Key Decisions

June 2012 – Two-Tier System For Paying

(filed under: | June 16, 2012)

Other Cases Of Interest

If An Application For Insurance And The Policy Contain The Right Language, It Can Properly Use A Two-Tier System For Paying A Property Damage Claim

Ortega v. Topa Insurance Company
(Cal. Ct. of App., 2d Dist.), filed May 24, 2012, published May 24, 2012

Eric Ortega owned a 2003 Mercedes Benz E320. It was insured under an insurance policy issued to Ortega by Topa Insurance Company. The policy provided coverage for loss of or damage to the vehicle on a two-tier basis. Topa agreed to pay all of the reasonable costs incurred if repairs were done at one of its preferred repair facilities, but only 80 percent of the reasonable costs incurred if the repairs were done at an unapproved repair facility selected by the insured. The policy also provided that in determining the amount necessary to restore damaged property to its pre-loss condition, the estimate would be based upon the prevailing competitive labor rates and “the cost of repair or replacement parts, which may be new, refurbished, restored, or used, including, but not limited to: (1) original manufacturer parts or equipment; and (2) nonoriginal manufacturer parts or equipment.”

Ortega’s car was vandalized. As a result, he made a claim under his policy. Topa’s claims administrator advised Ortega of the limitations in his policy.

Because of the limitations in his policy, Ortega took his car to an approved facility. However, he was dissatisfied with the repairs. Among other things, the facility used after-market parts.

Ortega filed a class action lawsuit against Topa. He alleged the limited physical damage coverage provision in the policy violated Insurance Code section 758.5 (d)(2) and that the application for the policy violated the disclosure requirement of Section 758.5 (d)(1).

In several motions before class certification, the trial court determined that the Topa policy and application did not violate the Insurance Code and thereafter struck the class allegations.

The Court of Appeal affirmed. In what appears to be an issue of first impression, it concluded the insurance application met the statutory disclosure requirement and “prominently disclosed” to the applicant that the auto insurance policy he or she applied for includes a contract provision suggesting or recommending a particular automotive repair facility. It also concluded the limited physical damage coverage provision in the policy does not violate Section 758.5 (d)(2).

To the extent that policyholders used an authorized facility to repair their damaged vehicle and were not satisfied with the repairs because the facility did not return the covered vehicle to its pre-loss condition, the trial court did not err in concluding that the complaint did not allege common issues of fact.

By virtue of the foregoing, the trial court properly determined the case was not suitable for treatment as a class action.