Court Finds Texas Insurer-Owned Repair Shop Law ConstitutionalPosted 4/17/2006
By Robert L. Redding, Jr.
After a year of state insurer-owned shop legislative activity held in abeyance across the country, the U.S. District Court, Northern District of Texas, issued a long-awaited opinion in the Allstate Insurance Company and Sterling Collision Centers Inc. v. Greg Abbott, Attorney General; Carol Strayhorn, Comptroller of Public Accounts; case. District Court Judge Ed Kinkeade decided that "H.B. 1131 does not violate the dormant Commerce Clause and is constitutional."
House Bill 1131 was the number attached to the original Texas insurer-owned shop legislation. Collision repairers in Texas had met with state policymakers to discuss the problem of insurer-owned shops. State Sen. John Carona attended NACE 2002, the last year it was in Dallas, meeting with repairers to discuss the problem. Carona took the issue back to Austin for consideration.
After the bill became law, Allstate and Sterling challenged the legislation in federal court.
The court did state that there were four sections of the law that violated Allstate's freedom of speech under the Constitution. This would be applicable to the communication between Allstate and Sterling for those collision shops already in Texas and would not impact the ban on future collision shops in Texas for all insurance companies.
The Allstate challenge on First Amendment grounds that was supported by the court included the following four provisions. These were found to be unconstitutional:
The court was clear that these constitutional concerns did not invalidate the prohibition on insurer ownership of collision repair shops. The court stated, "The validity of H.B. 1131's overall prohibition of ownership does not depend on the speech restrictions. These provisions are clearly independent of each other, and the court believes that the Texas legislature would still have passed H.B. 1131 had the speech restrictions been omitted."
The Automotive Service Association became involved in the insurer-owned shop issue during consideration of California legislation prohibiting insurer-owned shops. In testimony and in other advocacy efforts, ASA emphasized the impact of these shops on the consumer-repairer-insurer relationship. Specifically, that the consumer would be the ultimate loser in an insurer-owned shop environment or marketplace. This conflict of interest could impact the quality of the repair.
The court held, "Regardless of the evidence, the court has found the trial record replete with proof that the members of the Texas legislature were concerned with the lack of independence and conflicts of interest that arise when a consumer repairs his or her vehicle at an auto body shop owned by his or her insurance company. Witnesses testified to support these concerns, such as insurance companies cutting costs on repairs, approving only partial repairs, requiring that cars be repaired instead of "totaled," trying to steer customers to insurer-owned shops, and Allstate terminating PRO shops to increase business for Sterling."
In a discussion of vertical integration between insurers and repair shops, the conflict of interest issue was again heightened. The court discussed that an effort to provide lower-cost repairs would place the repair shops in the "unfortunate position" of having to decide whether to be an advocate for the accident victim (its customer) or an arm of the insurance company keeping costs of repair down.
"Thus, the vertical integration of an insurance company into the auto body repair industry creates an inherent conflict of interest." The phrase "inherent conflict of interest" was used by former ASA Chairman Kevin Caldwell in a presentation before California policymakers on the same issue prior to Texas considering similar legislation. Carona argued that his chief motivation for introducing the legislation was to eliminate the obvious conflict of interest that arises when an insurance company also owns the repair facility, according to the court.
The decision was clearly a blow to those who attack local rule. The one-sided environment of state insurance regulation, in this case, went the other way with policymakers siding with consumers and small businesses. Citing several cases, the court cannot "second-guess the empirical judgments of lawmakers concerning the utility of the legislation" (International Truck and Engine Corp. v. Bray, 372 F. 3d at 728). Continuing, the "court must credit a putative local benefit so long as an examination of the evidence before or available to the lawmaker indicates that the regulation is not wholly irrational in light of its purposes" (Ford Motor Company v. Texas Dept. of Transportation, 264 F. 3d at 504).
This case should be required reading for auto body shop owners. In addition to an inside look at an insurer-owned shop, the decision includes an analysis of the insurer-repairer-consumer relationship. For example, the court discusses the original equipment manufacturer parts versus aftermarket parts issue. Repairers can review the decision on ASA's legislative Web site, www.TakingTheHill.com.
As of this writing, there are no new insurer-owned shop bills introduced in any states this year.
U.S. District Court FindsTexas Insurer-Owned Repair Shop Law Constitutional
The U.S. District Court, Northern District of Texas, has issued an opinion on the Texas insurer-owned shop law. The Automotive Service Association (ASA) had supported the legislation - H.B. 1131 - in the Texas legislature, which put a halt to insurer-owned shops in the state of Texas. Texas state Sen. John Carona had first broached the issue publicly at an International Autobody Congress and Exposition (NACE) press conference in Dallas.
After the legislation became law, Allstate challenged H.B. 1131 in court. In Allstate Insurance Co. and Sterling Collision Centers Inc. v. Greg Abbott, Attorney General; Carol Strayhorn, Comptroller of Public Accounts; the court concluded that "H.B. 1131 does not violate the dormant Commerce Clause and is constitutional, with the exception of the speech restrictions...," according to Judge Ed Kinkeade.
Bob Redding, ASA Washington, D.C., representative, said: "We are very pleased with the ruling. This new law in Texas demonstrates what collision shop owners can do when they join together with a common message under a single banner. Texas repairers should be very proud and look to how they can continue to improve the collision repair industry. This decision will have ramifications in the collision industry throughout the United States. Many state collision leaders were watching this decision to determine if similar legislation would be introduced in their states." To review the decision, please go to www.TakingTheHill.com, ASA's legislative Web site.
Timeline of Insurer-Owned Shop Legislation Decision
John Carona, Texas state senator, appears at the Automotive Service Association's International Autobody Congress and Exposition in Dallas to brief the industry on legislation he plans to introduce banning insurance company ownership of body shops.
February 2003 Carona intoduces Senate Bill (S.B.) 435, modeled after California's earlier S.B.1648. The bill would outlaw any insurer ownership interest, both controlling interest and minority interest. The bill would affect the minority-owned Caliber shops as well as the wholly owned Sterling Collision Centers. ASA encourages Texas repairers to contact their state senators requesting their support of S.B. 435. The Texas Senate later passes the bill by a unanimous vote of 31 to 0.
Republican Texas Gov. Rick Perry signs H.B. 1131 (companion legislation to S.B. 435), the Insurer-Owned Repair Facility Legislation, into law to take effect Sept. 1, 2003. The bill prohibits insurance companies from owning auto repair facilities in Texas. The legislation passed by the Senate was amended from its original House version to allow those facilities currently owned by insurance companies to remain in business if they meet certain criteria outlined in the legislation. ASA has been working closely with a coalition of repairers in Texas to get the legislation passed. Bob Redding, ASA's Washington, D.C., representative, predicts this landmark legislation will most likely be mirrored in states across the nation.
Allstate-Sterling files suit in the District Court of Dallas County, Texas challenging the constitutionality of Texas' new insurer-owned shop law, H.B. 1131. The suit against the attorney general of the state of Texas and the Texas comptroller of public accounts claims that the new law violates Allstate's rights under the 1st and 14th Amendments of the U.S Constitution. ASA joins the state of Texas in opposing the Allstate suit.
The U.S. District Court of North Texas, Dallas County, grants Allstate's request for a preliminary injunction; temporarily prevents the new insurer-owned shop law from being enforced until a court decides the case.
The deadline to appeal the injunction passes. The trial is scheduled for September.
Opening arguments are heard in the case of Allstate v. Abbott in the United States District Court in Dallas, with District Judge Ed Kinkeade presiding. ASA provides media alerts throughout the trial.
The U.S. District Court, Northern District of Texas, finds the Texas Insurer-Owned Repair Shop Law constitutional. ASA supported legislation H.B. 1131 in the Texas legislature, which put a halt to insurer-owned shops in the state of Texas.
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