environmental compliance guide for auto body shops december 2009
Auto Damage Claims: Replacement Parts and Repair Shops Significance of issue Auto replacement parts...
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Transcript of Auto Damage Claims: Replacement Parts and Repair Shops Significance of issue Auto replacement parts...
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