Is Time Finally Up for Total Loss Under-Indemnification Tactics?

by Chasidy Rae Sisk

When a vehicle owner brings their car to a shop after an accident, they typically expect it to be repaired, so it’s a tough blow when they learn their vehicle has been deemed a total loss.

It’s even more upsetting when their insurance carrier shortchanges them by undervaluing the actual cash value (ACV) of the loss. Yet, that’s a common occurrence these days as demonstrated by the prevalence of allegations, lawsuits and settlements related to under-indemnification.

While shops, vehicle owners and consumer advocates have been bringing these concerns to the forefront for a number of years through a variety of methods, a recent lawsuit in California suggests that this ongoing issue has finally captured the attention of public officials and hopefully indicates that it’s time for these lowball settlements to come to an end. 

The Alameda County Consumer Justice Bureau (CJB), under District Attorney Pamela Price, recently filed a lawsuit against Progressive, USAA, CCC Intelligent Solutions and Mitchell International, which alleges that, in order to maximize insurers’ profits to the detriment of California consumers, the companies “worked together to create and use automobile valuation software to systematically undervalue ‘totaled’ vehicles and pay California insurance consumers less than the actual value owed under the policies” in violation of a number of California laws, including the Insurance Code, Unfair Competition Law and False Advertising Law.

“A vehicle is the lynchpin to life in California. Many residents live paycheck to paycheck and go deeply into debt just to buy a car,” District Attorney Price said in the press release issued by her office. “When an insurance company underpays its customers for a totaled vehicle, that can result in missed loan payments, damaged credit scores, impacted borrowing, and the inability to buy a replacement vehicle. That can lead to job losses and even homelessness. California residents and small businesses try their best to follow the law. They expect their insurance companies and affiliates to do the same.”

According to the 69-page complaint filed in April 2024, these insurers not only failed to operate in good faith; they are accused of using specially designed valuation software – specially created by software developers as a means of manipulating and lowering the ACV of total loss vehicles by utilizing a deceptive set of “comparable” vehicles which allow insurers to lower the reported ACV and coerce customers into accepting lowball settlement offers. Additionally, the complaint indicates that insurers minimize their losses further by reselling the totaled vehicles at auction. 

The lawsuit acknowledges that policyholders are only one entity being negatively impacted by this scheme. It also impacts businesses, including car manufacturers and dealers, gap insurance providers, automobile loan institutions and car repair facilities “that lose out on potential repair business when vehicles are systematically totaled instead of repaired.”

Industry leaders weigh in on this scheme and what the CJB’s lawsuit could mean for collision repairers nationwide.

“The idea that insurers under-indemnify their policyholders isn’t shocking…We’ve all known that something isn’t quite right about how insurers ‘value’ claims for years,” ABAT President Burl Richards points out. “But it is pretty exciting to see a public official taking note of this egregious wrongdoing and making an attempt to defend her constituents. I’ve often wondered if insurance companies will ever be held accountable for shortchanging customers on total losses and also on repairable claims since they often refuse to pay for the OEM-required processes and procedures that are necessary to perform safe and proper repairs. It’s great that one state is taking notice of the under-indemnification scheme that shortchanges consumers and makes it increasingly difficult for body shops to run their businesses effectively. Hopefully, this momentum spreads across the country and creates some real change!”

“The outcome will certainly be interesting, especially if any or all of the plaintiffs are found guilty, as it could catalyze similar actions in other jurisdictions,” suggests Alliance of Automotive Service Providers of New Jersey President Ken Miller. “The systematic undervaluation of total losses is not a new issue, and I wouldn’t necessarily view this case as a solution to the problem, even with a favorable verdict. But we can hope! So, until this problem is resolved, let’s try something different. As service providers, we have a responsibility to edify our customers about the total loss process, inform them about the relevant laws and suggest potential tools to help determine a proper valuation. Armed with the correct information, savvy individuals should be able to negotiate equitable settlements with insurers and avoid being taken advantage of.”

“For far too long, here in Massachusetts, we have seen this method aggressively pursued by many insurers in an effort to unjustly mitigate their financial liability and obligation to the vehicle owners,” notes Alliance of Automotive Service Providers of Massachusetts Executive Director Lucky Papageorg. “Using the ‘official’ looking computer-generated reports, which can be difficult to navigate by the typical vehicle owner, insurers successfully deter far too many insureds from challenging the validity of the settlement offer as being fair and reasonable. From my own personal experience when approached by insureds seeking assistance, I have found that the settlement offers are significantly lower at first, but those that are challenged by the vehicle owner will typically increase significantly. 

“We have been educating our member shops regarding what to look for and how they may assist their customers by providing them with information,” he continues. “I feel that the only way to thwart the underhanded methods of the insurers, in combination with the information providers, is exactly what is happening in California; a lawsuit may take time to be resolved but will shine a light on the collusion between the parties, which is clearly evident and meant to under-indemnify their policyholders. This practice has allowed insurers to unjustly enrich themselves at the expense of the policyholder. I applaud the action being pursued in California.”

The CJB’s complaint estimates that the underpayment on an individual total loss claim averages $3,000 to $4,000, creating an “aggregate amount of underpayments affecting California insureds [which] is likely in the billions of dollars,” yet the “unlawful, unfair and fraudulent” scheme continues since it’s unlikely that most insureds will file a lawsuit against their carrier, a fact that insurance companies are well aware of. 

“Even if insureds suspect an underpayment, most would conclude that it is not in their economic interest to bring suit against an insurance company defendant over that amount of money,” the complaint points out. “The relatively small amount of any single underpayment and the extremely large amount of the underpayments in the aggregate are some of the insidious aspects of the scheme. An insured should never have to invoke appraisal or sue their insurer to recover money stolen from them by their insurer.”

The lawsuit seeks civil penalties, restitution for California consumers, injunctive relief and associated fees and costs. “Public safety includes protecting consumers from powerful companies that seek only to maximize profits,” District Attorney Price acknowledged in the release. “We are seeking to level the playing field for vehicle owners who face what looks like a rigged game when their car or truck is totaled because a loss of a vehicle can destabilize a person’s life.”

Stay tuned to Texas Automotive as this situation unfolds.

Want more? Check out the July 2024 issue of Texas Automotive!