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Auto Repair And Competitive Auto Replacement Parts
According to the National Safety Council, there were about 11.8
million motor vehicle crashes in 2003 causing $240.7 billion in
losses. Costs include wage and productivity losses, medical and
administrative expenses, property damage and employer costs.
Dealing
with auto repair costs
When it comes to repairing vehicles in crashes,
insurance companies pay for the majority. According to the Insurance
Information Institute,
payment for vehicle damage accounted for $44 of every $100 earned
in private passenger auto insurance premiums in 2003; $76 if liability
claims are included.
Auto repair costs jumped 12% from 1999–2001
(the most recent year for which there are complete data), according
to the Insurance
Institute for Highway Safety. More recent data, while incomplete,
are showing a further 9% jump, to $3,681 per claim by 2003.
Insurers
continually look for ways to keep repair costs down and in turn,
the premiums charged to policyholders. One major US insurer
entered the auto repair business in 2001 by purchasing a chain
of auto shops in nine states. Another introduced a streamlined
vehicle claims service in 2003 to handle repairs using outside
repair shops. By handling automotive repairs from start to finish,
insurers expedite the repair process, benefiting policyholders
and the company’s bottom line.
Competitive replacement parts
It comes as no surprise that insurers
find themselves at odds with automakers regarding the use of parts
manufactured by someone other
than the original manufacturer. These are known as competitive
auto replacement, aftermarket or generic parts.
The industry’s
use of generic parts is somewhat limited, with the insurance industry
finding itself defending the right
to use parts in courts across the country. Legal battles, including
class action lawsuits, are pending or in appeal at close of publishing.
At the core of most of these lawsuits is the issue of whether or
not insurers are satisfying insurance policy contractual agreements
through the use of generic crash parts in repairing policyholder
vehicles. According to the Property Casualty Insurers Assn. of
America (PCI), more than two dozen state courts have struck down
class-action lawsuits claiming that the use of aftermarket parts
results in diminished value of vehicles.
Note: Limited space allows for only some of the prices to be shown
* Does not include cost of labor or paint
©2005 Property Casualty Insurers Association of America, used
with permission, all rights reserved
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The Highway Loss Data Institute reports that
the average cost for collision repair in 2002 was $3,519, up
43% from 1992. |
Insurance companies’ view
PCI reports that the cost of repairing damaged vehicles typically
accounts for 40–50% of the insurance premium. Crash parts,
the most frequently damaged parts of vehicles involved in collisions,
are sheet metal and plastic parts that do not affect the operation
of a vehicle. These include hoods, fenders, bumper covers and door
panels.
Insurers contend that without the availability of generic
parts, car makers would be in a position to create a monopoly in
the replacement
part business, with nothing to restrain pricing. The availability
and competition created by generic parts has reduced the cost of
many OEM parts. However, a 1999 study commissioned by one of PCI’s
predecessors, the Alliance of American Insurers, found that the
cost of OEM parts averaged 60% more than identical parts certified
by the Certified Automotive Parts Association (CAPA).
By offering
lower prices for most auto replacement parts, competitive replacement
manufacturers are chipping away at their OEM competition.
Examples of OEM cost reductions include Ford, which reduced its
price list for such crash parts as hoods, bumpers and fenders by
an average of 35% for its Taurus, Sable, F150, Escort and Tracer
models. Toyota Camry’s 1992 OEM fender cost $253, compared
to a non-OEM manufactured fender costing $202.
Car repairs are costly.
Ohio’s repair rates increased by
an average of 9.8% from 2001–2005. The use of certified aftermarket
parts can greatly affect industry cost-containment efforts. A PCI
study shows that a 2002 Dodge Grand Caravan Sport minivan retailing
at $24,815 costs about $71,631 if rebuilt from car company parts,
not including the cost of paint and labor. This is nearly triple
the original cost (see above).
One insurer began offering a two-tier
policy in selected markets in 2001. The company provides policyholders
the option of choosing
repairs using independently produced aftermarket parts or adding
a policy rider that specifies the use of car company replacement
or original equipment manufacturers (OEM) parts in repairs. Cost
of the OEM parts endorsement, which is based on the vehicle’s
value, is applied to both comprehensive and collision coverages.
The endorsement adds about 5–10% to the cost of these coverages.
Auto makers’ point of view
Auto makers claim that the sheet metal and plastic sections that
form the “outer skin” of a vehicle are better in terms
of fit, finish, strength, durability and rust resistance when manufactured
by the OEM. They contend that the lower cost of generic parts is
quickly made up by the poor quality of the parts and negative impact
on the vehicle’s resale value.
To counter this argument,
a study of 1,907 car company parts by the Certified Automotive
Parts Association (CAPA) released in July
2002 found that half of them (954) did not meet CAPA standards
for fit, finish and appearance. GM parts had the highest failure
rate followed by Ford, Chrysler, Nissan, Toyota and Honda.
Some
consumers are led to believe that repairing a vehicle with competitive
auto replacement parts negates the vehicle’s
warranty. This is not true. The Magnuson-Moss Warranty Act, passed
in 1975, states that placing a competitive auto replacement part
on a vehicle does not affect the warranty on the remaining parts.
Original
equipment manufacturers say their prices are fair, reflecting the
need to stock equipment that may never be used and insisting
their parts are better. According to PCI, auto manufacturers are
not necessarily manufacturers of their replacement parts. This
business is subcontracted to independent manufacturers in the US
and abroad. These subcontractors may also be producers of non-OEM
parts. Auto manufacturers may be buying parts from the same source,
the only difference being a “genuine” parts label appearing
on the OEM version.
CAPA program
To alleviate auto maker concerns regarding the quality and fit
problems of non-OEM parts, CAPA was established in 1987 to develop
and oversee a testing and inspection program for certifying the
quality of repair parts. Similar to Underwriters Laboratories,
the CAPA board consists of representatives from the Advocates for
Highway and Auto Safety, the collision repair industry, aftermarket
distributors and the insurance industry.
CAPA’s testing program
provides consumers, auto body shops and insurance adjusters with
an objective method for evaluating
the quality of certified parts and their functional equivalency
to similar parts made by automobile companies. The organization
was founded to promote price and quality competition in the auto
parts industry, thus reducing the cost of crash repairs to consumers.
In
order for a part to meet CAPA certification requirements, a participating
manufacturer undergoes a detailed review of its factory
and manufacturing process. Upon factory approval, the manufacturer
submits parts for certification. Samples are tested for material
properties, fit, finish, paint adhesion, coating and adhesive
performance, weld integrity and corrosion. The parts are also examined
to confirm
the manufacturer, country and manufacture date.
The availability
of aftermarket parts has revolutionized the auto repair industry.
Today, almost 2,500 part types have achieved
CAPA
certification. Competitive repair parts are now so good that
more than 90% of the firms manufacturing or distributing them
provide
five-year warranties and some insurers guarantee the parts
for the life of the car.
CAPA contends that use of its certified
parts could reduce repair costs by at least $400 million a year.
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The US motor vehicle aftermarket business is
a $250 billion industry employing millions at over 500,000
business locations.
(Certified Automotive Parts Association) |
Vehicle crash tests and studies
Another concern raised by OEM parts manufacturers and auto makers
is that safety is compromised when generic parts are used. A March
2000 report issued by the Insurance Institute for Highway Safety
(IIHS) reaffirmed that the source of a car’s cosmetic crash
parts is irrelevant to crashworthiness.
IIHS tested a 1997 Toyota
Camry from which the front fenders, door skins and front bumper
were removed. The OEM hood was replaced
with a certified hood from an aftermarket supplier. The test results
were compared with those from an earlier test of a 1997 Camry with
its original equipment parts intact. Both Camrys, according to
IIHS, performed well in 40 mph frontal offset impact crashes, earning
good crashworthiness ratings with essentially no difference in
crashworthiness performance.
This is not the first time the Institute
crash-tested a vehicle equipped with generic crash parts. In the
late ‘80s IIHS
conducted a 30 mph front-into-barrier crash test of a 1987 Ford
Escort without front fenders, door panels and grille, and equipped
it with a competitive parts hood. The hood far exceeded federal
safety requirements. The Department of Transportation has established
performance standards on parts that affect the crashworthiness
of a vehicle such as lights
and reflective devices.
Public attitude toward the use and need
for competitive auto parts was part of an Insurance Research Council
study released in November
2001. Survey results found that more than half (52%) of respondents
would be willing to use aftermarket parts if they were assured
of the parts’ quality. A 57% approval rating was given for
equipment that has CAPA certification. 68% of those responding
said they’d be willing to use CAPA parts if their insurer
would guarantee repairs.
Legislative activity and state laws
The National Conference of Insurance Legislators (NCOIL) is considering
a model aftermarket parts bill and held hearings in July 2005.
The model bill requires that an independent third party such as
CAPA certify all non-OEM aftermarket crash parts. It also requires
that the consumer be notified by the repairer, via the insurance
estimate, that aftermarket parts will be used and the name of the
parts manufacturer.
The crux of the debate was between CAPA representatives who argue
that consumers benefit by the competition between independent collision
parts manufacturers, and those who represent the Alliance of Automobile
Manufacturers who allege poor quality of aftermarket parts.
Despite the allegations of poor quality and an effort to kill
the crash parts model bill, members of the NCOIL Property and Casualty
committee agreed to create a special committee to address the issues
necessary to develop an appropriate model bill.
Bills have been
introduced in state legislatures this session to limit the use
of aftermarket automobile parts in post-collision
repairs. These bills would require that aftermarket parts be
given the same warranty as equivalent original parts. Also the
service
centers making the repairs would be obligated to inform customers
if the use of such parts affects vehicle warranty.
At least 40
states have enacted regulations concerning aftermarket parts.
These include laws regarding disclosure of the aftermarket
parts manufacturer, disclosure requirements on car repair estimates
if aftermarket parts are used, general disclosure statements
and prior consent rules. State aftermarket parts regulations
are available
online at www.iii.org/media/hottopics/insurance/genericauto/.
Ohio law requires disclosure regarding the use of generic parts
in all types of insurance appraisals. The bill, Am. Sub.
HB 302, was passed in 1990.
Insurance industry obligations
The selection of crash parts is determined by availability, cost
and quality. When a vehicle is damaged, the insurer has an obligation
to provide fair and timely claims service. The industry is obliged
to make sure replacement parts are of “like kind and quality,” as
stated in the policy.
Collision repair shop usage survey
According to a September 2004 Trendline Survey conducted by the
Collision Repair Industry Insight magazine:
- 100% of the responding shops indicated that they inform customers
when non-OEM parts have been specified for their vehicles.
- If
aftermarket parts are specified on an insurance estimate, 58%
of the respondents indicated that they use them, 42% indicated
that they negotiate for use of its OEM counterpart and 0% stated
that they substitute an OEM part on their own.
- 78% of the aftermarket
parts used by the responding shops are CAPA-certified.
Lawsuits
and ramifications
State Farm was found liable for its use of generic auto parts
in a 1998 class action suit. A Williamson County, Illinois judge
awarded a total of $1.18 billion in damages: $456 million for breach
of contract, $600 million for punitive damages under the consumer
fraud law and $130 million for disgorgement damages—representing
direct savings realized by State Farm from use of non-OEM parts.
An intermediate appellate court later reversed the award of disgorgement
damages and upheld the rest, for a total judgment of $1.06 billion.
State Farm appealed to the state's high court, arguing that the
lower court erred in improperly certifying the case as a class
action, thus applying Illinois state law to other states. It also
argued that consumers should be free to choose aftermarket parts
as a way of reducing insurance costs.
On August 18, 2005, the Illinois Supreme Court reversed the prior
state court's $1.06 billion judgment. The high court decision overturning
the lower court ruling in (Avery, et.al. v.
State Farm) held that
the national class was improperly certified in 48 states. It threw
out all of the monetary damages awarded by lower courts and ruled
that the use of aftermarket auto parts did not breach the insurance
company's contract with its policyholders.
In February 2003 Ohio’s Court of Appeals denied class
certification to a group of plaintiffs challenging the use of non-OEM
parts.
The court upheld an earlier ruling in Augustus v. Progressive Corp.
The court ruled in favor of the insurers by finding that the claimants
did not have enough in common to constitute a class. Secondly the
court accepted the insurer’s claim that using a non-OEM part
could return a damaged car back to pre-loss condition.
Sources:
Property Casualty Insurance Association of America (PCI) and Certified
Automotive Parts Association (CAPA). Portions reprinted
from Insurance Information Institute (III), “Issues
Update.”
Online sources for information
on replacement parts:
III: www.iii.org/media/hottopics/insurance/genericauto/
CAPA: www.capacertified.org
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