Awaiting Avery and the Fate of Aftermarket Parts
By E. L. Eversman, Esq.
With everyone eagerly awaiting the Illinois Supreme Court's decision reviewing Avery v. State Farm Mutual Automobile Insurance Company, 321 Ill. App.3d 269, 254 Ill. Dec. 194, 746 N.E.2d 1242 (2001), appeal allowed, 201 Ill.2d 560, 271 Ill. Dec. 922, 786 N.E.2d 180 (2002), the issues raised by the use of repair parts, other than original equipment manufacture, are again in the forefront of automobile news. Avery created a sensation when the trial court's decision was announced holding State Farm Mutual Insurance Company (State Farm) liable to customers for breaching its contracts of insurance and for violating the Illinois Consumer Fraud and Deceptive Business Practices Act - in a cumulative amount of $1.18 billion. The lower court's decision was upheld on appeal, and State Farm appealed that decision to the Illinois Supreme Court. The Illinois high court's decision will have a material finacial impact on State Farm, as well as the aftermarket automobile industry.
What was Avery all about?
Avery was a lawsuit brought in Illinois by a number of plaintiffs seeking to have their claims against State Farm certified as a national class action. Plaintiffs sued the insurer on theories of breach of contract and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (CFA), claiming that State Farm did not honor its insurance contract to pay for parts of "like kind and quality" to restore the insured's vehicle to "pre-loss condition". The insureds complained that State Farm repaired their vehicles using inferior replacement crash parts rather than original equipment manufacture (OEM) parts and affirmatively misrepresented the quality of these replacement parts. In a nutshell, the insureds argued that State Farm repaired their vehicles with inferior parts and lied about their quality for the sole purpose of saving money.
What are aftermarket parts?
OEM parts are those produced by the maker of the vehicle or the manufacturer's designated vendor. Replacement crash parts, often referred to as "aftermarket parts" are those made by a company other than the original manufacturer or vendor. In other words, these parts are the automobile industry's equivalent of the generic version of a brand-name drug. There are also different categories of these parts, including certified and non-certified parts. The certification comes from an organization created and largely funded by the insurance industry, not any governmental entity. Nonetheless, the majority of aftermarket parts are non-certified.
According to the Collision Industry Conference's October 2003 Cycle Time Task Force presentation, using OEM parts in repairs increases body shop productivity due to the availability and proper fit of parts and has a 99.9% satisfaction rate among customers. Using certified aftermarket parts by body shops requires more time and attention from repairers as orders must be cross-referenced with OEM part numbers, incorrect parts are shipped, parts are less well packaged and are more likely to be damaged in shipping, or uncertified parts are substituted for certified ones. The CIC task force also determined that many aftermarket parts do not fit properly and require additional time to adjust the product in an attempt to make it function. Customer satisfaction with these parts is only 50% to 70%. Non-certified aftermarket parts have the lowest customer satisfaction and have similar fit and ordering issues like their certified counterparts.
At trial
At trial, plaintiffs presented experts whose testimony supported a finding that all of the aftermarket parts specified in State Farm's repair allowances were inferior to the OEM parts in terms of "appearance, fit, quality, function, durability, and performance." Plaintiffs contended that, not only was the quality of the products unsatisfactory, State Farm's promise to replace the non-OEM part was illusory, as it required the policyholder to resolve the problem with the aftermarket manufacturer or charged its insureds with the cost associated with installing a replacement. Because aftermarket producers are largely located outside of North America, often in Taiwan, forcing the customer to resolve the warranty problem with the manufacturer, essentially, left the customer with no real remedy.
Additionally, the evidence demonstrated that State Farm did not consider a vehicle's condition immediately prior to the accident when writing estimates and determining which parts it would pay for in the repair. In practice, State Farm recommended the use of aftermarket parts in every repair, provided they were less expensive and available, irrespective of the age, type, or condition of the damaged vehicle. The insurer's adjustors were required to use a computer system programmed to select the least expensive, available, certified aftermarket part. If the damaged part had no comparable certified one, then the computer would automatically select a non-certified, non-OEM part for use in the repair. Interestingly, the trial testimony indicated that State Farm employees, associates of State Farm executives, and "special customers" were exempted from this practice, and their vehicles were repaired with OEM parts.
When the jury (on the contract claim) and the judge (on the CFA claims) applied the evidence of State Farm's adjusting practices and the expert testimony as to the inferior nature of aftermarket parts to the insurer's promises and policy terms that it would use parts of "like kind and quality" to return insureds' vehicles to "pre-loss condition", the jury found that State Farm breached its insurance contract and the judge ruled that State Farm's practices violated Illinois consumer protection laws. Accordingly, the jury awarded almost $500,000 million to the insured class members as compensation for their damages. In addition, the judge ordered State Farm to disgorge $130 million in savings realized by mandating the use of non-OEM parts and awarded plaintiffs $600 million in punitive damages.
On appeal
State Farm appealed the verdict on a variety of issues, claiming that the class should never have been certified, that the consumer fraud judgment was incorrectly determined, and that damages were improperly awarded. In a lengthy opinion, the court of appeals found the certification of the class and the determination that State Farm violated the consumer protection statutes were not wrongly decided. However, the court agreed with State Farm that the order requiring it to disgorge the $130 million in savings from its aftermarket program duplicated damages already awarded by the jury, and it reversed the disgorgement award. The court upheld the remainder of the decision. The Illinois Supreme Court then granted State Farm an appeal of the appellate court's decision.
What is "riding" on the Illinois Supreme Court's decision?
The decision by the Illinois high court will materially impact the aftermarket industry. At present, there is legal precedent identifying aftermarket parts as inferior to OEM parts in appearance, fit, quality, function, durability, and performance. Clearly, that is not the type of recognition any product maker desires. If the Illinois Supreme Court upholds the decision, insurers and product makers will have a virtually impossible task trying to convince consumers that aftermarket parts are appropriate for their vehicle's repair. Upholding the decision, also, opens the door lawsuits by third parties (non-insureds) whose vehicles were repaired with inferior aftermarket parts mandated by State Farm's estimating system when a State Farm insured caused the accident.
On the other hand, if the Illinois Supreme Court agrees with State Farm and reverses the decision, consumers will find that their vehicles will invariably be repaired with aftermarket parts - certified or not - and, if the product fails to perform properly, their recourse will be enforcing a warranty from a potentially unreachable manufacturer. If the insurer is successful in forcing the use of aftermarket parts, it makes one wonder whether State Farm employees, associates, and "special customers" will continue to be entitled to repairs with OEM parts.
E. L. Eversman
The information provided in this column is for information purposes only and should not be construed as legal advice. You should always consult an attorney licensed to practice in your Country, State, and/or Territory as laws vary from Country to Country, State to State, and Territory to Territory. The author is delighted to share information but cannot be responsible for damage or adversity encountered by reliance upon that information and urges you to consult with local counsel.
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