured’s prevention of the insurer’s performance by refusing to authorize the repair, excuses the insurer’s obligation under the policy. The Court of Appeal also rejected the Hibbs’ contention that Allstate’s adjuster chose to settle the claim.

Finally, the Court of Appeal addressed the Hibbs’ contention that Allstate breached the implied covenant of good faith and fair dealing. The Court of Appeal held that Allstate did not act in bad faith when it authorized the repairs to the van finding that there was no authority indicating such authorization constituted bad faith and that any repair authorized by Allstate would still be subject to further authorization by Hibbs’ under Section 9884.9.

The Court of Appeal also found that Allstate did not breach the implied covenant of good faith and fair dealing by ignoring the Hibbs’ request for a mechanical and safety inspection to ensure the van was safe or for failing to respond to the Hibbs’ settlement demand for full market value, because Allstate was not obligated under the policy to provide such expert inspections or to pay full market value for the vehicle.

However, the Court of Appeal found that a triable issue of fact existed as to whether Allstate breached the covenant of good faith and fair dealing by prosecuting its subrogation claim against Brooks. The Court of Appeal found that because Hibbs did not consent to the repairs, the repair shop was not due any compensation. As a result, Allstate had no right to subrogation against Brooks. In addition, the Hibbs were prejudiced by Allstate’s subrogation action since Brooks would have a right to an offset against any cause of action the Hibbs might be able to successfully assert against him.

As a result, the Court of Appeal reversed and remanded for trial on the issue of bad faith and awarded costs on appeal to Hibbs.

So what does this mean for a body shop and its customer? It has been pointed out in legal commentary and blogs on the case that the ruling upholding the 1867 New York case basically lets the insurer do what it wants, regardless of the interests of the insured. That is the letter of the policy but Colorado and Missouri found otherwise.

It is poor public policy when what the insurer wants frustrates the legitimate desires of the insured.  The only thing beyond the letter of the  policy that the Judge cites is that an insurer might want to repair a vehicle rather than giving an “unsafe” (unrepaired) vehicle to the insured.  But the vehicle couldn't be driven anyway.  And even if they did, no way the insurance company would be liable.

Good public policy suggests we should allow such recovery (instead of repair) as consumer friendly. Did the Hibb’s feel that the repairs wouldn’t be safe and so wouldn’t drive the vehicle even if repaired?  Maybe someone in a similar situation thinks the insurer has incorrectly valued the vehicle and—rather than file a lawsuit (with resulting transaction costs) —thinks more can be gained if she takes the repair money and sells the unrepaired car for scrap. That might be better  than accepting a repaired car and selling it to someone else.  Perhaps the insured can find someone to repair the vehicle himself for less than the original shop, and wants to pocket the difference.  None of these things hurt the insurer, but they all help the insured.  They should be allowed.  So this is one of those rare instances where California law, rather than leading the pack, radically lags behind it.  Following an outdated, anti-consumer opinion from 1867 in New York rather than the weight of modern, pro-consumer, authority.

For stakeholders, the takeaway message is this:

A. The body shop must give the customer a written estimate for price, labor and parts before authorization to proceed with repairs. An authorization for teardown and a verbal approval authorization over the phone does not satisfy Section 9884.9

B. Where an insurance policy has language similar to Allstate’s: “Allstate will pay for the loss in money, or may repair or replace the damaged … property at our option”—the language provides the insurer the option to repair. The insurer may elect to repair the vehicle instead of paying for the loss in cash.

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