New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

OGC Op. No. 08-07-09

The Office of General Counsel issued the following opinion on July 16, 2008, representing the position of the New York State Insurance Department

Re: Insurer Payment Obligation Under Collision Coverage

Questions:

1. May an insurer recommend or suggest a particular facility for motor vehicle repairs if not expressly requested by the insured?

2. Must an insurer, as part of a good faith negotiation, negotiate labor rates?

3. If an insured elects to have a vehicle repaired at a facility other than that recommended by the insurer, is the insurer financially responsible for any excess repair cost over the cost that the recommended facility would have charged?

Conclusions:

1. No. Insurance Law § 2610(b) (McKinney 2006) prohibits an insurer from recommending or suggesting a particular facility for repairs in the absence of an express request from the insured. Any previous opinions issued by the Insurance Department to the contrary should no longer be followed.

2. Yes. A good faith negotiation, like a good faith settlement offer, should be inclusive of all elements of the cost of the repair, including labor rates.

3. The Department has opined that if an insurer makes a good faith offer to the insured to
pay for the cost of repair, and, after providing the insured with the prescribed notice of rights letter (known as the NYS APD 1), identifies a facility that will repair the damage at the cost estimated by the insurer, the insurer is not obligated to pay for any repair cost that exceeds the amount of the good faith offer required by regulation. However, at least one court has held that an insured may be awarded the balance of the repair costs if the insured establishes that the excess cost was necessary to restore the vehicle.

Facts:

It is reported that insurers are using, and courts relying on, an opinion dated April 16, 2002 from the Department’s Office of General Counsel (“O.G.C.”) to argue that an insurer may recommend to an insured a specified facility for physical damage repair without a request from the insured. The inquirer asks whether the Department continues to adhere to the April 16, 2002 opinion.

The inquirer also asks what constitutes a good faith negotiation and what elements such a negotiation must include.

The inquirer further asks whether the Department adheres to the view that an insurer is not financially responsible for repair costs in excess of those at an insurer-recommended repair facility should an insured use a facility not recommended by the insurer.

Analysis:

Insurance Law § 2610(b) is relevant to the inquiry, and reads as follows:

In processing any such claim (other than a claim solely involving window glass), the insurer shall not, unless expressly requested by the insured, recommend or suggest repairs be made to such vehicle in a particular place or shop or by a particular concern.

In May 2000, the Department issued Circular Letter No. 16 (2000) in response to a decision issued in the United States District Court for the Southern District of New York in Allstate Ins. Co. v. Serio, 2000 WL 554221 (S.D.N.Y. May 5, 2000). In that case, Judge Richard Conway Casey ruled that Insurance Law § 2610(b) violates the First Amendment of the United States Constitution as an unjustifiable burden on free speech. In light of the decision, Circular Letter No. 16 noted that the Department would not enforce Insurance Law § 2610(b), and that insurers were free to recommend or suggest that repairs to a damaged vehicle be made in particular places or repair shops, irrespective of any express request from the insured.

Judge Casey’s decision was appealed to the United States Court of Appeals for the Second Circuit, which declined to rule on federal constitutional grounds, and certified questions to the New York Court of Appeals. In Allstate Ins. Co. v. Serio, 98 N.Y.2d 198 (2002), that court upheld the restriction on insurer recommendations or suggestions about particular repair shops while ruling that Insurance Law § 2610(b) does not regulate speech on other subjects. Thereafter, the Second Circuit reversed the District Court. Allstate Ins. Co. v. Serio, 293 F.3d 95 (2nd Cir. 2002), and the Department withdrew Circular Letter No. 16 (2000) and issued Circular Letter No. 14 (2003) in its place. That letter makes clear that Insurance Law § 2610(b) remains in effect and will be enforced by the Department.

Thus, as provided by the plain terms of that statute, an insurer may not recommend or suggest a particular place or shop for motor vehicle repairs if not expressly requested by the insured. See O.G.C. Opinion No. 04-06-03 (June 8, 2004). Any O.G.C. opinion letter to the contrary, including the April 16, 2002 opinion described in the fact pattern, do not represent the Department’s position, and should no longer be followed.

In response to the second and third queries, Section 216.7 of the New York Comp. Codes R. & Regs. (“NYCRR”) Tit. 11, Part 216 (Regulation 64) governs standards for prompt, fair and equitable settlement of motor vehicle physical damage claims. 11 NYCRR § 216.7(b)(1) reads as follows:

If, upon notification of a loss, the insurer intends to exercise its right to inspect damages prior to repair, it shall have six business days following receipt of notice of claim to inspect damages prior to repair, it shall have six business days following receipt of notice of claim to inspect the insured’s damaged motor vehicle, which is available for inspection, during normal business hours at a place and time reasonably convenient to the insured. In addition, negotiations shall commence and a good faith offer of settlement, sufficient to repair the vehicle to its condition immediately prior to the loss, shall be made within the aforesaid six-day period to the designated representative, and it may also be made to the insured. If there is no designated representative, the offer shall be made to the insured within the six-day period.

11 NYCRR § 216.7(b)(7) reads as follows:

Negotiations must be conducted in good faith, with the basic goal of promptly arriving at an agreed price with the insured or the insured’s designated representative. If the insured’s intended repair shop is not a designated representative of the insured, the insurer may also reach an agreement with that repair shop on the cost to repair the damaged vehicle, but that agreement shall not be binding upon the insured or the designated representative. Early in negotiations, the insurer must inform the insured’s designated representative or, if there is no designated representative, the insured of all deductions that will be made from the agreed price. If an insurer shall require proof of loss, its offer shall be communicated to the insured via a proof of loss. The insurer shall also communicate the offer to the designated representative.

Thus, 11 NYCRR § 216.7(b)(1) requires that when an insurer exercises its right to inspect physical damage of a motor vehicle, “negotiations shall commence and a good faith offer of settlement, sufficient to repair the vehicle to its condition immediately prior to the loss shall be made…to the designated representative, and it may also be made to the insured.” 11 NYCRR § 216.7(b)(7) requires that negotiations be conducted in good faith.

Any settlement offer by an insurer should include all elements of the cost of the repair, including labor rates, necessary to restore the vehicle to its condition immediately prior to the loss. Similarly, any negotiation shall include all elements of the cost of repair. However, a good faith negotiation need not result in an ultimate agreement on a settlement amount provided that a repair shop, reasonably convenient to the claimant, is able to repair the vehicle for the amount the insurer offers in settlement.

If negotiations do not result in an agreed settlement, 11 NYCRR § 216.7(b)(14)(i) requires an insurer to provide an insured with a prescribed notice of rights letter (known as NYS APD 1). The APD 1 indicates that the insurer may not reveal the identity of a repair shop that would repair the motor vehicle at the insurer’s estimate unless expressly requested by the insured. The “Section 2610 of the Insurance Law Disclosure Statement” is attached to the APD 1 and includes a recommendation request. Once the insurer receives the APD 1 with the request, 11 NYCRR § 216.7(b)(14)(ii) requires the insurer to “furnish the insured or the designated representative, at the express request of either, with the name and address of a New York State registered motor vehicle repairer, properly equipped to complete the repairs on the damaged motor vehicle (back-up shop), at a location reasonably convenient to the insured, who will repair the damaged motor vehicle at the insurer’s estimated cost of repair.” See O.G.C. Opinion No. 06-08-18 (August 25, 2006).

O.G.C. has previously opined that if an insurer makes a good faith offer to the insured to pay for the cost of repair and identifies a facility that will repair the damage at the cost estimated by the insurer, the insurer is not obligated to pay for any repair cost that exceeds the amount of the good faith offer required pursuant to 11 NYCRR § 216.7(b)(1). In such a circumstance, if the insured elects to repair the vehicle at another facility at a higher repair cost, the insurer is not financially responsible for the excess cost above the amount of the insurer’s offer. See O.G.C. Opinion No. 02-03-05 (March 6, 2002); O.G.C. Opinion (April 16, 2002).

However, the insurer’s offer is ultimately subject to judicial review. In Rizzo v. Merchants & Businessmen’s Mutual Ins. Co., 188 Misc.2d 180, 727 N.Y.S.2d 250 (App. Term, 2nd Dept. 2001), the court held that after the insured accepted checks from the insurer in the amount of the insurer’s estimate of repair, the insurer was still obligated to pay the balance of the repair costs to the insured despite the repairs being performed at a more expensive shop not recommended by the insurer. The court noted that an insured is not automatically entitled to be reimbursed for the full amount charged by a more expensive repair shop chosen by the insured to make repairs, and that where “the parties cannot reach an agreed price, the insured bears the burden of establishing the reasonable cost of the repairs necessary to bring the vehicle to its condition prior to the loss.” Id. at 183. Other courts have followed Rizzo by holding that the insured bears the burden of establishing the reasonable cost of repairs. See M.V.B. Collision, Inc. v. Allstate Ins. Co., 2007 WL 2288046 (E.D.N.Y. August 8, 2007); Gapud v. Kaur, 836 N.Y.S.2d 499 (Nassau Cty. Dist. Ct. 2007).

For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.