Dan Krocker, CPA Attorney at Law 710 North Post Oak Road, Suite 400 Houston, Texas 77024 (713) 683-0397 Fax (713) 683-0398 dankrocker55@aol.com April 2, 2004 REQUEST FOR INFORMATION PERTAINING TO THE CONFLICT OF INTEREST OF ALLSTATE OWNING AUTOMOBILE BODY SHOPS, STERLING COLLISION Re: Case No. 3:03-CV-2187-K, Judge James E. Kinkeade, U.S. Dist. Court, Northern District of Texas, Dallas, Texas, Allstate Insurance Company, Sterling Collision Centers, Inc .v. Greg Abbott, Attorney General for the State of Texas Re: Case No. 801,289, Krocker v. Allstate et al, in the County Court at Law No. 2, Harris County, Houston Texas Failure to Provide a Rental Car and failure to reimburse fees for wrecker service Bad Faith claim, Breach of Contract, DTPA, and Violations under Tex. Ins. Code Art. 21.21 Gentlemen: In pursuing my case against Allstate on a bad faith claim, I sent an open records request to the Texas Attorney General. I received several banker’s boxes of files which informed me that Allstate had filed suit against the Attorney General for the State of Texas pertaining to the constitutionality of a recent state law in the state of Texas, HB 1131. H.B. 1131 recognizes the inherent conflict of interest in insurance companies owning body shops and repair shops. Texas H.B. 1131 became Texas law on Sept. 1, 2003. The law prohibits further expansion of insurance company owned auto body repair facilities in Texas and restricts the ability of these companies to speak to Texas customers and claimants. On February 11, 2004 on the CBS Evening News segment, “Eye on America” and on February 12, 2004 on the CBS Early Show, examined the conflicts of interests of insurance companies owning auto body shops. Allstate and Sterling Collision worked diligently with the various state legislatures to mold a bill which they could all agree on. The state legislature made significant concessions to Allstate and Sterling Collision to get some version of the bill passed. Despite representations by Allstate and Sterling that they were satisfied with the final version of the bill, Allstate and Sterling Collision filed a legal challenge to H.B. 1131 on Aug. 29, 2003. Allstate and Sterling Collision should be estopped from further litigation since the state legislature worked out a bill which they had agreed to. Allstate and Sterling want a second bite at the apple. The case is currently in the U.S. District Court in the Northern District of Texas and alleges H.B 1131 is unconstitutional because it violates both Allstate’s and Sterling’s First Amendment right of free speech and the Commerce Clause by unduly interfering with interstate commerce. Kenneth Star represents Allstate and Sterling. A review of the pleadings illustrate their ineffective argument that the new law interferes with interstate commerce. A review of the state legislature comments and discussions reflects the following: 1. H.B. 1131 attempts to eliminate the only independent voice that the car owner has in the repair process, that of an independent body shop owner, insurance companies control both the money to pay for damage to a claimant’s car and the person who will decide what repairs need to be made to get the car out the door. Because publicly traded insurance companies have a responsibility to stockholders to seek the highest premium possible and pay the lowest claims, for which they can negotiate, the consumer, is caught in the middle of the equation. 2. The vertical integration of this industry with a third party payer now directly competing with traditional independent providers creates an inherent conflict of interest by providing an unusually convenient and virtually irresistible avenue for predatory practice by the insurance industry and leaves the consumer without anyone to question the type or quality of repair that their insurance company proposes. This situation would be like an HMO owning a hospital and directly employing your doctors. The lack of choice ensures a system flawed with shoddy, poor quality and less safe repairs. Insurance company ownership of body shops eliminates the rights of consumers and destroys the competitive marketplace. In many states, insurers force repairers to use cheaper, more inferior parts, place caps on prices that can be charged for auto refinishing or paint products, clip cars and steer business away from specific shops. Insurance companies owning the collision repair facility would be like having two attorneys from the same firm represent the plaintiff and the defendant. Neither parties’ best interests will be served. 3. Insurance companies invest in things like stocks and bonds and real estate trusts. They should not invest in auto body shops. There’s only one reason for them to have an auto body shop and that is for them to direct your banged up vehicle to their auto shop to make an extra buck off of you. They’re going to charge you the same rate, the same price as you would get at the garage down at the local Chevy dealership or your neighborhood garage. They’re going to charge you the same price. But just like your neighborhood garage is going to make a profit, they’re going to make an extra profit. So, they’re making one off of your premium and two off of the repair. There is no reason for an insurance company to own an auto repair facility. Insurance companies are basically risk adverse. They like solid liquid investments and auto shops are not one of these. Allstate and Sterling falsely contend that their conflicts of interests and lack of disclosure of ownership of the repair facilities, conflicts of interests, failure to provide trained technicians, failure to inform the claimant of aftermarket parts, used parts, non-OEM parts, crash parts and false guaranty promises are actually an “innovation or idea which provides a superior customer option”. In reviewing the pleadings, discovery, state legislation and consumer complaints, I have found Allstate and Sterling have made the following false statements to the court: 1. Sterling offers “full guarantees” on parts and labor and faster repair times”. 2. “Allstate and Sterling has (sic) always disclosed Sterling is owned by Allstate and that policyholders have the right to select any auto body shop of their choosing”. 3. “Insurer-owned shops have multiple integrity incentives. First, they are an arm of the insurance company trying to promote an overall positive image of the insurer. Second, insurer-owned shops have no incentive to insurer to “cheat themselves”. 4. Sterling has removed all references to Allstate from its website.” 5. “The fact is everything Allstate says about Sterling is truthful and non-misleading.” 6. “Sterling expressly recognized “Allstate customers and claimants may use any body shop they choose.” 7. “Sterling truthfully told customers that they can, on average, expect to get their cars back sooner, get placed in a rental car more easily, and complete payment resolution more readily.” 8. Sterling Collision has a 94% customer satisfaction rating. I am interested in documenting consumer complaints which highlight the inherent conflicts of interests, fraud, bad faith claims pertaining to Allstate and Sterling Collision. In 2001, Allstate purchased Sterling Collision and refers claimants directly to Sterling Collision or their approved list of repair shops. In our case and in many of the complaints I have reviewed from open records requests and an examination of complaints on allstateinsurancesucks.com, I have found a large number of insureds and third party claimants are dissatisfied with their treatment by Allstate and Sterling Collision. I am interested in intervening in the suit between Allstate and the Attorney General in the United States District Court in Dallas since the case has predominately focused on the conflict of interests, constitutionality of the new state law prohibiting insurance companies from owning body shops and economics of the insurance companies steering all their business to their own body shops or shops on their approved lists and immediately discontinuing their relationships and referrals to independent body shops which are within a 5 to 10 mile radius of their insurance owned shops. Currently, the bulk of the argument in the case has been towards economics rather than attacking Allstate and Sterling’s false claims that their arrangement benefits the consumer. The Allstate and Sterling arrangement is an inherent conflict of interest which inhibits the flow of information to the consumer concerning the risks of clipping cars, the use of non-OEM parts, aftermarket parts, used parts, imitation parts and crash parts. An examination of HB 1131 and the current case law highlights the shortfall of the Texas Legislature in protecting the rights of its consumers with regard to the Insurance companies promotion of owning body shops and repair shops and their use of imitation, non-OEM, aftermarket crash parts and clipping. . Recently, the Texas Supreme Court in AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY, ET AL. v. GARY SCHAEFER, 2003 Tex. LEXIS 472, *; 47 Tex. Sup. J. 40 (October 16, 2003) decided that the Texas Standard Personal Auto Policy does not obligate an insurer to compensate a policyholder for a vehicle's diminished market value when the car has been damaged but adequately repaired. Various consumer groups such as Consumer Reports have found the imitation parts dangerous and defective. These imitation parts often are not tested in accordance with federal safety regulations, and their inferior performance in collisions is potentially life-threatening. Furthermore, it appears that repairs made with non-OEM parts often void existing warranties and reduce the vehicle's resale value. Many automotive industry associations refuse to handle imitation parts. The state of Texas is lagging behind the more progressive states’ legislation against the promotion of imitation parts. Many policies provide for an amount necessary to repair or replace the property with other of like kind and quality, which forces the consumer to retain experts to argue whether particular imitation parts are “like kind and quality.” Most consumers can not afford the experts, pro-long litigation, expenses for experts. Most consumers can not even afford rental car expenses when the insurers refuse to provide rental cars as covered under the policy. The insurers work around the state law to financially squeeze the consumer into accepting a low settlement figure. Collision repairers have struggled for years with the issue of aftermarket crash parts. Some insurers have a history of encouraging collision repairers to use aftermarket crash parts. Vehicle owners in the state of Texas should have the right to formal notice of the use of these replacement crash parts and to consent, in writing, to their use. Although the state of Texas requires a formal notice procedure, much of the time the notice requirement is fulfilled in the original insurance policy agreement only and not at the time of repair. At the time of repair, any notice is provided in a deceptive manner to entice the consumer into using aftermarket crash parts by giving the consumer false guaranties and assurances. Most vehicle owners know little about the specifics of a vehicle repair. The vehicle owner’s interest will arouse after a vehicle accident. It is at the point of repair that the vehicle owner should be informed of the types of crash part(s), i.e. aftermarket, original equipment manufactured, recycled, etc., to be used in the repair. The Texas Legislature should be more proactive in the education of consumers about the second most expensive purchase most consumers will make in their lifetime. Although the insurers can no longer force the consumer to use a particular repair shop, they do mislead the consumer on the attributes of the aftermarket crash parts by providing false, misleading information and empty guaranties to market imitation parts without any of the savings going to the consumer. I am finding Allstate attempts to get around the 1991 amendments which prohibit them from steering claimants to particular shops under their Direct Repair Program (“DRP”) or their Priority Repair Option (“PRO”) by suggesting the car can be fixed at an unrealistically low prices which prohibits the claimant from locating a shop that can fix the car at the quoted price or requiring totaled cars be clipped and attached to another car of the same make and model. I have been unable to locate a body shop that does this clipping procedure other than Sterling Collision and shops recommended by Allstate. Unlike many of the independent body shops which require their technicians to have ASE certification or ICAR certifications, the employees and managers at Sterling Collision lack such training and certification. Sterling is attempting to have one manager at each location go through the ASE or ICAR certification but this is simply a corporate goal which has not be obtained. There is no record that any Sterling Collision shop is an ICAR Gold Class shop. To the extent Sterling management eventually does get the training and certification, then the question for the consumer will be, do you want your car fixed by a certified technician or do you want a certified technician checking it off to make sure its right? Allstate has suggested I look at their list of body shops that do clip jobs. The 1991 amendment and H.B. 1131 is useless for such a situation when I am right back being blindly led to clip a car and use aftermarket parts by a body shop owned by the insurance company. To add insult to injury, the clip jobs may affect the vehicle VIN number since the newly acquired wreck may be attached at the firewall by the steering column causing your vehicle to now have a different VIN number. Obviously, Allstate does not properly disclose the clipping process, the problem with the VIN number and the problem with diminished value. I have posted my pleadings on Allstateinsurancesucks.com and have received a tremendous response from various consumers and lawyers pertaining to the conflict of interest in insurance companies owning body shops, clipping, aftermarket parts etc. I am now gathering more information from claimants on their treatment received from Allstate or Sterling Collision to assist my intervention in the Allstate, Sterling v. the Attorney General case. Sincerely, Dan Krocker