CFC to Governor: Veto AB 1200 - Increasing Insurance Industry Profits at Consumer Expense

Governor Arnold Schwarzenegger
State Capitol
Sacramento, CA 95814

Re:  AB 1200 (Hayashi) – Request for Veto

Dear Governor Schwarzenegger:

The Consumer Federation of California urges you to veto AB 1200 (Hayashi). This bill weakens important consumer protections for automobile policy holders.

California’s anti-steering law grants policyholders the right to have auto body repairs done at a repair shop of the policyholder’s choosing. Insurers are prohibited from recommending repair shops unless the consumer has requested recommendations, or the insurer has informed the consumer in writing that the consumer has the right to choose a repair shop.

California’s anti-steering law was enacted because the insurers enter into direct repair contracts with body shops that agree to use inferior after market parts, and to cut corners on repair protocols in exchange for getting additional business that is steered their way by the insurer.

Recent documents obtained from whistleblowers demonstrate the coercive pressure that insurers exert on their direct repair program shops. Mercury Insurance has a reward and punishment system that drives its captive repair shop to use inferior quality parts. Mercury Insurance’s contract with direct repair shops reimburse these shops by a mark up of 20% over the cost of after market, junkyard and refurbished repair parts, and it penalizes the repair shop by reimbursing at only 95%  of the repair shop’s cost for good quality original equipment manufacturer parts. Use of after market parts can make a car unsafe and can void a factory warrantee.

An email from AIG 21st Century Insurance to their direct repair shops informs the shops that they are using too few aftermarket and junkyard parts and too many original equipment manufacturer parts, and reminds them that their contracts with AIG are voluntary and subject to cancellation by the insurer. This message is designed to coerce repair shops to get in line with AIG’s inferior parts policy or risk losing business.

Direct repair programs serve only the interest of the insurer, and undermine the requirement of law and the interest of the policyholder to receive a repair that restores the automobile to pre-crash state of operation. DRPs also thwart the desire of repair shops to perform quality work with quality parts.

AB 1200 is inaccurately presented by the insurance industry as advancing the consumer’s right to know about benefits of their insurance policy. On the contrary, motorists are required to be insured, and the only reason motorists entered into an insurance policy is to receive fair, good quality repairs.

The only benefit in a direct repair contract is to the insurer who saves money at the policy holder’s expense. AB 1200 gives insurers new opportunities to cajole policyholders to select the shop that is most favorable to the insurance company, even after the policyholder has made a repair shop selection. AB 1200 allows insurers to provide only the information that benefits the insurer. If AB 1200 also required insurers to disclose the terms of their direct repair contracts, policyholders would flee from these shops as quickly as possible.

AB 1200 is insurance-industry sponsored legislation designed to increase the profits of insurance industry at the expense of the policy holder. We urge you to veto this anti-consumer bill.