Auto Damage Claims: Replacement Parts and Repair Shops Significance of issue Auto replacement parts State Farm case Insurance companies and repair shops

Car Repairs 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 Parts Crash parts - sheet metal or plastic installed on exterior of car Hoods, doors, fenders, trunk lids Mechanical parts - involved in operation of vehicle Batteries, filters, mufflers, spark plugs Original Equipment Manufacturer (OEM) After-market parts Recycled parts Certification Certified Automotive Parts Association (CAPA)

History of Replacement Parts Henry 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 1970s Auto manufacturers started to raise prices on crash replacement parts much more than car prices Independent manufacturers started to produce crash replacement parts

History - 2 Car manufacturers were forced to compete on price with after-market producers Car manufacturers strategy Discredit after-market parts Ban after-market parts Lawsuits 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 1990s Crash parts market OEM New 80% OEM Recycled 5% After-market parts15% Examples of costs 1997 Ford Contour hood OEM$450 After-market supplier$ Toyota Camry LE Cost new $23,263 Cost of OEM parts $101,335

Studies on Quality of After-Market Crash Parts Insurance Institute for Highway Safety 1987 and 2000 No significant differences in crash results Possible exception – hoods hood latch could fail hood may fail to buckle properly in crash Ford 1994 After-market crash parts inferior to Ford parts Thatcham 1995 (British insurance industry test facility) No significant difference in crash tests Consumer Reports 1999 CAPA certified parts rusted more quickly and did not always fit properly Bumpers (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 Coverage The limit of our liability for loss to property or any part of it is the lower of: 1. The actual cash value; or 2.The cost of repair or replacement The cost of repair or replacement is based upon one of the following: 1.The cost of repair of replacement agreed upon by you and us 2.A competitive bid approved by us; or 3.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 Illinois October 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 Upheld Insurers would be forced to use OEM parts Independent after-market crash part suppliers would be driven out of business Manufacturers would have a monopoly on crash parts Prices of crash parts would increase Cost of auto insurance would increase significantly Cost of auto repairs, whether or not insured, would increase

Insurance Product Options Insurers could offer: OEM replacement parts coverage at a premium After-market replacement parts coverage at a discount Consumers will have choice on type of coverage to purchase Auto 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