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Letter to the Editor
This article originally appeared in the June 2002 Issue of INSIGHT
©2002 Collision Repair Industry INSIGHT All Rights Reserved
Keystone Automotive Pulled into Another Insurer Legal Battle
CAA Applauds SB1648's Passage in Insurance Committee
ASA Adds Association Support to Ca Bill Opposing Insurer-Owned Shops
Coalition for Auto Insurance Competition Campaigns for Reform in New Jersey
Customer Satisfaction Seminar Added to BASF's VisionPLUS University
New NHTSA Study: Economic Impact of U.S. Crashes Hits $230.6 Billion
PPG's CertifiedFirst Network Continues to Grow
Valspar Sales Up 16 Percent in First Half of 2002
FinishMaster Continues Acquisition Strategy with Same Store Sales Down Slightly
Pep Boys Q1 Earnings Up 49 Percent; Sales Even
ADP Convergence 2002 Industry Conference: Building a Community of Influence
INDUSTRY UPDATE
Keystone Automotive Industries, Inc. has received notification that Erie Insurance Company has filed a joinder complaint against forty-four additional manufacturers and distributors of aftermarket collision replacement parts, including Keystone Automotive.
The forty-four additional defendants are now part of a class action originally filed against Erie Insurance in May 2000 with respect to Erie's specifications of aftermarket collision replacement parts.
Erie Insurance claims that the manufacturers and distributors of these aftermarket parts have represented that their replacement parts were as good as OEM parts and that they were not defective, inferior or substandard.
In late 1999, after the State Farm verdict, Erie Insurance stopped specifying aftermarket parts, so it is anticipated that the joinder of Keystone will not have a direct impact on operating results.
The class action was filed against Erie Insurance in the Philadelphia County Court of Common Pleas by a plaintiff alleging that she was the holder of an Erie automobile insurance policy, that her insured vehicle had been in an accident and, at the direction of Erie, certain of the parts used in the repair of the vehicle were aftermarket parts. She alleges that the use of these parts, rather than OEM parts, breached the insurance contract, was an unfair trade practice and a violation of consumer protection law and was in bad faith. Plaintiff alleges that aftermarket parts are defective, inferior and substandard compared to OEM parts and fail to restore a damaged vehicle to its pre-loss condition and value.
On March 13, 2002, the Court certified a national class joining all Erie Insurance policyholders whose cars had been repaired with one or more of the 25 aftermarket crash parts specified in the class action or had received monetary compensation based upon the cost of such aftermarket parts, between 1994 and the date the complaint was filed.
"Keystone vigorously denies any liability to the plaintiffs or Erie Insurance on multiple grounds. First and foremost, Keystone believes that the aftermarket products it distributes are of like kind and quality as compared to the original OEM parts. In addition, Keystone warrants substantially all of its products to be free of defects in material and workmanship for as long as the original purchaser owns the vehicle on which the part is installed. In fact, over the past ten years, warranty claims have been extremely rare," said Charles J. Hogarty, president and chief executive officer of Keystone.
Hogarty noted that results of re-cent blind tests, conducted by independent third parties, have shown that certain aftermarket parts scored higher than the comparable OEM replacement parts in terms of fit and finish.
"The facts do not support a claim that all of the aftermarket parts specified in the class action are inferior, nor that a vehicle repaired with any of these aftermarket parts is worth less than if the vehicle had been repaired with OEM parts. Aftermarket mechanical parts have been successfully used to repair vehicles for decades with no detrimental impact on consumers," he said.
Hogarty added that it has been Keystone's experience that there have been virtually no safety issues with the parts it has distributed. He cited a U.S. General Accounting Office report in early 2001 which focused on the safety of aftermarket crash parts and the National Highway Transportation and Safety Administration's (NHTSA) role in regulating these crash parts.
According to NHTSA, it has not taken any action to regulate aftermarket crash parts because studies conducted to date and other data and analysis do not demonstrate that there are safety-related problems with these parts.
"We welcome the opportunity to demonstrate to the Court what the marketplace already knows, that substantially all the products we distribute are of like kind and quality to OEM parts. Most consumer groups support the use of aftermarket products as the most cost-effective method of moderating increasing automobile insurance rates. To effectively ban the use of aftermarket collision replacement parts through the use of class actions, would restore OEMs to a monopoly pricing position, resulting in much higher repair costs and insurance premiums," Hogarty said.
"While Keystone is confident as to the quality of the parts that it distributes and believes that it will ultimately prevail in the class action, litigation is costly and outcomes are difficult to predict. A substantial verdict against Keystone would have a material adverse impact upon the company and its operations," he added.
Charles Hogarty also sent out a letter to the collision repair industry on May 16, 2002 stating the following:
"Yesterday, we received notice that forty-four distributors and manufacturers, including Keystone, are being brought into the lawsuit that was filed against Erie Insurance Company in May 2000. The twist here is that it was not the plaintiffs who want us in, but rather Erie Insurance Company, the defendant. The speculation is that Erie believes they can win the case by being able to have manufacturers and distributors clearly and honestly prove that many aftermarket parts are not "inherently inferior" as the claimant's charge. In the State Farm case, this kind of testimony and proof was never allowed into the case which could have helped them.
"Although we prefer not to be involved in any lawsuit, we do welcome the opportunity to demonstrate the value and quality that the aftermarket brings to the collision repair process. Other than some legal fees, we anticipate little if any measurable effect on our business and are hopeful that a win in this case will actually reverse some of the damage caused by the State Farm case."
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The California Autobody Association was successful in passing SB1648 out of the Senate Insurance Committee on May 1st at the state capitol in Sacramento.
This was a major hurdle for the bill, with the vote ending up 5-0 in favor of SB1648, which will make it illegal for insurance companies to own body shops in the state of California.
The insurance industry was heavily represented during the hearing in opposition of the bill. Their position was that the bill deprives shops of needed capital from insurers who want to invest in shops. Allstate Insurance Company called the bill "anti-competitive".
The California Autobody Association was also heavily represented and strongly in support of the bill. The insurance committee heard testimony from David McClune, CAA Executive Director; Jack Molodanof, CAA Lobbyist; Yumi Vaught, the current CAA President; Rick Johnson, CAA Vice-President; Kelly Swenson, CAA Treasurer; Don Feeley, CAA past president; and Curt Nixon, CAA Legislative Com-mittee Chairman.
The CAA's position is that this bill will lead to anti-trust violations, limit the consumer's choices, and create unfair competition.
In addition to the CAA supporting this bill, the California Motor Car Dealers Association said that if insurers were to own shops and control the repair market, consumers would be unlikely to be able to pick a repair shop based on which one would do the best work.
Also, the Consumers for Auto Reliability and Safety believe that insurer ownership of shops will lead to reduced quality of repair work as shops will be guided by the bottom line, not how well a fender fits.
The bill will now go to the state senate floor for a vote.
The Automotive Service Association (ASA) supports California Senate Bill 1648 introduced by State Senator Jackie Speier, D-San Francisco. By a 5-0 vote, the bill passed the Senate Insurance Com-mittee, chaired by Speier, on May 1.
Bob Redding, ASA's Wash-ington, D.C., representative, sent a letter to Speier in support of her bill.
Redding said, "ASA supports Senate Bill 1648 and looks forward to working with you as the bill makes progress in the legislature. As small business owners, we believe the rights of our customers have to be protected. Your legislation provides this protection."
Earlier this year, the ASA board of directors approved the following related policy:
ASA opposes insurance companies having a controlling ownership interest in automotive repair facilities and views such ownership as being in direct conflict with the consumers' right to choose. ASA has historically supported the consumers' absolute, unequivocal right to choose a repair facility for a collision or mechanical repair.
Senate Bill 1648 opposes insurance companies having a financial interest in auto body repair facilities. If the legislation is enacted, any insurance company that has a controlling interest in an auto body repair facility will have three years to divest itself of its interest. It also makes it illegal for insurance companies to offer an incentive program for referring an insured to a shop owned by the insurer.
The bill analysis written by the Insurance Committee states, "There is an inherent conflict of interest that imperils consumer protections when an insurer that pays for the repair of a vehicle has that repair work done at a facility from which it derives income as an investor."
Speier contends insurer ownership in repair facilities could lead to the sanctioning of non-OEM parts. California law requires a repair facility to disclose when non-OEM parts are being used in the repair of a vehicle.
Speier said, "The anti-steering regulations (in California) are weak and provide no deterrence to an insurer coaxing insured's to shops that have a DRP [direct repair program] relationship with the insurer."
In addition, she said, "Insurer ownership would only serve as a greater incentive to steer insured [motorists] to shops owned by the insurer."
There is a precedent in California to limit ownership. Hospitals are not allowed to hire physicians, but instead have contractual agreements with them. Physicians are also not allowed to refer patients to labs they own or in which they have a controlling interest.
The Automotive Service Association, headquartered in Bedford, Texas, is the largest not-for-profit trade association of its kind.
The Coalition for Auto Insurance Competition is launching an additional wave of advertising as part of its continuing statewide media campaign for reforming New Jersey's car insurance system to increase insurance competition and consumer choice.
The campaign seeks to educate New Jerseyans and to enlist their support to achieve comprehensive reform essential to improving the auto insurance market in New Jersey by encouraging more insurers to do business here.
"The Coalition is striving to achieve a regulatory system that promotes competition, encourages companies to sell auto insurance in New Jersey, and creates a stable market that offers more choices for consumers," said John Friedman, chairman of the Coalition for Auto Insurance Competition.
"Four out of the six largest insurers in America already do not do business in New Jersey, he continued. “And when the state's largest auto insurer completes its announced withdrawal, that number will increase to five out of six. Over 20 auto insurers have left New Jersey in the past decade. More have announced they intend to leave. This, in turn, has profound consequences for consumers. Nearly one million New Jersey drivers could soon find themselves scrambling for coverage."
The Coalition is broadcasting radio ads on nine radio stations in New Jersey and New York and placing ads in eight newspapers throughout the state.
"It's only natural to expect that consumers will shop around for the best deal if they have more choices. Competition and choice benefit consumers and when companies compete, consumers win," said Friedman.
"Having to operate under the state's restrictive and difficult regulatory regime where insurers are told what products to sell, to whom they must sell to and how much to charge, companies lack an incentive to remain and invest in New Jersey," continued Friedman. "If New Jersey was a good place for insurers to do business, companies would flock to our state and consumers would have a multitude of choices. Instead, insurance companies have crowded the exit ramps. If reform of our state's regulatory system is not addressed, consumers will continue to suffer from the dearth of choice and market competition."
The Coalition welcomes the participation of businesses, associations and consumers who seek to work together to bring about meaningful and responsible auto insurance reform.
Members include the Independent Insurance Agents of New Jersey, Professional Insurance Agents of New Jersey, Citizens for a Sound Economy, National Association of Mutual Insurance Com-panies, Professional Insurance Agents of New Jersey, New Jersey Food Council, New Jersey Retail Merchants Association, NJ SEED (Society for Environmental, Economic Development), Somerset County Chamber of Commerce and the Commerce and Industry Association of New Jersey.
"Achieving Complete Customer Satisfaction" is the newest program in the series of Professional Business Management seminars offered by BASF's Automotive Refinish business. The series of half-day seminars is a major component of VisionPLUS University, BASF's set of value-added instructional programs and business tools for the collision repair industry.
"This 'university' concept is an innovative one," said Guy Bargnes, Director, Marketing, BASF Automotive Refinish. "Of the many seminars and courses on the market, BASF's program is unique in that its workshops and training courses, as well as VisionPLUS OnLine, are integrated in content and approach," Bargnes continued. "It's a powerful combination of information, training and advanced management tools, and all the elements are mutually supporting. We feel this is a superior and more efficient way to deliver information to key people at the shop and distributor levels than a piecemeal or a la carte approach."
Designed in collaboration with Collision Management Services, Inc. (CMS) the seminars teach crucial business-management concepts and techniques to owners and managers of collision repair facilities.
The seminars are accredited with the American Management Institute and are conducted by Bernie Blickenstaff, President of CMS.
"We teach practical techniques that have been proven to work in real-world collision centers, large and small," said Blickenstaff, with 26 years of experience in collision repair. According to Bargnes, training key collision center personnel in productivity and profitability principles was a logical step for BASF.
"These workshops deal with concepts that are crucial to every shop," said Bargnes, "and now we can ensure that everyone in the chain -- BASF sales reps, distributor personnel and body shop personnel -- has the same training."
The content of the Professional Business Management Seminars and the distributor and collision center workshops is integrated with VisionPLUS OnLine, BASF's proprietary Internet-based business analysis and benchmarking toolset. VisionPLUS OnLine is part of BASF's "eBusiness Toolbox" that includes several Web-enabled color management systems and eCommerce Web sites.
"VisionPLUS University is an important value-added complement to our products, color-management tools, technical training and eCommerce offerings," Bargnes concluded "BASF's 'university' concept offers everything a shop needs in one, integrated and proven package."
U.S. Transportation Secretary Norman Y. Mineta has announced that the economic impact of motor vehicle crashes on America's roadways has reached $230.6 billion a year, or an average of $820 for every person living in the United States.
His announcement was based on a comprehensive new research study released today by the U.S. Department of Transportation's National Highway Traffic Safety Administration (NHTSA).
The new report, based on calendar year 2000 data, calculates the U.S. economic costs of an average roadway fatality at $977,000 and estimates the economic costs associated with a critically injured crash survivor at $1.1 million.
"This new report offers further proof of the enormous toll America faces each year due to death and injury on our roadways. It underscores the compelling need for all of us - individuals as well as government - to strengthen our commitment to highway safety," said Secretary Mineta.
The NHTSA study highlights the vital importance of seat belt use. In one year, the use of seat belts prevents an estimated 11,900 fatalities and 325,000 serious injuries, saving $50 billion in medical care, lost productivity and other injury related costs. Conversely, the failure of crash victims to wear seat belts leads to an estimated 9,200 unnecessary fatalities and 143,000 needless injuries, costing society $26 billion.
"The evidence is overwhelming that seat belts save lives and reduce the severity of injuries. This report makes it obvious why we must buckle up and why we must dedicate ourselves to a higher seat belt use rate," said NHTSA Admin-istrator Jeffrey W. Runge, M.D.
The report underscores the huge economic costs associated with alcohol- involved crashes, which resulted in an estimated 16,792 fatalities in 2000, as well as 513,000 nonfatal injuries, and $50.9 billion in economic costs. Such crashes account for 22 percent of all crash costs.
Costs for crashes involving a driver or non-occupant with a blood alcohol content of .10 percent or greater accounted for 75 percent of the total of all alcohol-involved crash costs. The impact of alcohol involvement increases with injury severity.
Crashes linked to alcohol accounted for 46 percent of fatal injury crash costs; 21 percent of nonfatal crash costs; and 10 percent of the costs in crashes involving property damage only.
The study determined that excessive driving speed is associated annually with 12,350 fatalities and 690,000 non-fatal injuries. This represents 30 percent of all fatalities and 13 percent of all nonfatal injuries. Crashes in which at least one driver was exceeding the legal speed limit or driving too fast for conditions cost $40.4 billion in 2000, or $144 for every person living in the U.S.
NHTSA's new study, titled "The Economic Impact of Motor Vehicle Crashes 2000," also estimates the yearly economic cost of roadway crashes to include:
- $61 billion in lost workplace productivity
- $20.2 billion in lost household productivity
- $59 billion in property damage
- $32.6 billion in medical costs
- $25.6 billion in travel delay costs.
About nine percent of costs from motor vehicle crashes are paid from public revenues. Federal revenues account for six percent, while states and localities pay about three percent. Private insurers pay about 50 percent. Individual crash victims pay about 26 percent. Third parties, such as charities, health care providers and uninvolved motorists delayed in traffic, pay about 14 percent.
Overall, nearly 75 percent of the costs of roadway crashes are paid by those not directly involved -- primarily through insurance premiums, taxes and travel delay. In 2000 these costs, borne by society rather than individual crash victims, totaled $170 billion.
The cost of motor vehicle crashes in the U.S. has reached 2.3 percent of the U.S. Gross Domestic Product (GDP).
In the year 2000, which the NHTSA research used as a basis for determining the annual economic impact of motor vehicle crashes, 41,821 persons were killed; 5.3 million were injured, and 27.6 million vehicles were damaged.
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The CertifiedFirst Network, the PPG North American group of quality-rated auto body repair shops, has welcomed the 900th collision repair center to its program.
CertifiedFirst shops are located in 44 states and in five Canadian provinces. Currently, an additional 300 collision centers are undergoing the Network's third-party verification process.
The Network's standards for participation remain high, with many shops making facility and customer service improvements in order to qualify to participate. Overall, 30 percent of shops that applied to participate in the CertifiedFirst Network did not qualify on their first attempt.
"The CertifiedFirst Network focuses on helping participating collision repair centers provide superior customer service," said Mary Kimbro, director of the CertifiedFirst Network. "We're looking forward to welcoming shop 1,000 very soon."
A significant aspect of the Network is that the standards required to be met by participating auto body repair shops are verified by independent third parties.
The standards are divided into two major categories - an evaluation of the shop itself, on aspects ranging from its facilities to employee training and ongoing measurement of the satisfaction level of the shop's customers. Underwriters' Laboratories Inc. (UL) conducts the facility verification review and Customer Research, Inc. (CRI) verifies customer satisfaction.
The Valspar Corporation reported net income for the second quarter ended April 26, 2002 of $34,534,000, versus net income of $19,036,000 for the comparable period last year. Diluted earnings were $0.67 per share, up from $0.44 per share reported a year ago. Sales for the quarter increased eight percent to $554,002,000 compared to $513,745,000 last year.
Net Income for the first six months of 2002 was $47,142,000 or $0.92 per diluted share, compared to $23,494,000 or $0.54 per diluted share for the same period a year ago. Sales for the first half increased 16 percent to $985,042,000, compared to $850,725,000 during the comparable period last year. Last year's first half sales included only four months of revenues from the Lilly Industries acquisition completed December 20, 2000.
Commenting on second quarter results and the outlook for the third quarter, Richard M. Rompala, Chairman and Chief Executive Officer, said, "We registered positive sales growth in all of our product lines... As a result, we expect third quarter sales growth of four to five percent and earnings per share growth of 10-20 percent versus adjusted, comparable results of $0.63 per share a year ago."
FinishMaster, Inc., the national independent distributor of automotive paints and related accessories, has reported that net income for the first quarter ended March 31, 2002 was $3,124,000, or $0.40 per share, compared to net income of $839,000, or $0.11 per share in the prior year period.
FinishMaster also announced the acquisition of Innovative Refinish Supply, Inc., located in Phoenix, Arizona.
Effective January 1, 2002, FinishMaster adopted State-ment of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Based upon currently available information, management does not anticipate a material impact on its financial position or results of operations from the initial impairment review.
Increased income from operations of $2,287,000, which resulted from higher gross margins and lower amortization expense, was the primary contributor to the improved financial performance for the quarter. Improved gross margins of $1,267,000 were attributable to higher net sales and discounts earned from normal vendor programs. Lower amortization expense of $1,041,000 was due primarily to the adoption of SFAS No. 142, which eliminates the amortization of goodwill and intangible assets with indefinite useful lives.
Even though net sales increased 1.5 percent for the quarter to $84,131,000 from $82,896,000 in the prior year period, "same store" sales declined 1.8 percent.
"Our sales picture reflects the ongoing pattern of declining revenue in the paint and material aftermarket," stated Wes Dearbaugh, President and Chief Operating Officer. "We continue our efforts to increase sales and gain market share. We believe our 'same store' sales decline is less than the overall market decline."
Andre B. Lacy, Chairman and CEO added, "I am concerned with the continued weak industry demand for automotive paint and materials reflected in our 'same store` sales decline. We must turn this around or we must develop other ways to increase revenues."
FinishMaster, headquartered in Indianapolis, operates three major distribution centers and 159 branches in 25 of the 35 largest metropolitan areas in the country.
The Pep Boys - Manny, Moe & Jack, the national full service automotive aftermarket chain, announced a 49 percent increase in earnings for the thirteen weeks ended May 4, 2002.
Sales for the quarter were $558,973,000, just one percent more than the $551,577,000 recorded last year. Comparable store sales, which improved over the course of the quarter, increased slightly.
Pep Boys' Chief Executive Officer, Mitchell G. Leibovitz, commented, "Improved sales, higher merchandise margins and leveraged operating expenses enabled us to achieve our sixth consecutive significant increase in quarterly earnings.
"Although tire sales and service labor revenue have been negatively impacted by two recalls and the recession, aggregate comparable store sales were ahead of plan for the first quarter... continued improve-ment in sales should be quite visible in our future results."
Peter Op de Beeck, President of ADP Claims Services Group, promised attendees of the annual ADP Industry Conference, held this year April 22 - 24 at the beautiful Marriott Beach and Golf Resort at Hilton Head, SC, a meeting packed full of thought-provoking and stimulating discussions and ideas to assist in day-to-day business.
INSIGHT Publisher Charlie Baker came away thoroughly impressed by the varied and meaningful menu of presentations and opportunities for discussion presented by ADP at the golf Mecca Hilton Head.
"The entire meeting was well-organized, informative, and relaxing," commented Baker. "I felt well taken care of every minute. From the ground floor up ADP’s 'building' was well-constructed. World-class speakers, such as Robert Reich, former Secretary of Labor; Tom O’Brien, CEO of Insurance Auto Auctions; and George Hansen, President of CARSTAR; to name a few, provided much food for thought"
Op de Beeck’s opening remarks underscored the importance of open systems and the need to build what he called a "Community of Influence" based upon an open, modular infrastructure.
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