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American Family Insurance halts aftermarket parts usage following court decision

Friday, July 31, 2009 - 23:00
Guyette American Family Insurance aftermarket parts Missouri Court of Appeals Steve Witmer

American Family Mutual Insurance will not be specifying aftermarket parts on repair estimates in Missouri pending an appeal before the state's Supreme Court.

The Missouri Court of Appeals for the Western District on May 5 reinstated a lower court's jury award of $17 million in a class-action lawsuit filed by policyholder plaintiffs who contend that the insurer illegally set lower payouts to crash victims based on utilization of aftermarket parts and the intentional omission of labor and materials costs associated with actually completing an estimated repair.

"It wouldn't be prudent to continue that practice in light of the appellate court's decision," says Steve Witmer, an American Family spokesman who notes that he is only referring to the aftermarket parts issue.

Witmer declined to discuss the labor/materials cost aspect of the case. "We're not going to comment on that," he says. "The positions are out there, and we're looking forward to our appeal to the Missouri Supreme Court."

Witmer goes on to say that "the use of aftermarket parts can bring financial relief to the consumer."

"This case, as much as any, was a battle of the experts," wrote Missouri appellate court Judge Harold L. Lowenstein. "Both sides presented the testimony of numerous experts to support their contentions and refute those of their opponent. Courts are wary about wading into such a battle and routinely decline to pass upon the credibility of witnesses or second-guess whom the jury chose to believe."

The highly complex opinion encompasses 30 pages, covering a case first filed in 2000. A Jackson County jury trial last year determined that the plaintiffs in the class-action lawsuit, representing some 319,000 Missouri residents, had "suffered damage" from the insurance company's policy of paying for vehicle repairs based on the cost of cheaper aftermarket parts. Three months later the presiding judge threw out the verdict, saying the plaintiffs had not provided adequate evidence of that damage.

The three-member appeals panel says the trial judge's decision was wrong and the jury's verdict is to be restored. The case was sent back to the original judge "for additional relief and attorney's fees."

The appeals court ruling reads in part: "That these repairs were not specified on the estimate meant that the estimate did not include the labor and materials necessary to perform the repairs. Thus, American Family did not pay sufficient funds to return the car to pre-loss condition. Whether the repairs were actually done is not relevant to whether American Family breached their contract with the insureds by failing to include sufficient time and materials to pay for all necessary repairs to return the car to pre-loss condition."

Lowenstein further wrote that "even assuming that American Family's 'ignorance' would excuse its failure to allocate time and materials for the performance of these repairs and that such 'ignorance' was a defense to the breach of contract claim, the record was replete with evidence from which a reasonable juror could find that American Family knew the omitted repairs were required but left undone."

Much of the legal wrangling centers on the performance of aftermarket components compared to that of OEM parts.

"All aftermarket crash parts are not the same like kind and quality as OEM crash parts," says Bob Redding, Washington, D.C. representative for the Automotive Service Association (ASA).

"We need more public policy focus on the quality issue," he asserts. "We could start with laws that assure consumers know what types of parts are being used on their vehicles and consent to the use of those specific parts."

Redding says the Missouri court's "focus on the estimate versus the use of the parts" is a significant factor in the matter.

"It's hard to determine the impact of this case on the industry as of yet," he tells ABRN. "After the Illinois State Farm Case, we saw voluntary industry shifts in the use of aftermarket crash parts."

Editor's note: The following quotes from the Illinois Avery vs. State Farm case are in bold face italic type to set them apart from the Missouri ruling. In the 2005 Avery vs. State Farm decision, which Lowenstein cited in his Missouri opinion, Illinois Supreme Court Chief Justice Mary Ann McMorrow wrote:

"Plaintiffs do not claim to have proven that any of the non-OEM parts specified by State Farm in its repair estimates were defective...Plaintiffs deliberately avoided any theory relating to defective parts at trial because such a theory would have significantly increased their burden of proof...

"Plaintiffs claim to have proven...that non-OEM parts are 'categorically inferior' to OEM parts. But 'categorically inferior' is not the same thing as 'categorically defective.' This point is important...

"Both the circuit (trial) court and the appellate court refer to State Farm's specification of 'categorically inferior' parts as if the act of specifying non-defective parts, by itself, is fraudulent...However, it is no more fraudulent – in and of itself – to specify non-OEM parts while knowing that they are not as good as OEM parts than it is to sell Chevrolet automobiles while knowing that they are not as good as Cadillacs.

"Plaintiffs object to two phrases describing non-OEM parts...The first phrase plaintiffs point to is 'quality replacement parts'...The second phrase is 'very high performance criteria'...Plaintiffs maintain that both these phrases are deceptive under the Consumer Fraud Act.

"State Farm, however, contends that these phrases are merely 'puffing'...We agree...Describing a product as 'quality' or as having 'high performance criteria' are the types of subjective characterizations that Illinois courts have repeatedly held to be mere puffing...

"The circuit court held that State Farm violated the Consumer Fraud Act by providing a guarantee...It is not clear what the circuit court meant when it held that State Farm's guarantee improperly put a 'burden' on policyholders. Every guarantee places a burden on the consumer...

"The circuit court cannot be correct if it meant that the guarantee is fraudulent because it required the policyholders to take action. If this were true, every guarantee, no matter how comprehensive or generous, would be inherently fraudulent...

"None of the named plaintiffs in this case testified that they had problems using the guarantee. Indeed, none of the named plaintiffs made any attempt to invoke it...

"When State Farm specified a non-OEM part in one of its repairs, it disclosed the use of that part...According to plaintiffs, State Farm should also have disclosed the categorical inferiority of non-OEM parts...But many businesses undoubtedly sell products with the knowledge that those products are not as good as other brands on the market.

"Under plaintiffs' reasoning, it would appear that to avoid liability under the Act, every knowing sale of a brand of product which is not the top brand would have to carry a disclaimer: 'Notice, our brand is not, on the whole, as good as our competitors'..."

However, the decision in the Show Me State differs from the Avery vs. State Farm citation in that Lowenstein defers to the jury's view that "aftermarket parts are not of like kind and quality to OEM parts and that American Family breached its contacts with its policyholders."

The ASA of Missouri/Kansas (ASA MOKAN) welcomes the Missouri appeals court ruling. "We're delighted to see the decision," says Sheri Hamilton, the association's executive director. "We're definitely getting some positive impact on our industry."

Hamilton does note, however, that reaction from the membership has been muted. "I'm not hearing much of a buzz."

Bob Smith, president of the Missouri & Kansas Collision Coalition, says he is surprised that the ruling does not place greater emphasis on the labor/materials omissions portion of the case.

"They were instructing their people to leave items off of estimates, and it was proven in court," Smith observes. "As for the parts issue, we've been talking about it for many years, and we're going to be talking about it for many more."

Nonetheless, Smith stresses that the appeals court's ruling "is going to be a mixed bag of tricks" depending on whether individual repairers prefer OEM or aftermarket components.

"Parts quality was the decision that they came to, but you will find some aftermarket parts that do fit," says Smith, who also sits on the Certified Automotive Parts Association's (CAPA) technical committee. "Conversely, you'll find new (OEM) parts that don't fit. It depends upon your supplier." Aftermarket parts "are here – they're part of the industry; they have their place.

"The best thing we (the collision repair industry) can do is insist on quality, certified proper fitting parts for our customers no matter where they come from," Smith continues, urging repairers to inform the proper parts source when they come across a faulty product. "As for CAPA, there's an official channel to report a bad part; it's taken seriously," he says.

"Repair facilities need to let the proper people know about poor-fitting and poor-quality parts instead of complaining about it to people who can do nothing. It does take a few minutes out of your day, but the results could be worth it," Smith says. "Good parts are good parts. Bad parts are bad parts; you get parts all over the spectrum, which creates problems for everyone in the repair process."

In Lowenstein's Missouri appellate court ruling, he wrote: "Even American Family's expert, Dr. Jason Hertzberg, an engineering consultant, admitted that in 'salt spray' tests, aftermarket parts consistently developed 'red rust' while OEM parts did not. He testified further that the steel in OEM parts was of a higher carbon, higher strength and higher hardness value.

"Viewing the evidence and the inferences arising from the evidence in a light most favorable to the jury's verdict, plaintiff's evidence established that, because of the nature of the engineering, production and materials, aftermarket parts were inferior in fit and performance and, therefore, not of like kind and quality to OEM parts. That plaintiffs sought to establish that non-OEM, aftermarket parts are categorically inferior because of the engineering and manufacturing process and the materials employed, not that individual parts were individually defective, does not undermine their proof. In that plaintiffs' theory was one of universal inferiority, the trial court erred in finding that the plaintiffs were required to demonstrate that any particular aftermarket crash part was specifically inferior to the corresponding OEM part. The plaintiffs presented sufficient evidence for a reasonable juror to conclude that aftermarket parts are not of like kind and quality to OEM parts and that American Family breached its contacts with its policyholders when it paid to return the damaged vehicle to pre-loss condition based on the nature and cost of aftermarket parts."

According to Jack Gillis, CAPA's executive director, "It's not a good finding for repair shops or consumers. If the insurance company involved is not going to be using alternative parts, the first victims will be the repair shops."

Citing the rising numbers of totaled vehicles, Gillis explains, "These totals mean that the shops will not get the repairs that they need to stay in business. Most consumers want their cars repaired. When a car is totaled the consumer is in a fix – they have to take the money and get a new one."

Having aftermarket parts available makes the repair process more affordable, he says. "In the end the real losers will be the consumers (through either more) cars totaled-out or paying higher premiums," states Gillis, who welcomes American Family's appeal to Missouri's top judicial panel. "I'm confident that the courts will ultimately decide in favor of competition."

Nationwide, 80 percent of the parts used by collision repairers are of the OEM variety. Five percent are used or recycled; 12 percent are non-CAPA certified, with just 3 percent properly vetted via CAPA's certification process, according to Gillis.

"Four out of five times when a repairer uses a non-carmaker's part, they use a non-certified part," notes Gillis, calling on the industry's vendors to become more involved with CAPA's program to ensure uniform quality standards.

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