An Illinois county court yesterday ordered the nation's largest auto insurer to pay $456 million to policyholders who, in a class-action lawsuit, accused the company of approving the use of inferior parts in collision repairs of their cars and trucks.
The verdict, which State Farm Mutual Automobile Insurance Co. said it will appeal, is a major setback for a campaign by both insurance companies and some consumer groups to encourage the use of generic body parts to hold down repair costs. Later this week, the judge in the case plans to rule on whether the company deliberately deceived customers, which could significantly increase the penalty.
Insurance company officials said the jury verdict would result in higher insurance premiums and have a chilling effect on competition in the $9 billion-a-year parts market. Car companies and their suppliers still dominate the parts market, but generic body parts -- generally sheet-metal parts such as fenders and door panels -- now account for about 15 percent of repairs covered by all insurers.
But the plaintiffs in the case argued that the replacement parts didn't measure up, leaving them with hoods that didn't close properly and other problems. And internal memos from State Farm executives disclosed during the trial raised questions about whether the parts -- known in the trade as "aftermarket" parts -- were the equal of the originals.
"Their own documents said there was a problem with the parts," said Thomas Hatley, foreman of the 12-member jury in the Williamson County Courthouse in Marion, Ill. "We fairly quickly came to a conclusion that the parts were not of like kind and quality."
Insurance companies 12 years ago established the Certified Automotive Parts Association, now headed by Washington consumer advocate Jack Gillis, in an effort to validate the quality of generic parts. But earlier this year, Consumer Reports said that many of the CAPA-certified parts weren't up to snuff and often resulted in substandard repairs.
The lawsuit was filed on behalf of 4.7 million current and former State Farm policyholders -- in every state except Tennessee and Arkansas, where similar lawsuits are pending -- who had cars repaired from July 1987 through February 1998. Plaintiffs are seeking $4 billion on their claim that State Farm committed fraud in using the generic parts.
Because Associate Circuit Judge John Speroni certified the policyholders as a class, the verdict could both discourage insurance companies from promoting the use of generic parts and affect some state laws that encourage the use of cheaper parts, if policyholders live in those states.
If the jury verdict isn't increased by Speroni, policyholders should expect to receive about $100 each. The exact form of payment has not been determined, and appeals could take many years.
State Farm officials said the real issue concerns breaking the automakers' dominance over the replacement-parts business and getting a better deal for their policyholders.
"The issue is whether we will be able to continue offering our policyholders the best available service at the lowest possible prices by using lower-priced quality parts not made by original-equipment manufacturers," said State Farm spokesman Bill Sirola. "We feel strongly about this, so strongly that we are going to appeal" the county jury's verdict and any penalties resulting from a fraud ruling by the judge, Sirola said.
The American Insurance Association, a Washington-based trade association representing 370 major property and casualty insurers, joined in the criticism of the verdict, calling it "a decision that adversely affects competition and could prove costly for millions of consumers."
But plaintiffs' attorney Michael B. Hyman, speaking to reporters yesterday in Marion, said the generic parts -- most of which were made in Taiwan -- used in State Farm repairs were substandard because they had not been adequately rust-proofed, crash-tested or tested for other potential defects. "The whole industry has to change its practice of putting in these parts, which the jury has found to be inferior," Hyman said.
Officials at the Dallas-based Automotive Service Association, which represents 15,000 independent auto-repair shops nationwide, said the Illinois ruling should help to educate consumers about how parts are chosen in auto repairs. "The biggest problem is consumer ignorance," said Bob Redding, the association's Washington representative. "Consumers simply don't know what kinds of parts are being used, and that puts us in the middle of a bad situation."
Many auto insurers are willing to pay only for generic parts, but most consumers believe they are receiving original-equipment parts, Redding said. Consumers who discover that their parts are from an outside supplier, often because the part fits improperly, "often get angry with us," Redding said.
Redding's association has been lobbying state legislatures nationwide to establish a program of "notice and consent," in which consumers would be given the right to accept or reject non-original parts in the repair of their vehicles.
A number of insurers, such as the Chubb Group of Insurance Cos. in Warren, N.J., already guarantee their policyholders the right to use only original parts for repairs.
The verdict comes as the parts business is restructuring into an increasingly competitive business. Globally, major automakers have been spinning off, or otherwise divesting themselves of, in-house parts operations in a bid to cut costs through open-market competition.
Companies such as Delphi Automotive, once a captive supplier of General Motors Corp., must now compete head to head with generic and original-equipment suppliers to stay in business. Ford Motor Co. is in the process of trying to win the United Auto Workers union's backing for a plan to spin off its Visteon Automotive group.