5 Points On New Ruling: Unreasonable Storage Reduces ACV Payment

A recent decision by the Appeals Court in the case of Puopolo et al. v. The Commerce Insurance Company might be a short opinion that has a disproportionate impact on first-party property damage total loss claims.

The ten-page Puopolo decision holds that automobile insurers are permitted under the standard automobile policy to reduce total loss payments owed to first-party insureds for storage charges imposed by independent body shops that are unreasonable. In the Puopolo case, Commerce proved to the Court that a reasonable rate for storage of a total loss, based on a statute and its eight-hundred preferred body shops’ charges, was $35.00 a day. The Court then agreed with Commerce’s legal position that when its insureds brought their damaged vehicles to nonpreferred body shops that charged higher storage rates for storing a total loss, Commerce could pay the nonpreferred body shops their higher storage rates but then recover its overpayment, to the extent it was unreasonable, from the insureds’ actual cash value payments.

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When an insurer may chargeback for an unreasonable storage charge

The circumstances for when an automobile insurer can reduce a total loss payment by excess storage charges are summed up in the following list from the Puopolo decision affirmed by the Appeals Court:

1. Where the owner of an automobile insured in Massachusetts entrusts their damaged vehicle to a non-referral repair shop and thereby agrees to pay storage fees at the rate charged by that shop; and,
2. The vehicle’s insurer declares the vehicle to be a total loss, offers to pay the insured the actual cash value of the vehicle, and exercises its contractual right under the standard Massachusetts automobile insurance policy to take title to the vehicle; and if,
3. The insured-selected repair shop refuses to release its statutory lien on the vehicle until it is paid the full storage charge that was agreed to by the insured.
4. Then the insurer may, consistent with the terms of the standard policy and Massachusetts law as stated in the Puopolo decision, pay the full storage charge agreed to by the insured with the non-referral repair shop, take possession of and title to the damaged vehicle, and
5. Deduct from its actual cash value payment to the insured the difference between (i) a reasonable storage charge for the time the vehicle was at the non-referral repair shop and (ii) the excessive storage charge actually imposed by the insured-selected repair shop

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The facts of the Puopolo plaintiffs’ legal claims against Commerce

The facts in the Puopolo case are uncomplicated. Three insureds of Commerce, Michelle Puopolo, Victor Pagan, and Jessica Nohmy, had first-party property damage losses and made claims under their insurance policies with Commerce. Each of these insureds elected to have their vehicles brought to an independent body shop that had no preferred contract with Commerce

After her vehicle suffered damage, Ms. Puopolo brought her vehicle to Commonwealth Auto Body and agreed to its posted rates. Commonwealth was not a Commerce referral shop. Mr. Pagan, after his loss, had his vehicle removed from a Commerce preferred body shop that charged $35.00 per day for storage to J & G Transmission Auto Body which charged $95.00 per day for storage. The final plaintiff, Ms. Nohmy, chose to have her vehicle moved from a Commerce preferred body shop, which charged $35 a day, to Susi Auto Body which charged $65.00 a day, because she knew the shop’s owners.

On each of the three claims, Commerce declared the vehicles total losses, and when Commerce sought to retrieve the vehicles for salvage, the body shops claimed storage charges at their posted rates: $1,700.00 on the Puopolo vehicle, $2,280.00 on the Pagan vehicle, and $760.00 on the Nohmy vehicle.

Commerce did not dispute the storage bills or attempt to reduce the charges. Instead, Commerce deducted from the plaintiffs’ total loss payments that portion of each storage payment that it felt exceeded a reasonable storage rate.

The plaintiffs filed suit in the Superior Court, claiming that Commerce had breached their contracts by paying less than the full actual cash values of their vehicles except for any deductibles.

After initially certifying the plaintiffs’ claims as a class action, the Superior Court, on cross-motions for summary judgment, decertified the class and entered summary judgment for Commerce.

The plaintiffs appealed to the Appeals Court

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The Puopolo Plaintiffs’ legal claims and the Appeals Court’s decision

In the Appeals Court, the plaintiffs argued that Commerce had, under its 2008 and 2016 policy forms, the obligation to pay the actual cash value of the total loss, less any deductible, but otherwise, Commerce had no right to further reduce the contractual amount payable.

The 2008 edition policy did not provide specifically for storage costs on first-party claims. However, this policy stated that the losses the insurer would pay included “reasonable expenses incurred” where the insured has done “whatever is reasonable to protect the automobile from further damage or loss.” The 2016 edition, however, stated that the insurer “will also pay reasonable and necessary expenses for towing, recovery, and storage of your auto.”

In its decision, the Appeals Court held that neither contract form provided as a legal matter that the actual cash value of the vehicle payable under the policy for a total loss was “irreducible,” except for the policy’s deductible.

The Court found that plaintiffs, in their argument, had overlooked the words in both policies that obligated Commerce to pay only “reasonable expenses.”

Then, applying the principle that “every word of an insurance contract must be presumed to have been employed with the purpose and must be given meaning in effect whenever practicable,” the Court concluded that these insurance contracts plainly allowed Commerce only to pay storage expenses that were reasonable. Therefore, Commerce had the right to offset from its payments to these insureds the unreasonable portion of the payments Commerce made to the nonpreferred body shop the insureds selected

The Court also noted that the only evidence of what constituted a reasonable daily storage fee had come from Commerce, pointing out that the statutory rate for police-ordered tows was $35.00 per day and that Commerce’s 800 preferred shops charged between $25.00 and $35.00 a day for storage.

The Court also ruled against the plaintiffs on their unfair claim practice count and their argument that Commerce had a duty under the Commonwealth Automobile Reinsurers (CAR) performance standards to contest unreasonable storage costs.

The CAR standards for “Storage and towing costs” required servicing carriers, like Commerce, to “have a plan to ensure that non-regulated towing and storage charges are reasonable, or to resist and reduce said charges if unreasonable.”

The Court held that the plaintiffs had focused on only the second clause of the standard. The plaintiffs claimed that this clause of the standard imposed an obligation on Commerce to negotiate or dispute storage payments with nonpreferred shops like the ones where the plaintiffs had independently elected to store their vehicles. The Court, however, noted that the standard had an either-or condition. Commerce, to the Court, satisfied the standard because it had a plan to ensure that storage charges were reasonable because it had a preferred body shop referral network with reasonable storage fees.

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Five points to consider about insurers deducting excess storage charges

For insurers, the Puopolo decision creates a revenue-neutral situation that allows them to avoid disputes with independent body shops over total loss storage charges. The decision’s effect is to create a sort of balance billing situation like what once existed in health insurance before legislation banned the practice.

However, independent agents may wish to proactively advise insureds with claims that involve first-party auto damage claims that are possible total losses about the risk of dealing with a nonpreferred body shop. Now that the Appeals Court has approved carriers offsetting payments for unreasonable storage rates against an insured’s total loss payment, agents may have to answer insureds’ questions about total loss payments deductions ranging from hundreds of dollars on up.

However, for both agents and insurers, there are some initial points they may wish to consider.

1. Agents advising insureds about where they may have their vehicles repaired may want to alert their insureds to carefully check the posted rates and to read the documents they are asked to sign at a nonpreferred body shop.
2. If an agent refers or suggests a nonpreferred body shop to an insured for repairs, they should advise the insured that this body shop may be charging a rate that could result in a chargeback by their insurance company if their vehicle is determined to be a total loss.
3. Insurers implementing the practice allowed by the Appeals Court to offset excess storage charges against total losses may wish to warn first-party claimants about the possibility of a deduction in a total loss payment for excess storage charges.
4. Similarly, while insurers cannot steer insureds away from or towards any particular body shop, the Appeals Court decision should allow insurers to initially advise insureds that the company has a policy of seeking recovery for excessive storage charges if they contract with a nonpreferred body shop.
5. Both agents and insurers might consider including in their standard documents a statement explaining to insureds that if they contract with an independent body shop, they best know what daily storage rate that body shop charges and that they may be liable for a goodly portion of that rate if their vehicle is declared a total loss.

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Twenty days for the Puopolo plaintiffs to file for further appellate review by the Supreme Judicial Court

The Massachusetts Appeals Court is an intermediate appellate court. The ultimate judicial authority resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review. However, the allowance of any further appeal is discretionary by the Supreme Judicial Court.

Under the Massachusetts Rules of Appellate Procedure, the Puopolo plaintiffs will have until May 16, 2022, to file a petition for further appellate review.

Agency Checklists will keep you posted

Applications for further appellate review are rarely granted. In this case, an unusual factor was that the Superior Court had originally certified the Puopolo case as a class action but subsequently decertified the class and entered summary judgment for Commerce. That fact, coupled with the effect of the Puopolo decision on consumers and independent body shops, may cause the Supreme Judicial Court to give this case a closer look for possible further appellate review.

Agency Checklists will monitor this case and keeps its readers posted as to any further developments.