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Chick''s Auto Body v. State Farm Mutual Automobile Insurance Co.

Decided: March 5, 1979.


Deighan, J.s.c.


The New Jersey Antitrust Act (N.J.S.A. 56:9-1 et seq.) seeks "To promote * * * growth of commerce and industry * * * by prohibiting restraints of trade * * * through monopolistic practices and which act to decrease competition * * *." Plaintiffs body repair shops invoke the act to decrease competition by compelling defendant insurance companies to pay a higher rate for their repair services than defendants pay to plaintiffs competitors. If successful, the end result would increase the ever-spiralling insurance rates.

After extensive depositions each defendant has moved to dismiss the complaint or, in the alternative, for summary judgment based upon an exemption in the Antitrust Act for, "The activities * * * of any insurer * * * to the extent that such activities are subject to regulation by the Commissioner of Insurance of this State, or are permitted or are authorized by, the Department of Banking and Insurance Act of 1948 (C. [§ ] 17:1-1 et seq. and the Department of Insurance Act of 1970 (C. [§ ] 17:1C-1 et seq. (N.J.S.A. 56:9-5(b)(4))."

Plaintiffs admit that plaintiff Association, as a nonprofit Association, has no standing to sue and may not do so on behalf of its members. New Jersey Optometric Ass'n v. Hillman-Kohran , 144 N.J. Super. 411, 428 (Ch. Div. 1976) (affirmed) 160 N.J. Super. 81 (App. Div. 1978).

The three-count complaint charges the participation of defendant automobile insurance companies with (1) "an intentional and organized scheme of fixing prices for repair work throughout the southern New Jersey area". (2) "a practice of boycotting * * * automobile repair shops which did not adhere to the aforedescribed scheme of price fixing" and; (3) "a conspiracy to fix prices," all in violation of the New Jersey Antitrust Act, N.J.S.A. 56:9-1 et seq.

Plaintiff auto body shops estimate and perform repair work on damaged automobiles. A portion of this work includes estimates for repairs to automobiles damaged in accidents, as a result of which the owner is entitled, under his automobile insurance policy, to reimbursement for the damage from his automobile insurance carrier. Defendant insurance carriers adjust automobile damage claims under automobile insurance policies written by them in New Jersey.

Plaintiffs allege that defendants fix the prices which plaintiffs charge for repair to damaged automobiles covered by policies of insurance issued by various defendants. In addition, plaintiffs assert that defendants boycott plaintiff auto body shops if they do not meet prices fixed by defendants, and that defendants conspire to fix prices.

From an affidavit submitted by Insurance Company of North America, payment of automobile physical damage claims comprises the largest single cost element in its premium structure for physical damage coverage within the State of New Jersey. In 1976, payments of automobile physical damage claims in New Jersey represented approximately 60% of the total earned premiums allocable to automobile physical damage coverage within the State of New Jersey.

The affidavit establishes that this cost component has a direct impact upon the premium levels charged for automobile insurance. The repair costs must be actuarially analyzed in order to determine and project future premium rates to cover anticipated costs and earn a reasonable return. As such, the cost of repairs to damaged automobiles represents a vital and integral factor in the rate-making structure. There is, therefore, a direct relationship between payments made by defendant insurance companies to settle automobile physical damage claims and the premium rate structure for automobile physical damage insurance. Premium rates for automobile physical damage insurance are filed with and subject to regulation by the New Jersey Commissioner of Insurance. The facts as to relationship between repair costs and premiums have been also judicially recognized. Travelers Ins. Co. v. Blue Cross of Western Pennsylvania , 361 F. Supp. 774 (W.D. Pa. 1972), aff'd 481 F.2d 80 (3 Cir. 1973), cert. den. 414 U.S. 1093, 94 S. Ct. 724, 38 L. Ed. 2d 550 (1973); Frankford Hospital v. Blue Cross of Greater Philadelphia , 417 F. Supp. 1104 (E.D. Pa. 1976); Manasen v. California Dental Services , 424 F. Supp. 657 (N.D. Cal. 1976); California League of Indep. Ins. Producers v. Aetna Cas. & Sur. Co. , 175 F. Supp. 857 (N.D. Cal. 1959); Proctor v. State Farm Mut. Auto. Ins. Co. , 182 U.S. App. D.C. 264, 270, 561 F.2d 262, 268 (1977).

After a damaged motor vehicle is taken to an automobile repair shop, an insurance adjuster inspects the vehicle, prepares an estimate which the insurance company will pay to repair the vehicle and negotiates a price with the body shop. Three elements are used in arriving at the "bottom line" cost estimate: (1) parts to be replaced, (2) time to replace parts and (3) hourly labor rate for repair. Plaintiffs admit that insurance adjusters negotiate the first two elements of the cost formula in good faith, but complain that they refuse to pay more than the prevailing competitive hourly labor charges. They further object to a maximum hourly labor rate which each defendant will pay to a repair body shop for auto

body repairs. Although they acknowledge that any difference between the hourly labor rate charged by the shop and that paid by the insurance company can be billed to and collected from the automobile owner, they contend that the insurance company should pay their hourly rates even if a competitor shop, using generally accepted standards, properly repairs the damaged vehicle at the hourly labor rate which the insurer was willing to pay.

Despite the gravamen of their objection, plaintiffs admit that they receive an hourly service charge in excess of that fixed by the adjuster because (1) they receive a discount on replacement automobile parts and, in addition, (2) they routinely complete repairs in less time than assigned to the adjuster. In every instance plaintiff repair shops consider the "bottom line" dollar amount in deciding whether to take a job at the estimate repair allowance. If they estimate that completion of the repairs will result in a loss, the job will not be accepted.

The substance of plaintiffs' allegations are that defendants, in adjusting these loss claims, determine the estimated repair costs with the view toward having the necessary repairs performed at the least expensive prices. Plaintiffs complain because they are unwilling to perform repairs as cheaply as other repair shops. Actually, they complain that the "fixed price" is too low and should be higher. In effect, plaintiffs seek to force the insurance companies to increase their service rates, and, in turn, the automobile owners insurance premiums.

The purpose of the insurance exemption under N.J.S.A. 56:9-5(b)(4) has been described as "designed to avoid the situation whereby a state regulatory agency acting pursuant to one statute (the insurance laws) requires conduct which might be held to violate another statute (the Anti-Trust Act)." Borland v. Bayonne Hosp. , 122 N.J. Super. 387, 406 (Ch. Div. 1973), aff'd 136 N.J. Super. 60 (App. Div. 1975), aff'd 72 N.J. 152 (1977), cert. den. 434 U.S. 817, 98 S. Ct. 56, 54 L. Ed. 2d 73 (1978).

The qualifying words of the statute are "subject to regulation by the Commissioner of Insurance." See, generally, the cases decided under the McCarran Ferguson Act, 15 U.S.C.A. § 1011 et seq.; FTC v. National Cas. Co. , 357 U.S. 560, 78 S. Ct. 1260, 2 L. Ed. 2d 1540 (1958); Ohio AFL-CIO v. Insurance Rating Bd. , 451 F.2d 1178 (6 Cir. 1971), cert. den. 409 U.S. 917, 93 S. Ct. 215, 34 L. Ed. 2d 180 (1972); Seasongood v. K & K Insurance Agency , 548 F.2d 729 (8 Cir. 1977). The requirement of state regulation to qualify for exemption is abundantly satisfied. The activities alleged in the complaint are regulated by the Commissioner of Insurance in at least three ways, i.e. , (1) regulation of the claims adjustment activities of the defendants, (2) regulation of auto damage insurance rates and (3) regulation of unfair and anticompetitive trade practices of insurance companies.

Regulation of the Claims Adjustment Activities of Insurance Companies

By virtue of authority conferred by N.J.S.A. 17:1-8.1 and N.J.S.A. 17:29B-1 et seq. , the Commissioner of Insurance adopted an expansive automobile physical damage claims procedure effective May 1, 1976. N.J.A.C. 11:3-10.1 et seq. Pursuant to the regulations, a loss adjustment mechanism was established which delineates the required method for resolving all physical damage claims.

In the case of a partial loss an insurer must inspect or cause to be inspected a damaged vehicle within seven working days following receipt of notice. It must commence negotiation and make an offer of settlement within the same period. N.J.A.C. 11:3-10.3(a). These comprehensive regulations define an "agreed price" and the "reasonable cost to repair the damages to the motor vehicle." N.J.A.C. 11:3-10.2. All obligations of the insurer are then stated in terms of the "agreed price" and "reasonable cost." The insurer is not obligated to assume the cost regardless of the reasonableness

thereof. The insurer's decision as to what is a reasonable labor rate is well within the scope of the regulations. Plaintiffs would deny defendants their right, as granted by the regulations, to become actively involved in the process of claims adjusting and to figure their own estimate of the necessary repairs.

The regulations assure the insured the choice of repairer. However, if the insured has no preference as to a repair facility, or if the insured asks the insurer for a recommendation, the insurer "must recommend a qualified repairer who will repair the damaged vehicle at the insurer's estimated cost of repairs." N.J.A.C. 11:3-10:3(d). The insurer must not only recommend a shop, but guarantee its work as well. N.J.A.C. 11:3-10:3(g). Consequently, knowledge of the prices a shop charges, the quality of work it performs, or the guarantee a shop provides, is essential if the insurer itself must guarantee the work of a shop it recommends.

The regulations require that the repairs be made in accordance "with generally accepted standards for safe and proper repairs." N.J.A.C. 11:3-10:3(f, g). If, as plaintiffs contend, defendants authorize incomplete or shoddy repairs such a complaint is properly made to the Commissioner of Insurance.

The complaint of plaintiffs is failure of the defendants to negotiate. Even this is regulated by the Department because all negotiations are required to be conducted in "good faith." N.J.A.C. 11:3-10:3(b). It is further required that the insurer make "all reasonable efforts to obtain an agreed price" with the shop of the customer's choice. N.J.A.C. 11:3-10:3(d). The negotiations must center on the "agreed price," i.e. , the "reasonable cost" of repairs, not the particular hourly rates of the plaintiffs. In furtherance of that policy, if an insurer inspects the damaged vehicle, it must furnish to its insured a ...

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