Verdict Against State Farm Is Tossed
The Illinois Supreme Court on Thursday overturned a $1-billion fraud and breach-of-contract verdict against State Farm Mutual Automobile Insurance Co., ruling that an 8-year-old case challenging use of generic parts in collision repairs should not have been tried as a class action.
Along with State Farm and its policyholders, the ruling could affect the multibillion-dollar auto parts industry and companies with appeals before the same court -- including cigarette maker Philip Morris USA, which is seeking to reverse a multibillion-dollar award in another class-action case.
In the insurance case known as Avery vs. State Farm, an Illinois jury in October 1999 ruled that State Farm failed to honor its contracts with an estimated 4.7 million policyholders whose cars were repaired with allegedly inferior generic parts instead of pricier versions from vehicle manufacturers. At issue was the meaning of language in the policy requiring the giant insurer to restore vehicles to “pre-loss condition” by using parts of “like kind and quality.”
The case had been pending before the Illinois Supreme Court since 2001, when a state appeals court affirmed the verdict but reduced the original award of nearly $1.2 billion to $1.056 billion.
Dick Luedke, a spokesman for State Farm, based in Bloomington, Ill., said the ruling would be “good for consumers [who] now stand to benefit from a more competitive auto parts market.”
Michael B. Hyman, a Chicago lawyer for the plaintiffs, said he was “very disappointed.” He said the ruling was going to open the door for insurance companies to indiscriminately use generic parts, which were found by the jury “to be of inferior quality to original equipment.”
Thursday’s ruling held that plaintiffs had not proved they suffered real harm from having cheaper parts installed on their vehicles. But the court’s main holding was that policyholders from states with different consumer protection statutes should not have been bundled together for a case tried under Illinois law.
By grouping individuals with similar claims, class actions are meant to promote efficiency. But under court rules, class status is to be granted only when similarities outweigh the differences between individual claims, a standard that the court said was not met in the State Farm case.
Among other things, it said the language in the State Farm insurance contracts was not uniform and that consumer laws in Illinois differed from those in other states where other policyholders lived.
The verdict six years ago was a blow to producers of aftermarket parts and prompted State Farm to suspend the use of generic components.
John Palumbo, chief financial officer of Keystone Automotive Industries Inc. of Pomona, a major distributor of generic parts, said he was “very pleased” by Thursday’s decision, adding that it should restrain the cost of insurance premiums.
“It lifts ... a cloud that’s been over the industry for five years, and we think there will be more utilization of aftermarket parts because of this decision,” Palumbo said.
Keystone’s shares zoomed upward by $2.33, or 8.6%, to $29.32.
Investors bid up top cigarette makers’ shares, hoping for similar results in class actions against tobacco companies.
Philip Morris, a unit of Altria Group Inc., is appealing a defeat in March 2003, when a judge in Madison County, Ill., found the company had deceived smokers about the risks of low tar or “light” cigarettes, and socked it with $10.1 billion in damages.
In a note to investors, Christine Farkas, an analyst with Merrill Lynch, said Thursday’s ruling “could be very helpful” but cautioned that there was “no guarantee that the Avery decision is an accurate predictor of the outcome” of Philip Morris’ appeal.
George Szelcs, a Chicago lawyer with the firm Korein Tillery, which brought the Illinois “lights” case, said he was not discouraged by the ruling.
Szelcs said there were major differences between Avery and the Philip Morris litigation, noting that the class in the cigarette suit is made up entirely of Illinois residents.
“I don’t see the Avery result as dictating a similar result in our case by any means,” Szelcs said.
Even so, Altria shares rose $2.53 to a record high of $70.39. Shares of Reynolds American Inc. climbed $3.44 to $85.24. Separate class actions involving “light” cigarettes are pending in Illinois against the company’s R.J. Reynolds Tobacco unit and Brown & Williamson Tobacco Corp., which has been merged into Reynolds American.
Hyman said the plaintiffs’ lawyers were pondering their next move. Options include appealing to the U.S. Supreme Court or refiling the case on behalf of policyholders who live in Illinois, he said.
Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento-based group, said price competition among parts suppliers was good in theory, but feared the decision could give insurers free rein to use “schlocky parts.”