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 bottom line.

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 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.

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 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

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:
III: www.iii.org/media/hottopics/insurance/genericauto/
PCI: www.pciaa.net/sitehome.nsf/lcpublic/26?opendocument
CAPA: www.capacertified.org