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South Dakota bill would curb deductible waiving by ‘bad actor’ auto body shops

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Business Practices | Insurance | Legal
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A bill brought by the South Dakota Auto Body Association aimed at curbing repairer insurance fraud was unanimously passed out of committee Thursday.

Under SB 93, contractors providing motor vehicle, auto body, or collision repair services would not be able to “advertise, promise to provide, or offer any coupon, credit, or rebate to pay all or part of an applicable insurance deductible.”

During a hearing held by the Senate Commerce and Energy Committee bill sponsor Sen. Steve Kolbeck (R-District 2) said it would “protect consumers from potential bad actors.”

He said the legislation mirrors a South Dakota statute that applies to roofing contractors and has been on the books for 13 years. Similar legislation for auto body shops already exists in 17 other states, he said.

“The bill amends Chapter 3724 which deals with deceptive trade practices and consumer protection — those are the purposes behind this bill,” Kolbeck said. “The auto body shops in the state have brought this bill to police their own industry. …We don’t want to over-regulate but we certainly don’t want to underregulate an industry.”

Justin Smith, attorney and lobbyist for the South Dakota Auto Body Association, said when a policyholder doesn’t pay their deductible their insurance contract is violated and insurance companies end up paying more than they should.

“The association does hope this type of conduct is not occurring in South Dakota but this legislation is necessary based on the risks of fraud against insurers and South Dakota customers as well as to protect consumer safety,” Smith said. “It’s for those reasons that laws like this are on the books in a number of other states including our neighbors North Dakota and Montana.”

According to Smith, North Dakota’s law is nearly identical to SB 93 and imposes a criminal penalty. In Tennessee, legislators created a private right for the customer or insurer to sue the auto body shop for damages, he said.

“If an auto body shop engages in the prohibited conduct under Senate Bill 93, the business’s contract with the customer is void,” Smith said. “This is a clean solution that doesn’t burden our courts with criminal prosecutions or our Division of Insurance with additional enforcement obligations.”

Smith testified that last year, an auto body shop advertised that it would pay customer deductibles, which led the association to contact state regulators to ask questions.

“Our members have believed for decades that the provisions of Senate Bill 93 were already law in South Dakota,” he said. “The association was told that, unlike many other states, there’s no explicit law on the books in South Dakota that directly prohibits this practice.”

“This bill only prohibits a very limited category of business practices that carry specific types of fraud or safety risks. After passage of SB 93, auto body shops will still be able to make legitimate business decisions like offering customer loyalty discounts, need-based cost reductions, coupons, and other programs.”

Doug Abraham, an attorney and lobbyist for the American Property Casualty Insurance Association, De Smet Farm Mutual Insurance Company of South Dakota, and De Smet Insurance Company of South Dakota, said all of his clients support the legislation and feel like it’s necessary.

“The average cost of repair in the United States is $4,700 for an auto collision,” he said. “The average deductible is $500 and that’s creeping up towards $1,000. An insurer has a duty to pay the fair market value of the repair costs… If an entity, on an average $4,700 average claim, can afford to give back to the consumer $1,000 to incentivize them to come in the door, the math on that doesn’t work. There’s something dishonest at play. Fundamentally, this is purely an issue of insurance fraud. I agree that that is already illegal. It’s already theft by deception but this will eliminate this conduct.”

Abraham added that the legislation would make auto insurance more affordable and allow companies to offer lower deductible plans at a more cost-effective rate. It would also ensure “better service and a fairer environment every time you go to each repair provider.”

Craig Matson, lobbyist for the South Dakota Insurance Alliance and Farmers Mutual of Nebraska, also spoke in support of the bill.

“If you are the insured who has a claim and you go in and you pay your deductible you are being treated differently than those folks that have their deductible waived,” he said. “[T]he costs of those claims where the deductible is waived or refunded are actually going to be shifted to the other ones who were following the rules of their policy. If you are a person paying your deductible, you also are paying the deductibles for those others who aren’t paying it.”

The committee received letters of support from the National Association of Mutual Insurance Companies and the National Insurance Crime Bureau.

Richard Tieszen, on behalf of State Farm Insurance, said if policyholders don’t pay their deductibles it will show up in the total repair bill and not necessarily in the customer’s favor.

“We choose our deductible,” he said. “We choose how much of the cost of repair would be paid by us. That’s done for a variety of reasons. When someone says they’re going to pay it, irrespective of what the deductible is that you’ve chosen, there’s something we need to be aware of there, and that is that it’s not free… We hope you’ll oppose it.”

Tieszen, however, is listed in the meeting minutes as a proponent of the bill.

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