Judge Hits State Farm in Parts Case

State Farm Mutual Automobile Insurance Co., already reeling from a $456-million jury verdict earlier this week--the largest single award ever against an insurance firm--was hit Friday with an additional $730-million award by an Illinois judge who found that the company deliberately defrauded policyholders by requiring body shops to use inferior crash parts to repair their wrecked vehicles.

The combined award totals $1.18 billion.

Plaintiffs’ lawyers said they plan to leverage their victory by pursuing more than a dozen identical class-action suits against other insurers that favor low-cost generic body parts.

“This is a wake-up call to the insurance industry that you can’t lie to your policyholders and get away with it,” said Michael Hyman, a Chicago lawyer for the plaintiffs.

State Farm officials, who have vowed to appeal the award, said Friday that they were shocked by the judge’s action.

“This decision astonishes us. We’re stunned by its severity,” said Edward B. Rust, chairman and chief executive of the Bloomington, Ill.-based company.

Insurance groups and some consumer advocates said the award will almost certainly result in higher insurance premiums for all car owners.

“This is a bad decision for consumers,” said Clarence Ditlow, director of the Center for Auto Safety, a nonprofit group founded by Ralph Nader and Consumers Union. “This may mean the demise of the market for [generic] crash parts, and consumers will have to pick up the tab for an extra $2 [billion] to $3 billion a year.”

On Monday, jurors in Marion, Ill., decided that during the last 11 years, State Farm broke its contract with 5 million policyholders to repair their vehicles with parts of “like kind and quality.”

On Friday, Williamson County Judge John Speroni assessed $130 million in actual damages and $600 million in punitive damages.

Because State Farm plans to appeal, it could be years before policyholders included in the class action see any money, even if the award stands.

In a 13-page decision, Speroni cited State Farm’s internal company documents that reveal how the insurer knew it was shortchanging its customers. In one 1997 memo introduced as evidence, a State Farm executive wrote, “We may well say it is like kind and quality, but the bottom line is that it is not the same.”

Speroni said that “State Farm occupies a position of trust with its policyholders who pay the required premiums and are entitled to receive all the benefits [the insurer] promises to provide in its insurance contract. State Farm violated this trust.”

Speroni’s decision settles, for now, a long-simmering dispute over the use of generic body parts such as fenders, hoods and bumpers. Generic replacements can cost up to 50% less than parts supplied by auto makers. State Farm, the nation’s largest insurer, with 37 million policyholders, insists that generic parts help keep premiums low. In 1997 alone, such parts saved its customers $237 million, it said during trial.

Many car owners say aftermarket parts often look shabby, perform poorly and fail to meet manufacturers’ safety standards. Car owners also say generic parts hurt resale value because they do not restore their vehicles to pre-loss condition after an accident.

More than a dozen class-action suits from Florida to Arizona now target insurers who require body shops to use generic crash parts. Plaintiffs’ attorneys say their legal assault has already reaped positive results. Earlier this week, State Farm announced it was suspending its use of generic crash parts. Industry groups say other insurers who are defending similar suits would do the same.

If generic parts are shunned, the $9-billion aftermarket crash parts industry could dry up, insurance officials say.

But Charles Hogarty, chief executive of Keystone Automotive, a Pomona distributor that last year sold $332 million in generic parts, said he doesn’t foresee “a stampede in that direction.”

David Snyder, an attorney for the American Insurance Assn., a trade group, said consumers would suffer if insurers are forced to buy their parts from auto makers.

“It makes no economic sense for insurers to be punished for trying to promote competition,” Snyder said. “It is bad law and bad economics to punish an insurer for delivering what the public wants, which is competition and lower insurance premiums.”

Elizabeth Cabraser, a San Francisco attorney for the plaintiffs, said the damage award will force generic parts manufacturers, most of whom are in Taiwan, to improve the quality of their products.

“Competition is good, but quality and choice are most important for consumers,” Cabraser said.

Chris O’Hara, a Phoenix attorney whose firm has filed eight similar suits against other insurers, said he is encouraged.

“It tells us we’re on the right track,” O’Hara said. “It sends a message that courts need to take these cases seriously.”