Insurance Primer

By Scott Long

Reprinted with permission from Hammer and Dolly.

Attorney Patrick McGuire began his seminar, "Insurance: A Primer for the Body Shop Owner" at NACE '05 in Las Vegas by stating that from an insurance perspective, different sets of rules apply to first-party and third-party claims.

McGuire explained that a first-party claimant makes a claim with his or her own insurance company (and is usually the person who causes a collision), while a third-party claimant makes a claim against someone else's insurance company (and is usually on the receiving end of a collision).

"First-party claims are governed by contract law," said McGuire. "That is simply the law that governs the rights of the parties through an oral or written agreement." As such, insurers must honor the letter of the contract, he said.

A typical policy is usually divided into four categories: physical damage (this is usually optional and is divided into collision and comprehensive), uninsured/underinsured motorist coverage, medical payments, and liability (divided into duty to indemnify the policyholder or damage to others and duty to defend the policyholder in the event of a court case).

"The key to any first-party claim is the customer chose the [insurance] company," said McGuire. "They agreed to the limits of the coverage, they picked their deductible, that was the choice they made."

McGuire said almost every policy has a non-OEM parts provision. "That is going to be a legitimate issue in first-party claims. The customer bought that contract knowing what it said," said McGuire. "The courts have very little patience for somebody who buys a contract, had the opportunity to review it, then later complains that there was something in there they didn't like."

In an insurance contract, said McGuire, policyholders have certain obligations to insurers, such as notifying them of a loss and giving them the chance to inspect a vehicle prior to the repairs.

Likewise, insurers have contractual obligations to policyholders, such as paying for a loss in a good faith and fair manner. "They can't make arbitrary decisions about what's covered and what's not," said McGuire, adding, "To bring that home for you, think about material costs. They can't make an arbitrary determination before a loss has even occurred as to how much they're going to pay."

McGuire then discussed insurers' liability for a loss, which might, for example, not exceed the least of the actual cash value of the damaged vehicle, the amount needed to repair or replace the vehicle, or the decrease in value of the damaged vehicle caused by the loss.

"In a first-party claim, it is the insurance company's option as to which one of these it's going to do," said McGuire. "You've probably had a car in your shop that you thought was a fixer, but the insurance company said, 'No, we're going to total it.'"
Offering another example of limit of liability language, McGuire said an insurer might say it will pay what it would cost to repair or replace the property with that of like kind and quality with deduction for depreciation.

Of course, the phrase "like kind and quality" is at the heart of the non-OEM parts debate, said McGuire, adding that shop owners should "assume that every customer has a policy that says something to the effect that an insurer can use aftermarket or non-OEM parts. So aftermarket parts are going to be an issue in first-party repairs."

McGuire said the recently overturned Avery v. State Farm did not find non-OEM parts to be defective, though all parties did admit that they are inferior. "Don't let somebody put a spin on what that case said or didn't say," said McGuire. "If the part is actually defective, the insurance company's going to have to pay for a different part. But saying it's not as good as or it's inferior simply because it's an aftermarket or salvage part isn't going to cut the mustard."

So the measure of damages in a first-party claim, said McGuire, is the reasonable cost of necessary repairs minus the deductible and minus specially excluded items (such as custom items not available from the dealer).

Turning his attention to third-party claims, McGuire said there is no contract between an individual on the receiving end of a collision and the insurer of the person who caused the collision. "A person cannot be bound by the terms of a contract he never saw or signed," he said.

"Whereas first-party claims are all governed by contract law, third-party claims are all covered by tort law," said McGuire. "Tort law governs the rights of parties in the absence of a contract."

However, though third-party is entitled to get paid, McGuire said the law says that a person shouldn't try to take advantage of the situation. "But do what's right to protect your property from further damage and recover your legitimate losses," he said.
The limit of liability for third-party coverage differs from that of first-party coverage, said McGuire, in that the limit is to pay on behalf of the insured all sums which the insured shall become legally obliged to pay as damages because of bodily injury or property damage.

"That's it," said McGuire, noting that there is no need for a third-party to notify an insurer before getting the vehicle repaired, there is is no LKQ parts provision, there are no depreciation issues, and there is no DRP option.

"Wrongdoers do not make the rules," said McGuire.

Thus, the measure of damages in a third-party claim, said McGuire is the reasonable cost of first-rate repairs plus the loss of use plus depreciation plus bodily injury.

"So reasonable cost of first-rate repairs, it's going to be the consumer's choice of shop," said McGuire. "Steering should not occur in a third-party claim."

© Hammer and Dolly. Volume 40, No. 12. December 2005. Reprinted with permission.