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June 2012

Ortega v. Topa Ins. Co. ? Two-Tier Physical Damage Coverage Permissible

An Insurer's Practice of Paying All Costs Incurred at a Preferred Repair Facility But Only Part of the Costs Incurred at an Unapproved Facility Does Not Violate Insurance Code § 758.5 Where Restriction Was Conspicuously Disclosed

(May 24, 2012) __ Cal.App.4th __, 12 C.D.O.S. 5675

The California Court of Appeal, Second Appellate District, affirmed an order striking class allegations challenging an automobile insurer's practice of providing two tiers of physical damage coverage, which entailed paying all of the reasonable costs incurred at a preferred repair facility ("PRF"), but only 80 percent of the reasonable costs incurred at an unapproved facility.  The trial court held this practice did not violate Insurance Code § 758.5, because (1) the policy disclosed the coverage restrictions in a sufficiently conspicuous manner; and (2)  the statute does not require 100 percent coverage under all circumstances.

Plaintiff and class representative Eric Ortega ("Ortega") obtained a restricted automobile policy from Topa Insurance Company ("Topa") subject to the two-tier physical damage coverage.  After Ortega filed a claim under the policy because his car was vandalized, he had it repaired at a PRF but was dissatisfied with the repairs because the PRF replaced the damaged parts with nonoriginal equipment or manufacturer ("non-OEM") parts.  Ortega alleged the PRF repairs did not restore his car to its pre-loss condition.

Ortega filed a class action suit against Topa.  He alleged Topa violates Insurance Code § 758.5 on two grounds:  (1)  the Topa application violates the disclosure requirement of section 758.5(d)(1); and (2) the limited physical damage coverage provision in the Topa policy violates section 758.5(d)(2) because it steers policyholders by requiring them to use a Topa PRF.

Ortega sought to represent three putative classes.  Class A consisted of Topa policyholders who chose to take their automobile to a non-PRF and were subject to the discounted coverage.  Class B were those policyholders who took their vehicle to a PRF and had non-OEM parts used that failed to repair the vehicle to its pre-loss condition.  Class C were those policyholders who were subject to the two-tier coverage practice.  Ortega, individually, and on behalf of the putative classes, asserted causes of action including breach of contract and breach of the implied covenant of good faith and fair dealing.

The trial court determined Class A and Class C could not maintain a class action lawsuit because the complaint failed to allege common questions of fact and law.  Class B was the only ascertainable class that met the requirements to proceed as a class.  The trial court then determined that Ortega and Class B could proceed with their contract and implied covenant claims, but only if the policy violated section 758.5.

The trial court concluded Topa's policy did not violate section 758.5.  Topa subsequently filed a motion to strike the remaining class allegations asserted on behalf of Class B.  The trial court granted the motion, disposing of the breach of contract and breach of the implied covenant causes of action.

Although a motion to strike is generally not appealable, where the trial court's order was effectively a final judgment because it struck all the class allegations from the complaint, Ortega could and did appeal under the "death knell" doctrine.

The appellate court applied an abuse of discretion standard on review.  It first considered whether the Topa application violated section 758.5(d)(1), which provides an insurer must "prominently disclose," in an application for insurance, that the insurance contract applied for recommends an automobile be repaired at a particular facility.  The statute does not define what "prominently disclose" entails; thus, the court looked to legislative intent, and held the legislature appears to have given insurance companies the right to choose how to make the disclosure conspicuous.  The title of the Topa application was boldfaced "[t]his is a restricted policy."  In a separate, boxed-off section, under the heading, "certification of applicant," the applicant must sign and certify his or her understanding of the nature of the restricted policy.  A separate section states that in exchange for reduced premiums, the policy has "limited physical damage coverages" and repairs must be "effected by an approved [PFR]."  Reading the application as a whole, the court concluded it met the statutory disclosure requirement. 

The appellate court turned to the question of whether the Topa policy violates section 758.5(d)(2).  The appellate court followed the reasoning of Maystruk v. Infinity Ins. Co.1, where it was held there was no statutory violation in a similar limited physical damage coverage provision because the statute did not specifically prohibit the practice of two tiers of coverage.  Rather, subsection (d)(2) requires the insurer to pay 100 percent of the repair costs when the insured accepts the insurer's recommendation to take the vehicle to a specific shop.  The Topa policy covered full costs incurred if the insured went to a PRF.  Thus, the Topa policy complied with the statute.  Its additional limited coverage to a non-PRF was not a direct violation.
Finally, Ortega appealed the trial court's ruling dismissing the Class B claimants on grounds the allegations did not plead common questions of law and fact.  Ortega contended he and the Class B claimants have asserted viable causes of action for breach of contract and breach of the implied covenant because the use of universally inferior non-OEM parts by the PRF did not restore covered vehicles to pre-loss condition.  He further contended he and the putative class did not receive notice from the PRF that the facility intended to use non-OEM parts.  The appellate court held that whether and when an insured received notice under these circumstances is an individual inquiry for the court.  Thus, the appellate court affirmed the trial court's ruling the complaint did not plead common issues of fact.

The appellate court affirmed the trial court's order striking all class allegations.
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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

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1 Maystruk v. Infinity Ins. Co. (2009) 175 Cal.App.4th 881


David L. Jones