Auto Insurers Attack NY Insurance Law
Using First Amendment

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If you're interested in advertising and the First Amendment, you have come to the right place because you will find numerous articles concerning commercial speech here. The following article originally appeared in an earlier Issue of Advertising Compliance Service™ - which was continuously published from 1981-2015. Entitled, "Auto Insurers Attack NY Insurance Law Using First Amendment", it discusses a commercial speech decision of the Federal District Court for the Southern District of New York. In this case, several of the largest U.S. auto insurers took aim at a little-known provision of the New York insurance law. Those auto insurers argued that First Amendment protections for commercial speech barred the New York Department of Insurance from intruding into the companies' communications to their insureds. The car insurance companies won, and the insurance restriction has been struck down.

Note: You will find a wide variety of online car insurance resources, articles and links on this page. This web page also contains a list of several ways to save money on car insurance.

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FILE: TAB #10, COMMERCIAL SPEECH, ARTICLE #34

Auto Insurers Attack NY Insurance Law Using the First Amendment

David S. Versfelt*

Circumstances Giving Rise to First Amendment Lawsuit

We all know the typical circumstances giving rise to a First Amendment lawsuit involving commercial speech. First, some governmental unit--federal, state, or municipal--promulgates a restriction aimed at an unpopular form of commercial speech, whether it be advertising for alcoholic beverages, promotion of cigarettes, or some other representation regarding, most often, a "sin" product. In response, one or more marketers of the particular product commences suit in federal or state court seeking to have the court prevent implementation of the restriction. In most cases, whatever the outcome, the controversy reflects a current political or legislative struggle; in essence, the policy dispute simply moves temporarily to the courts.

Recent Commercial Speech Decision

But a recent commercial speech decision of the Federal District Court for the Southern District of New York reflects a different course entirely. The case is Allstate Insurance Co. v. Serio, 2000 U.S. Dist. LEXIS 6055 (May 4, 2000). There, several of the largest auto insurers in the country took aim at a little-known provision of the New York Insurance Law--a provision that had been on the books for over 26 years--in an area of insurance regulation that certainly cannot be characterized as a current hot topic in public policy. Those insurers argued that First Amendment protections for commercial speech prohibited the New York Department of Insurance from intruding into the companies' communications to their insureds. The insurance companies won, and the insurance restriction has been struck down.

*Mr. Versfelt practices in the New York City office of the law firm Kirkpatrick & Lockhart LLP. He serves on the Editorial Advisory Board of Advertising Compliance Service™.

Background: Insurance Regulation In New York

New York State has long had one of the most regulated economies in the country, and the auto insurance industry in New York has not escaped regulatory oversight. The New York Insurance Law, and the state regulatory machinery overseeing insurance companies--known as the Insurance Department--reaches into virtually all aspects of the sale and administration of insurance policies. The Allstate litigation focused upon the laws and regulations applicable to insurance company communications with the owners of insured autos regarding selection of auto body shops to do vehicle repairs after a collision.

In 1973, the New York Legislature enacted Section 2610(a) of the Insurance Law prohibiting motor vehicle insurers from requiring that auto repairs after accidents be made at particular body shops. (The practice of requiring insureds to use favored body shops is called "steering.") The next year, the Legislature added Section 2610(b), which requires that in processing auto vehicle claims insurers "shall not, unless expressly requested by the insured, recommend or suggest repairs to be made . . . in a particular place or shop or by a particular concern." The purpose of these provisions was to prevent insurers from conditioning payments for losses on having repairs done by particular auto body shops. The Allstate litigation focused on Section 2610(b) and the Insurance Department's implementation of it.

How Statute Restricted Insurer Speech

The statutory prohibition interfered with the insurance industry's understandable desire to have repairs done at body shops whose operations have been vetted by the insurers as to price, quality of workmanship and speed of service. For example, Allstate has long had a "Priority Repair Option" Program--implemented in every state but New York--that provides for Allstate agents to recommend selected repair shops to any vehicle owner who does not volunteer a preferred shop, with Allstate offering to guarantee any repairs undertaken by their selected shops. However, in New York, the provisions of Section 2610(b), augmented since 1993 by internal enforcement guidelines of the Insurance Department, have prevented Allstate's standard implementation of its Program. The Insurance Department has characterized the written explanation of the Allstate Program that Allstate gives to owners of insured vehicles as unlawful "steering" of those owners in violation of Section 2610(b). To avoid monetary fines (or even stronger sanctions) Allstate never implemented its Priority Repair Option Program in New York. In New York, Allstate has not mentioned anything about repair facilities unless the owner of the vehicle specifically requests a referral or recommendation.

Another insurer, GEICO, also tried to implement a repair program in New York, and also was prevented from doing so by the Insurance Department based upon Section 2610(b). GEICO's program was less involved than Allstate's: it simply offered an endorsement to its auto policy, for a small discount in premium, that provided that GEICO could recommend specific body shops if the insured vehicle were damaged during the term of the policy. As with Allstate's program, however, the New York Insurance Department banned the endorsement and any corporate communications about it with GEICO policyholders in New York.

Insurers Strike Back in Court

Allstate and GEICO each decided to fight the Insurance Department in federal court. They sued, alleging that Section 2610(b) and the Insurance Department's implementation of it contravenes the companies' commercial speech rights under the First Amendment of the U.S. Constitution and the Constitution of New York. Each company moved for summary judgment based upon submissions including documents and depositions, and the Insurance Department cross-moved for summary judgment upholding the insurance statute and its implementation as valid regulatory means of protecting policyholders.

The Insurance Department tried several preliminary arguments in an attempt to prevent the court from evaluating Section 2610(b) under the First Amendment. First, it tried to characterize the activity restricted by the statute as "primarily commercial conduct," not commercial speech. But Judge Richard Casey easily rejected that assertion by citing Cohen v. California, 403 U.S. 15 (1971), because the only activity that the statute seeks to punish is "the communication and conveyance of a message"--a message about the companies' particular body shop repair programs. The Department next tried to describe Section 2610(b) as "content-neutral." However, the court rejected that position because the statute was enacted as a result of the Legislature's disagreement with "steering" messages that the Legislature thought the insurance companies were conveying. As the court reasoned, "prohibiting speech that a speaker would otherwise make . . . alters and regulates the content of the speech. Through Section 3610(b), the State seeks to control the dialogue insurance companies have with insureds."

The Department's primary thrust, however, was to argue that the insurance companies' communications for their various repair programs were inherently misleading and coercive. In essence, the Department argued that the inherent leverage the companies have over their policyholders makes it difficult for policyholders to appreciate that they have a choice as to selection of a repair shop. But the court rejected that position as well. After reviewing the particulars of the companies' programs, Judge Casey concluded that they left open a broad opportunity for insureds to choose a non-participating shop. Citing Central Hudson, 447 U.S. 557 (1980), and 44 Liquormart Inc. v. State of Rhode Island, 517 U.S. 484 (1996), the court would not accept the notion "that consumers' lack of intelligence requires the State to deprive them of options or limit their choices to those which the state thinks are acceptable."

Insurance Law Provision Failed under Central Hudson

The Insurance Department did not fare much better when the court applied the well-established analytical prongs of Central Hudson, 447 U.S. 557 (1980):

(1) that the state demonstrate a substantial governmental interest in the area of the challenged restriction; (2) that the specific restriction materially advance the state's interest; and (3) that the specific restriction be narrowly drawn to further the asserted state interest.

The court recognized that the Insurance Department had a substantial interest in regulating the insurance industry in New York. But the court found no advancement of that interest by the existence and enforcement of Section 2610(b). As Judge Casey reasoned:

The power to prohibit or to regulate particular conduct does not necessarily include the power to prohibit or regulate speech about such conduct. The Department cannot satisfy its burden of proving that Section 2610(b) advances the State interests `by mere speculation or conjecture . . ..' 2000 U.S. Dist. LEXIS 6055 at *67, citing Rubin v. Coors Brewing Co., 514 U.S. 476 (1995).

The Department was forced to admit that policyholder complaints about company "steering" to certain repair shops are only rarely reported, making Section 2610(b) look like legislative surplussage, given the prohibition established in Section 2610(a). The court concluded that "the harms recited by the Department are not supported by reliable evidence and the challenged statute does not serve the [asserted] Sate interests . . .."

The court then analyzed whether the statute was narrowly enough drawn, although it specifically noted that the failure of Section 2610(b) to satisfy Central Hudson's "advancement" requirement made any analysis of Central Hudson's final prong unnecessary. Nevertheless, the court found Section 2610(b) overbroad and over-intrusive because the valid regulatory interests of prohibiting an insurer from requiring the use of a particular repair shop is already addressed in Section 2610(a).

Judge Casey thus struck down Section 2610(b) as applied to Allstate and Geico, and it will not take much time for other vehicle insurers having similar repair shop programs to obtain the advantage of the ruling.

The Start of Corporate Challenges?

Judge Casey's decision to strike down enforcement of the statute followed well-established legal standards in the area of First Amendment commercial speech, such as Central Hudson's multi-pronged analysis. What is most striking about the Allstate litigation, however, is the fact that the insurance companies started the challenge against an arcane provision first established over 26 years ago.

That corporate assertiveness was rewarded here, and naturally raises the question whether other corporate entities in highly regulated industries, including electric and gas utilities, health care companies, banks and other commercial entities, might be encouraged now to challenge some of the myriad commercial speech restrictions that pervade the regulated sections of state industries.

LAWYER'S REFERENCE SERVICE

Allstate Insurance Co. v. Serio, 2000 U.S. Dist. LEXIS 6055 (May 4, 2000).

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