Auto Damage Claims:Replacement Parts and Repair Shops

• Significance of issue

• Auto replacement parts

• State Farm case

• Insurance companies and repair shops

Car Repairs

• 25-30 million auto claims each year

• $35 billion in 2001

• Major concerns for car owners– Time involved getting repair estimates– Inconvenience of leaving vehicle for days– Dissatisfaction with repairs

Auto Replacement Parts

Why is this an important issue?

Types of replacement parts

History of replacement part costs

Why is this an Important Issue

Size of market is significant

$1.2 billion per year spent for these replacement parts

Consumer fairness

Insurance companies

Auto manufacturers

Impact on price and solvency of insurers

Types of Replacement PartsCrash parts - sheet metal or plastic installed on exterior of car

Hoods, doors, fenders, trunk lidsMechanical parts - involved in operation of vehicle

Batteries, filters, mufflers, spark plugsOriginal Equipment Manufacturer (OEM)After-market partsRecycled partsCertification

Certified Automotive Parts Association (CAPA)

History of Replacement PartsHenry Ford is reputed to have said:

I would give my cars away if I could have a monopoly on selling replacement parts

Prior to the 1970s, manufacturers did have a monopoly on crash replacement parts

Inflation started to be a problem in 1970sAuto manufacturers started to raise prices on crash

replacement parts much more than car pricesIndependent manufacturers started to produce crash

replacement parts

History - 2Car manufacturers were forced to compete on price

with after-market producersCar manufacturers strategy

Discredit after-market partsBan after-market partsLawsuits against insurers that required after-market parts

Insurance companies formed organization to certify quality of after-market parts CAPA begun in 1987

Situation in Late 1990sCrash parts market

OEM New 80%OEM Recycled 5%After-market parts 15%

Examples of costs 1997 Ford Contour hood

OEM $450After-market supplier $266

1999 Toyota Camry LECost new $23,263Cost of OEM parts $101,335

Studies on Quality of After-Market Crash Parts

Insurance Institute for Highway Safety 1987 and 2000No significant differences in crash resultsPossible exception – hoods

hood latch could failhood may fail to buckle properly in crash

Ford 1994After-market crash parts inferior to Ford parts

Thatcham 1995 (British insurance industry test facility)No significant difference in crash tests

Consumer Reports 1999CAPA certified parts rusted more quickly and did not always fit properlyBumpers (not certified by CAPA) gave poor low-speed crash protection

State Farm Case

• State Farm auto policy language

• Class action suit on replacement parts– Avery v. State Farm

• Repercussions

State Farm Coverage Limit of Liability

Comprehensive and Collision CoverageThe limit of our liability for loss to property or any part of it is the

lower of:1. The actual cash value; or2. The cost of repair or replacementThe cost of repair or replacement is based upon one of the following:1. The cost of repair of replacement agreed upon by you and us2. A competitive bid approved by us; or3. An estimate written based upon the prevailing competitive

price. ....We will include in the estimate parts sufficient to restore the vehicle to its pre-loss condition. You agree with us that such parts may include either parts furnished by the vehicle’s manufacturer or parts from other sources including non-original equipment manufacturers.

What is a Policyholder Entitled To if a 5 Year Old Car is Damaged?

New OEM Parts

Recycled OEM Parts from another 5 year old car

New After-market Parts of Similar Quality to New OEM Parts

Avery v. State Farm (1)Originally Snider v. State Farm

Changed to Avery v. State Farm when it was determined that Tammi Snider’s vehicle was not repaired with non-OEM parts

Class action suit representing 4.7 million policyholders nationwide

Tried in Williamson County IllinoisOctober 1999 verdict

$456 million for damages$730 million punitive damages$1.2 billion total award

Avery v. State Farm (2)Appeals

Appellate court ruling (April 2001)

Upheld verdict

Reduced award by $130 million

Illinois Supreme Court (August 2005)

Overturned verdict

Class action had been improperly certified

Did not address OEM parts issue

United States Supreme Court (March 2006)

Declined to hear appeal from plaintiffs

Repercussions

Insurers suspended the use of after-market crash parts

Other states questioned why Illinois law was applied to policyholders in their states

Other lawsuits against insurers have been filed

Class Action Fairness Act of 2005

Class action cases involving over $5 million in damages and citizens from different states are to be tried in federal court, not state courts

If Verdict Had Been UpheldInsurers would be forced to use OEM partsIndependent after-market crash part suppliers would

be driven out of businessManufacturers would have a monopoly on crash partsPrices of crash parts would increaseCost of auto insurance would increase significantlyCost of auto repairs, whether or not insured, would

increase

Insurance Product Options

Insurers could offer:OEM replacement parts coverage at a premiumAfter-market replacement parts coverage at a discountConsumers will have choice on type of coverage to purchaseAuto manufacturers will still have to compete on crash parts

Insurance Companies and Auto Repair Shops

• Initial ruling– Allstate v. Lanier (North Carolina)

• Current approaches– Allstate owns a chain of repair shops– Progressive “one-stop auto claim centers”– Farmers provides garage recommendations– State Farm guarantees repairs

Impact on Consumers

• Insurance prices

• Quality of repairs

• Time involved in handling claim

• Competitiveness of small insurers