Jury Slams State Farm on Generic Auto Parts


In a major setback for the auto insurance industry, a jury in Illinois on Monday ordered the nation’s largest car insurer to pay $456 million for cheating millions of customers by ordering body shops to fix their cars with low-cost generic replacement parts.

The award against State Farm Mutual Automobile Insurance could grow much larger if the judge in the case grants lawyers’ requests for an additional $4 billion to satisfy fraud claims. The judge is expected to rule later this week.

The verdict is the largest in State Farm’s 77-year history and the largest single award ever against any insurance company, according to the American Insurance Assn., a trade group. The trial is being closely watched by plaintiffs’ attorneys, government regulators and consumer activists who during the last decade have challenged the auto insurance industry’s preference for so-called aftermarket parts to repair damaged vehicles.


Many car owners say the use of generic parts does not restore their vehicles to pre-loss condition after an accident, which hurts the resale value. Others have claimed in lawsuits that aftermarket parts often look shabby, perform poorly and fail to meet manufacturers’ safety standards.

State Farm, vowing to appeal the award, maintains that generic replacement parts are not substandard and that they save consumers money.

“We consider this a major setback for our policyholders,” said Bill Sirola, a State Farm spokesman. “If this verdict is allowed to stand, auto makers will have monopoly power to price their parts at whatever price they want. The cost of repairs going up will lead to higher premiums.”

State Farm insures one of every five vehicles on U.S. roads. About 3 million of its 37 million policyholders are in California.

If the award against the company remains intact, analysts and insurance groups say, consumers can expect to see their insurance premiums rise in the next few years.

“If our society requires insurers to use [original factory parts], then society will be required to pay the difference in cost,” said Harry Fong, an analyst with Deutsche Bank in New York.


Monday’s verdict by jurors in Marion, Ill.--the first case to go to trial--could bolster more than a dozen pending class-action lawsuits against other major insurers, including Allstate, Geico, Nationwide, USAA and Farmers Group, among others.

Some of the same plaintiffs’ attorneys who extracted billions of dollars in settlements from the tobacco industry are spearheading the suits against auto insurers.

How the $456-million award in the State Farm case will be divided among members of the class action is still to be determined.

Sirola said that despite the verdict, State Farm has no immediate plans to change its policy. But plaintiffs’ attorneys say they will ask Williamson County Judge John Speroni to order the Bloomington, Ill.-based insurer to do so.

“This is a clear message that State Farm needs to honor its contract and treat its policyholders fairly,” said Elizabeth Cabraser, a San Francisco attorney for the plaintiffs.

After deliberating for three days, jurors decided that during the last 11 years, State Farm broke its contractual promise with 5 million policyholders to repair their vehicles with parts of “like kind and quality.”

Speroni will decide whether the company violated Illinois’ consumer fraud laws by allegedly concealing concerns about the quality of the parts. During the trial, plaintiffs’ lawyers revealed internal documents by State Farm executives questioning the quality of parts--even as the insurer was sending brochures to its customers touting aftermarket repair parts as equal to the factory originals.

State Farm and other insurers insist that the use of cheaper parts does not affect resale values and helps hold down premiums. In 1998 alone, the use of aftermarket parts saved policyholders more than $233 million in premiums, State Farm lawyers said during the trial.

Consumer advocates dispute the contention that generic auto body parts save consumers money. Earlier this year, Consumer Reports, in an article titled “Cheap Car Parts Can Cost You a Bundle,” warned that such parts are inferior in quality to the manufacturers’ originals.

Tests showed that fenders took longer to install, did not fit as well and were more rust-prone. Aftermarket bumpers resulted in significant damage during accidents in some vehicles and “wouldn’t give you the protection you would need if you were having a low-speed impact in a parking lot or gas station,” R. David Pittle, technical director of Consumers Union, which publishes Consumer Reports, said Monday.

Generic parts typically cost 20% to 40% less than parts from the auto makers. For example, Ford’s replacement bumper for its Taurus sedan is listed at $535, compared with $242 for a generic replacement.

But generic parts can also mean higher repair bills. In 5-mph crash tests, a Ford with the original bumper suffered $235 damage; with the generic bumper, $1,320.

Most states allow insurers to approve the use of generic parts on the condition that customers are so informed in their contracts, according to Robert Hurns, an attorney with the National Assn. of Independent Insurers, the nation’s largest insurer trade group.

The chief executive of Keystone Automotive Industries in Pomona, the nation’s leading supplier of aftermarket parts, said he was disappointed by the jury’s verdict. “This is legalizing a monopoly,” said Charles Hogarty. “We hope the . . . public will see the danger of this and demand competition.”

Plaintiffs’ attorneys say the impact on the insurance industry would not be dramatic.

Morris Ratner, another attorney for the plaintiffs, said consumers should be given the option of paying lower premiums for generic parts.

The verdict “requires all insurers to be honest with their customers,” Ratner said. Consumers who settle for cheaper parts should pay lower premiums, while those demanding originals should pay more, he said.