Losers in State Farm Case May Be Consumers
Are copycat parts from Taiwan factories good enough to repair vehicles damaged in crashes, or do auto insurance policyholders deserve genuine, higher-priced parts made by General Motors, Ford and Toyota?
A judge and jury in Illinois decided this month that State Farm was ripping off customers across the country by telling body shops to use the lower-cost, generic parts, even though the company’s policies promised that damaged cars and trucks would be fully repaired to pre-crash condition.
Although the jury heard evidence that these so-called aftermarket body parts often don’t fit well and may rust, Williamson County Judge John Speroni blocked any evidence about the fact that they also cost less and therefore may result in lower policy charges to State Farm customers.
The insurer, the nation’s largest, was slammed with a record $1.2-billion verdict, $600 million of which was in punitive damages because Speroni decided the company had defrauded its customers by not adequately disclosing that it was requiring use of the cheaper parts.
The stakes in this battle are enormous, given the estimated 35 million automobile accidents that occur in the U.S. every year. The crash parts used to repair wrecks cost about $9 billion, money that is paid largely by insurers and financed by the premiums paid by all motorists.
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Even though the judge wouldn’t allow evidence about the economics of repair parts, the issue seems to be all about price.
Anybody who has had to buy a part made by the vehicle’s manufacturer--a so-called original-equipment manufacturer, or OEM, part--knows what kind of highway robbery these companies are getting away with.
Plastic wheel covers that should cost $2.50 end up going for $80. A 2-foot rubber heater hose can cost $40. Why would any motorist go to a dealer for windshield wipers or batteries or car wax?
Most consumers are familiar with what’s coming out of the gritty factories of Asia, which supply the bulk of aftermarket parts. You can buy a faucet, a hammer or a bicycle for cheap, cheap, cheap. Are they as good as the best American products, such as Delta faucets, or Vaughn hammers or Trek bikes? No way, but the stuff isn’t junk either, and for a lot of people it is perfectly adequate.
That’s the idea with these Taiwanese fenders and hoods, except for the fact that the insurance industry is calling the shots. State Farm claims it has saved its 37 million policyholders hundreds of millions of dollars--$237 million in 1997 alone--thanks to low-cost, generic parts.
I don’t know if that’s true, and frankly, I wouldn’t vouch for this multibillion-dollar insurance giant. But if I were fixing my car in my driveway on a Saturday afternoon, I’d head to the store and go straight for the aisle with the Taiwanese parts. After all, how long do vehicles last? Aren’t all of them destined for the junkyard too soon anyway?
Earlier this year, auto body technicians rated generic body parts as equal to--and sometimes better than--the corresponding OEM versions at the Collision Industry Conference, as reported by Auto Body News, an authoritative trade publication. In one case, a Ford fender received relatively poor marks, while a Tong Yang replacement fender from Taiwan for the same Ford model was given a thumbs up.
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It seems that the consumer lobby is split on the issue. Consumer Reports earlier this year slammed the quality of aftermarket parts, saying the auto body garages it surveyed found such parts to be inferior in terms of fit and corrosion resistance.
Morris Ratner, one of the plaintiffs’ attorneys in the State Farm case, said the issue was never about whether insurers could use non-OEM parts but about honesty toward policyholders.
“The company promised one thing--parts of like kind--and delivered another,” Ratner said. “That’s what the jury found fault with.”
But consumer advocates including Jack Gillis, author of “The Car Book,” have championed generic parts. He is head of the Certified Aftermarket Parts Assn., an organization that has spearheaded the use of non-OEM parts. Clarence Ditlow, executive director of the Center for Auto Safety, a nonprofit group founded by Ralph Nader and Consumers Union, is another expert who supports the use of generic parts.
State Farm asserted that its policyholders knew what they were getting, because the use of aftermarket parts was indicated on damage estimates from the body shops and spelled out in its insurance policies. Moreover, the company says, if insurers are forced to back away from lower-cost generics, then the major auto makers will have a monopoly on crash parts.
“We feel strongly [that] without this competition, if these verdicts are upheld, there would be no competition,” said Dave Hurst, a State Farm spokesman. “The auto makers would be free to charge whatever price they choose for these parts.”
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And the worst case appears to be exactly what’s happening in the aftermath of the State Farm legal defeat. The company announced Oct. 7--even before it was handed the larger of two separate legal decisions in the $1.2-billion verdict--that it has suspended the use of generic parts.
The company cited “consumer confusion,” meaning that its policyholders figured the company was ripping them off. Although State Farm vows to appeal the Illinois verdict, other insurers already appear to be following the company’s lead.
Here are two ironies about this sorry mess: The plaintiff who started the class action against State Farm had her case dismissed long ago, because it turned out that she never received a generic part on her car. Some damage.
And attorneys representing her and other plaintiffs in the case have petitioned the court for $18 million in legal fees. Guess who is going to pick up that bill?
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Ralph Vartabedian cannot answer mail personally but responds in this column to automotive questions of general interest. Please do not telephone. Write to Your Wheels, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. E-mail: ralph.vartabedian@latimes.com.
