Levy v. State Farm Mutual Automobile Insurance Co. (2007)
__ Cal.App.4th __, 2007 WL 869496

Court of Appeal Dismisses Automobile Policyholders' Claims Based on Allegations of Insurer's Violations of Industry Standards in Repair Estimates

The Court of Appeal, Fourth District, Division 3, upheld a demurrer without leave to amend on an attempted class action lawsuit filed against State Farm Mutual Automobile Insurance Company ("State Farm") for omitting certain labor and material costs from its automobile repair estimates, and using its own contracted repair shops in its survey to determine prevailing competitive repair labor rates used in its estimates. It further upheld the trial court's dismissal of plaintiffs' class allegations, and dismissal of the plaintiff who was an Illinois resident on the grounds of forum non conveniens.

The two plaintiffs purchased State Farm auto policies that obligated State Farm to pay the cost of repair or replacement for covered vehicles if damaged. The policy provided that one of the options available to the policyholder was to price cost of repair or replacement on "an estimate written based upon the prevailing competitive price." Prevailing competitive price was defined as "prices charged by a majority of the repair market in the area which the car is to be replaced as determined by a survey made by [State Farm]." Both plaintiffs, Eugene Levy, a California resident, and Sharon Battle, an Illinois resident, were involved in auto accidents and brought their cars to State Farm: Battle for repair, and Levy for payment in lieu of repair.

Both plaintiffs believed the value they obtained for their car, as a result of State Farm's repair estimates, to be inadequate. They brought suit in Orange County Superior Court on several causes of action, seeking damages, restitution, declaratory and injunctive relief. After the trial court sustained a number of demurrers, it finally sustained State Farm's demurrer to plaintiffs' fifth amended complaint without leave to amend. The crux of the fifth amended complaint was that State Farm's repair estimates did not meet industry standards as defined by automobile manufacturers, the Inter-Industry Conference on Auto Collision Repair (I-CAR) or the National Institute for Automotive Service Excellence (ASE). Specifically, the fifth amended complaint alleged that State Farm's repair estimates routinely omitted time and materials for a number of tasks which were required, that State Farm only contracted with repair shops that follow its deficient estimates, and that State Farm's estimates incorporated below-industry-standard labor rates.

The Court of Appeal first analyzed plaintiffs' complaint allegations and held that they failed to adequately allege that State Farm breached any insurance policy terms. The Court noted that the policy did not require State Farm to provide repairs based on plaintiffs' conception of industry standards. The Court further held that the relevant insurance policy language only required State Farm to "restore the vehicle to its pre-loss condition," and that this meant in an insurance contract the "preaccident safe, mechanical, and cosmetic condition."

The Court then held that California Code of Regulations, title 16, section 3365 (relating to accepted trade standards for auto body and frame repairs) did not purport to apply to insurers, or to provide any minimum standard for repairs required to return a vehicle to its pre-collision condition, and that the regulation did not adopt any particular repair standard, whether set forth by manufacturers, I-CAR or ASE.

The Court next dismissed plaintiffs' argument that the labor costs incorporated into the estimate provided plaintiff Levy were $4 per hour below industry standards, and this stated a cause of action, noting that the complaint made no connection between State Farm's alleged failure to follow industry standards and the policy's requirement that the repair estimate reflect the prevailing competitive price. The Court further held that nothing in the policy prevents State Farm from surveying only shops which agree to its rates, and that although some states prohibit insurers from including contracted repair shops in automobile repair labor rate surveys, California did not.

With respect to the cause of action for breach of the implied covenant of good faith and fair dealing, the Court held that most of the allegations were duplicative and addressed already in connection with the dismissal of the breach of contract cause of action. With respect to Unfair Competition Law (UCL) cause of action, the Court noted that plaintiff Battle, an Illinois resident, could not invoke the protection of the UCL, and that Levy's UCL allegations -- namely that State Farm misrepresented that it would pay the prevailing competitive price for repairs and misrepresented that checks tendered to insureds in lieu of repairs represented the full amount necessary to perform such repairs -- were not pleaded with sufficient specificity to satisfy the unlawful or fraudulent prongs of UCL's proscription on "any unlawful, unfair or fraudulent business act or practice." (Bus. & Prof. Code., § 17200)

The Court further held that plaintiffs' allegations relating to fraudulent nondisclosure, e.g., failing to tell insureds that it routinely omitted necessary repairs from repair estimates and failing to tell insureds that it used only data from shops that agreed to omit necessary repairs in determining the prevailing competitive prices for repairs -- were not deceitful because plaintiffs failed to cite any law or policy provisions requiring State Farm to follow "industry standards." The Court also confirmed that plaintiffs' allegations under Insurance Code section 790.03 did not create a private right of action and that plaintiffs could not circumvent that bar by recasting a cause of action under the UCL. The Court also held that plaintiffs failed to demonstrate how State Farm's "alleged failure to follow an ill-defined industry standard runs counter to public policy, or is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers."

The Court also upheld dismissal of plaintiffs' quasi-contract cause of action on the ground that such action could not lie where there existed a contract between the parties covering the same subject matter. Finally, the Court held that because each of the plaintiffs' substantive claims failed as a matter of law, there was no "actual controversy" to support a declaratory relief cause of action.

This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

Click here for opinion.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.