Auto Repair And Competitive Auto Replacement Parts
According to the National Safety Council, there were about 18.3
million motor vehicle crashes in 2002 causing $242.7 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 $47 of every $100 earned
in private passenger auto insurance premiums in 2002; $80 if liability
claims are included. Based on 2002 premiums written for private
passenger auto insurance, insurers paid over $111.6 billion in vehicle-related
claims, including liability claims.
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, benefitting policyholders and the company’s
Competitive replacement parts
It comes as no surprise that insurers find themselves at odds with
auto makers 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 continues to be somewhat
limited, with the insurance industry finding itself defending the
right to use parts in courts across the country. A number of 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
©2004 Property Casualty Insurers Association of America, used
with permission, all rights reserved
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 grilles.
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 13.5% between 2000–2004.
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
rebuilt from car company parts, not including the cost of paint
and labor. This is nearly triple the original cost (see
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.
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.
CAPA contends that use of its certified parts could reduce repair
costs by at least $400 million a year.
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
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
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.
42 states have enacted laws that dictate when and how insurers
and auto body shops must disclose the use of aftermarket parts to
their customers. Ohio law requires disclosure regarding the use
of generic parts in 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.
Up until recently, it was not uncommon for insurers to base repair
estimates on the use of generic replacement parts for older vehicles,
just as repair shops may opt to replace an older vehicle’s
crash part with one from a salvage yard.
Lawsuits and ramifications
In October 1999 an Illinois jury found State Farm Mutual Auto Insurance
Company liable for $445 million in damages and an additional $730
million in punitive damages in a class action lawsuit involving
its use of generic auto parts. The total award in the case was $1.19
billion. The company appealed in December 1999. In its April 5,
2001 decision, the Illinois appellate court left standing nearly
all of the trial court’s findings, and affirmed the judgment.
As of April 2004, State Farm’s most recent appeal awaits judgment
from the state’s highest court.
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), “Insurance Issues
Update,” edited by Ruth Gastel.
Online sources for information on replacement parts: