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Letter to the Editor

State Farm Non-OE Parts Lawsuit Nears Completion

Steve Binder, reporter for the Southern Illinoisian, contributed to this article.

The $2 billion class action lawsuit against State Farm insurance over the insurer’s specification of non-OE sheet metal was drawing to a close as INSIGHT went to press. State Farm was expected to conclude their defense in the case on September 29.

During the month of August and into September, plaintiffs in the case focused on dozens of internal documents from State Farm and the Certified Automotive Parts Association seeking to show that State Farm knowingly required repairers to install what the plaintiffs contend are inferior non-OE crash parts.

Robert Hunter Jr., the Consumer Federation of America’s insurance division chief and former Texas state insurance commissioner, testified on August 26 that internal memos showed that State Farm executives believed aftermarket parts were inferior to factory originals.

"The documents reveal that the non-OEM crash parts ... are of less quality than OEM parts," Hunter testified.

Hunter and former Georgia insurance commissioner, Tim Ryles, served as two of the plaintiffs’ insurance expert witnesses in the case. Ryles also examined internal memos and concluded that State Farm clearly was aware of customers’ and repairers’ complaints regarding the quality of non-OEM parts.

One key document highlighted by Hunter and Ryles during their testimony was a 1993 memo from Chicago area claims representatives and copied to Bill Hardt, State Farm’s assistant vice president for claims. A portion of it states, "I am being told that the quality issue is significant and is receiving negative feedback from repairers and customers."

Another memo from in-house attorney Gregg Mecherle in August 1997 to Frank Haines, vice president of claims, called on State Farm to reconsider using aftermarket parts because of the rising cost of defending against lawsuits and the "public relations problems we continue to have with our consumers."

However, under questioning by State Farm attorney Wally Greenough, Hunter said most of the documents he reviewed were supplied by attorneys for the plaintiffs in the case, suggesting that Hunter failed to read other documents that included favorable opinions of aftermarket parts.

Greenough used baseball as a backdrop. "If a newspaper columnist writes that the St. Louis Cardinals are bad, does that mean every player is bad?" Greenough asked.

"I don’t know," Hunter replied.

"Does that mean Mark McGwire is bad?"

"No, I would never say that. Especially being this close to St. Louis," Hunter said.

Greenough’s point went to the heart of State Farm’s defense. The auto insurance giant, the country’s largest with some 37 million policyholders, is accused of breaching its contract when it requires the use of aftermarket body parts to fix a car to its pre-crash condition.

Plaintiffs claim that aftermarket parts pale in quality to factory originals, so when a Chrysler minivan is repaired with a non-OE fender, for instance, it isn’t restored to its pre-crash condition.

Based on documents that Hunter said he reviewed, all non-OE parts are substandard to OE parts - a point the jury of eight women and four men must agree with for plaintiffs to win their contract claim.

State Farm also is accused of fraud for telling consumers it will have their cars fixed to pre-crash condition with non-OE parts when company officials knew the parts were inferior to OEM parts.

Hunter said if he had known in 1994 what he knows today - after reading the internal documents - he likely would have taken some action in regard to insurance companies’ mandating use of non-OE parts. At that time, he testified, he believed non-OE parts were as good as OE parts and that their existence helped drive down parts costs.

Texas attorney Tom Shadle, another plaintiff, testified that he paid an extra $45 for an OE fender for his Saturn car after a Jan. 1,1996 accident and said he never received information about quality replacement parts from a State Farm agent or estimator. A body shop mechanic advised him to reconsider using the non-OE part listed in State Farm’s estimate.

Bruce Davis, a State Farm claims representative from 1978-1984 in the Denver area, testified that the company routinely held contests and offered prizes for reps that pushed aftermarket parts the most. Davis said he quit in part because any promotion and raises were tied to pushing aftermarket parts, and he personally didn’t agree with the idea of pushing inferior products.

Davis, now an attorney investigating auto collision cases in Utah, said he repeatedly criticized State Farm’s policy regarding aftermarket parts to his immediate supervisor, Bill Bink.

Davis also testified that it was internal policy to allow for OE parts to be used with people who looked "well-off financially" and who likely wouldn’t challenge State Farm’s policy while forcing aftermarket parts on people with "fixed incomes, seniors, blacks, Hispanics and Vietnamese ... anyone who looked not sophisticated enough to come back at us on these issues," Davis said.

Jurors heard testimony from State Farm official Bill Hardt and Certified Automotive Parts Association Executive Director Jack Gillis.

Hardt, assistant vice president for auto claims, at times tried to distance himself from portions of the memos and even disagreed with some of the potentially damaging opinions in them.

His testimony before a Williamson County jury hearing the breach of contract case against State Farm was straight-forward and appeared unrehearsed, unlike an earlier deposition given by State Farm’s top executive, chairman and CEO Ed Rust Jr.

Rust repeatedly answered specific questions about non-original equipment manufacturer (OEM) parts with general responses about how the company strived to give policyholders "quality" repair work. At one point, jurors laughed at the CEO because of his non-answers to questions.

But Hardt didn’t hesitate when he was questioned by plaintiffs’ attorney Tom Thrash.

A portion of an Aug. 5, 1997 draft memo by in-house lawyer Gregg Mecherle to Hardt and other executives recommended that State Farm reconsider its policy to have body shops use non-OE parts. In one portion, the memo states that until the "aftermarket part manufacturers have enough competition within their own industry to begin to compete on quality rather than price, there will be part lots with quality problems."

"Do you agree with that statement?" Thrash asked.

"I don’t agree with that statement at all," Hardt responded.

Thrash then questioned Hardt about the parts’ overall quality. "Aftermarket parts have caused a lot of problems for State Farm, haven’t they?"

"They’ve caused problems, but I wouldn’t say a lot," Hardt said, adding later that State Farm favors a stronger aftermarket parts industry to increase competition in the market and drive down prices of factory originals. He said carmakers themselves waged a public relations campaign against aftermarket parts over the years.

Gillis was given a choice of buying one of two new Ford Tauruses. One had original parts. The other had a hood and two fenders made from Taiwanese aftermarket plants. Both cost the same. Gillis said he would opt to buy the car with aftermarket parts. "They’re the same car," he said.

State Farm’s connection to CAPA is signficant in that the insurance company promises to write estimates that include only CAPA certified parts when available; CAPA parts totaled about 3 percent of the market last year. About 80 percent of the market belongs to original carmakers while manufacturers of imitation parts that aren’t CAPA certified make up about 12 percent.

Gillis said the CAPA standards established and updated throughout the past 12 years have helped "raise the bar" of quality in the aftermarkets parts industry.

But he conceded that CAPA has had difficulty over the years convincing manufacturers to participate in the CAPA program. They have been able to sell their parts whether they’re CAPA certified or not. Parts defined in the lawsuit include outer-body items such as hoods, fenders, headlight casings, trim and molding.

Christine Moorman, a Duke University business school professor, said she supervised a survey this summer that showed about 65 percent of car owners insured by State Farm didn’t know their vehicles were repaired with parts not made by the original carmaker.

In addition, when told that the parts weren’t galvanized, had a lack of warranty and weren’t crash tested as factory originals are, some 77 percent of the owners said they would have complained about having the parts put on their vehicles.

"Consumers did not get the right information ... people did not know these parts were on their cars," she said in response to questioning by plaintiffs’ attorney Don Barrett.

The survey was prepared in response to testimony given earlier in the Williamson County trial by Philip O’Conner, a State Farm consultant who reviewed 1,364 claims files for vehicles repaired in Illinois between 1995-97.

O’Conner said of the 1,364 claims, a total of 18 complaints were logged about non-OE parts planned for the repair work. Another eight complaints were made after the work was finished.

Moorman’s survey takers reached 237 of the 1,364 car owners from the files that O’Conner reviewed.

She concluded that based on the various responses, car owners weren’t adequately informed that State Farm specifies imitation body parts for repairs and that they likely are inferior in some ways to factory originals.

Judge John Speroni told the parties that he wants closing arguments conducted Sept. 29, with the jury beginning deliberations by the afternoon.

Other witnesses to testify during the last weeks of the trial included:

• Michelle Vogler, a mechanical engineer hired by State Farm to evaluate the conditions of five Taiwanese car parts makers, told jurors the manufacturers were producing "good, quality parts" that she called functionally equivalent to automakers’ originals.

  Vogler’s testimony smacked squarely against the earlier opinions of Paul Griglio, a former GM, Chrysler and Ford die maker and manager. Griglio said it would be by "accident" that Taiwanese plants ever produced parts on par with factory originals on a consistent basis.

  Griglio now is a private consultant to the world’s 20 automakers, and he testified that non-OE manufacturers lack the equipment, expertise and design specifications to make consistently good parts. He visited three Taiwanese manufacturers in May 1998; Vogler visited the same three and two others.

  Vogler was State Farm’s last witness, and perhaps one of the insurance company’s strongest.

  Vogler, from Detroit, showed jurors a videotape from her tours of the Taiwanese plants and said she witnessed the use of "state-of-the-art" equipment such as coordinated measuring machines, some robotics for weld placements and computer-aided drawing programs.

  Overall, she said she was impressed with the facilities.

• Clarence Ditlow, who took over in 1975 as director of the Center for Auto Safety - an agency that Ralph Nader started - said few complaints about certified replacement parts have been logged at the center. He also said he believes parts overseen by the Certified Automotive Parts Association also pose no safety risks.

  But jurors also learned that Ditlow has been a member of CAPA’s board since 1988. His dual role as the auto safety center director and his role with CAPA was a focus of Consumer Reports stories and a Washington Post business piece earlier this year.

  State Farm’s connection with CAPA is at the heart of the ongoing class action trial. State Farm’s policy is to specify the use of CAPA-only aftermarket parts if such part types are made. If not, originals are ordered, but there has been conflicting testimony about whether State Farm-insured cars are sometimes repaired with non-CAPA certified parts over the years.

  Ditlow testified that he agreed with the plaintiffs’ position that non-CAPA certified parts may be inferior to OE. He has warned consumers to avoid buying uncertified aftermarket parts, he testified.

(Editor’s Note: For the latest details on the trial. Steve Binder, reporter for the Southern Illinoisian contributed to this article.)

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