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Letter to the Editor
This article originally appeared in the November, 1999 Issue of INSIGHT
©1999 Collision Repair Industry INSIGHTAll Rights Reserved
CIECA Starts Work on Electronic Parts and Materials Ordering Standards
Pennsylvania Approves Revised Appraiser Regulation
INSIGHT Publisher to Moderate NACE 99 PBEA Panel
CCC Consumer Services Acquires Fleming & Hall Administrator
INDUSTRY UPDATE
A Williamson County judge ruled October 8 that State Farm violated policyholders’ trust and committed fraud in connection with its use of imitation crash parts for car repairs, and he hit the insurance giant with $730 million in extra damages.
Associate Judge John Speroni found State Farm defrauded consumers by forcing body shops to use aftermarket fenders, hoods and trim parts the insurance company knew were inferior to carmakers’ originals.
The decision comes on the heels of a jury’s verdict on October 4 that found State Farm breached its contracts with policyholders for claiming the parts would restore vehicles to their pre-crash conditions.
The jury concluded State Farm should pay a total of $456 million in damages to a class of car owners whose vehicles were repaired between July 1987 and February 1998. Some 4.7 million vehicles were repaired during the period - meaning the average award per vehicle would be about $95.
The consumer fraud count covers a roughly three-year period from July 1994 to February 1998. It is unknown how many of the 4.7 million vehicles were repaired during this period.
Speroni’s award decision included $130 million based on the savings realized by using aftermarket parts during the period, and $600 million in punitive damages.
It is believed to be the highest punitive damage award ever on a fraud claim in Illinois, according to one of State Farm’s own lawyers.
Patricia Littleton, a Marion attorney and among the team that represented the plaintiffs, called Speroni’s decision a “serious wake-up call” for State Farm.
“We’re thrilled, absolutely thrilled. This ruling hopefully sends a strong message to State Farm that it has to stop its practice of lying to policyholders, and with their decision yesterday to stop using these parts, I think they’ve received the message,” Littleton said.
During a six-week trial, State Farm argued that premium prices are on average $8 to $12 lower each because of its policy of using aftermarket parts. Some $1.3 billion in savings were realized between 1987 and 1998, testimony showed.
State Farm spokesman Dave Hurst blasted Speroni’s decision, and restated the company’s plans to appeal the jury’s decision on the contract case and now Speroni’s fraud ruling and damage awards.
“We are stunned by the judge’s opinion and reject the notion that we in any way defrauded our customers,” Hurst said in a prepared statement. “The verdict simply ignores the evidence presented at the trial. We will appeal the decision and the judge’s outrageous punitive damages award.”
State Farm auto policies include language that describes aftermarket parts as being “like kind and quality” to factory originals and that they will restore vehicles to pre-crash conditions. In a press release issued October 8, Edward Rust, chairman and chief executive officer of State Farm Mutual Automobile Insurance Company also took issue with the decision.
“This decision astonishes us. We’re stunned by its severity,” said Rust, “We refer to generic parts in the insurance policy, it’s on the repair estimates, it’s in our brochures, it’s obviously described in our guarantee. State legislators and insurance regulators have weighed in on the issue, and we comply with all their disclosure rules in every state.”
Rust continues, “At trial, the plaintiffs presented no evidence that anyone had been harmed in any way. They did not produce even one policyholder who was economically harmed or whose car was physically damaged through the use of a generic part in the repair of a damaged vehicle. There are absolutely no safety issues involved in the use of these parts.”
But the jury, and now Speroni in his ruling, found that State Farm’s own documents showed company officials were aware that the parts failed to live up to the equality standard. Aftermarket sheet metal, for instance, that is used to make hoods, fenders and other metal parts, were rarely galvanized.
Sheet metal for carmakers’ parts are galvanized, and testimony during the trial showed that galvanized metal protects against rust better than metal that is not galvanized.
“State Farm occupies a position of trust with its policyholders, who pay the required premiums and are entitled to receive all the benefits State Farm promises to provide in its insurance contract with them. State Farm violated this trust,” Speroni wrote as part of his ruling.
“State Farm, in light of its knowledge of the inferiority of non-OEM (original equipment manufacturer) ‘crash parts,’ misrepresented, concealed, suppressed or omitted material facts concerning non-OEM ‘crash parts’ with the intent that its policyholders rely upon these deceptions, in violation of the Consumer Fraud Act,” the judge continued.
Speroni also noted that State Farm not only failed to tell policyholders of their own concerns about the quality of imitation parts, the company coined the phrase “quality replacement parts.” The judge called it a “misleading” term.
On October 7, State Farm issued a nationwide order for claims representatives to temporarily stop using aftermarket sheet metal to eliminate what Hurst said was policyholder “confusion.” Littleton said the move was in direct response to the jury’s decision on Monday, and the expected ruling against the company by Speroni on Friday.
Whether other insurance companies follow suit in suspending or stopping use of the parts remains to be seen. At least six other insurers face similar lawsuits; there are now 14 others pending.
Country Companies, for instance, issued an internal memo this week stating that it plans to continue using the parts because they offer a good value and because their policies are worded differently than State Farm’s. Country Companies doesn’t specifically make the claim that the parts are of “like kind and quality.”
Littleton said she and other lead attorneys Don Barrett, of Lexington, Miss., and Tom Thrash, of Little Rock, Ark., expect in the coming weeks to file an additional lawsuit covering car owners who had repairs made from February 1998 through Friday.
“They were deceived just as much as this class was, and they are entitled to damages,” Littleton said.
If upheld on appeal - which could take several years - Speroni ultimately will control how the damage awards are distributed to car owners.
He also has control over how much plaintiffs’ attorneys will receive in fees and costs, an amount that Littleton said would be apart and separate from the jury’s and Speroni’s rulings.
(Editor’s Note: For the latest details on the fallout from the trial, visit the news section of the INSIGHT website at www.collision-insight.com/news. Steve Binder, reporter for the Southern Illinoisian contributed to this article.) o
After polling members and other industry sources, the CIECA Board of Trustees has authorized the development of industry electronic data interchange (EDI) standards for parts and materials ordering, invoicing and payments. Frank Terlep, formerly Vice President of Business Systems for Mitchell International and currently Vice President of e-business solutions for Carstation.com has been named the interim chair of this project.
The first meeting of the group was held September 30 and was attended by members of the parts supplier community as well as repair facility and materials supplier representatives.
According to Terlep establishing EDI standards for parts and materials should not be a difficult project. Terlep stated, “There are already EDI standards in use throughout other industries for electronic ordering, invoicing, and payment. We simply have to conform these national standards to the specific needs of our industry. The existence of these standards however, will have an incredible impact on our ability to move into this area of electronic commerce. They will ensure that any system developer knows exactly what is required for universal electronic buying, and any supplier knows what to expect from its customers in electronic ordering. Electronic ordering can then take place with any supplier that uses the CIECA standards.”
According to Roger Cadaret, Executive Director of CIECA; “The national standards that we intend to adapt to our industry are the same that are used by the car manufacturers when ordering from their production suppliers, including paint companies. Their use has saved millions for the car makers and their suppliers, and can be expected to do so for us as well. Conceptually, a bill of material created in the repair estimating system can be automatically converted into electronic parts orders. The orders can be delivered to suppliers electronically and confirmed the same way. Repair centers will find their parts ordering efficiency increasing exponentially as the systems catch up to the standards and the processes adapt.”
Persons interested in participating on the Parts and Materials Ordering subcommittee should contact CIECA at: (734)699-0097.
ASA reported October 11 that the Pennsylvania Independent Regulatory Review Commission (IRRC) has approved the Motor Vehicle Physical Damage Appraisers (MVPDA) regulation by a vote of 4-1. The Pennsylvania Insurance Department originally proposed the regulation.
The regulation, according to the order of the Commission “adds provisions which clarify the licensing requirements and occupational standards for appraisers.”
The regulation also defines an aftermarket crash part as “a non-original equipment manufacturer replacement part, either new or used, for any of the non-mechanical parts that generally constitute the exterior of the motor vehicle, including inner and outer parts.”
The Automotive Service Association (ASA) had met with the IRRC and the Insurance Department to discuss the state regulation. ASA was concerned with language in the regulation regarding consumer steering. The original proposal allowed appraisers to provide the consumer with the names of at least two repair facilities able to perform repairs. The final language allows insurers to suggest a repair facility that is able to repair the vehicle, but insurers must include disclosure that there is no requirement to use any specified repair shop.
“ASA has worked hard to ensure that our members are protected by this regulation,” said John R. Mock, ASA National Chairman. “We are still concerned with language in the regulation that may incorporate steering in the state of Pennsylvania. Only time will tell if this concern becomes a reality.”
While the revised regulations have been approved, two Pennsylvania state senators have introduced bills that may impact the regulations by eliminating insurance company requirements that their insureds accept non-OE sheet metal or limits on their choice of repair facility.
The bills were introduced in mid-October by the Democratic state senators, Michael A. O’Pake and Jay Costa, Jr.
O’Pake said vehicles damaged in accidents should be restored to their original condition.
“Professional repairmen tell us they are pressured — and often required — by insurers to use replacement parts whose quality is untested, or whose quality has been found to be significantly inferior to the original parts,’’ said O’Pake (D-Berks).
O’Pake will introduce legislation that would require the use of Original Equipment Manufacturers (OEM) parts, or parts of equal quality, to repair collision damage during the vehicle’s warranty period, or for five years from the date of purchase, whichever is longer.
Costa will introduce separate legislation that would prevent insurers, appraisers and independent insurance agents from recommending or soliciting a request for a recommendation that accident victims use designated repair shops.
INSIGHT Publisher to Moderate NACE 99 PBEA Panel
The Future Direction of the Collision Repair Industry and Its Impact on Distribution
INSIGHT's publisher, Charlie Baker will moderate the Paint, Body & Equipment Association (PBEA) panel discussion/roundtable at NACE in Atlanta, GA. Baker promises, "an overview of the Collision Repair Industry today and a discussion of key trends in the industry that are shaping the collision repair marketplace, particularly consolidation and industrialization, as we approach the next Millennium."
Panelists Mike Condon, Allstate; Matthew Ohrnstein, Caliber Collision Centers; Charlie Moore of CarStation.com; and Jake Snyder, industry consultant; and a paint company executive will share their views on the future direction of the collision repair industry and distribution.
This discussion should be of major interest to distributors, jobbers, insurers, and collision repair shop owners. Attendance is open to those registered for NACE, but seating is limited, so register now to avoid being disappointed by a sell-out, as happened last year. Call Barbara St. Aubin, PBEA Headquarters, at (913) 383-1713.
CCC Information Services, Inc. (Nasdaq: CCCG), announced October 13 that its subsidiary CCC Consumer Services, Inc., has acquired Florida-based Fleming & Hall Administrators, a third-party administrator (TPA) of personal lines auto insurance claims. The acquisition creates a fourth regional base of operations for CCC’s TPA services and significantly extends the company’s ability to serve the Southeast market. Former Fleming & Hall President Brian Fleming has been appointed Vice President and General Manager of the new CCC operation and will manage it on a day-to-day basis.
“We now have regionalized processing facilities and knowledge workers in South Dakota, Michigan and California as well as Florida,’’ said Blaine Ornburg, President of CCC Consumer Services.
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©1999 Collision Repair Industry INSIGHT
All Rights Reserved
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