According to the National Safety Council (NSC), there were about 11.4
million motor vehicle crashes in 1999 causing $181.5 billion in losses.
Costs include wage and productivity losses, medical and administrative
expenses, property damage and employer costs.
When it comes to repairing vehicles in crashes, insurance companies pay for the majority. According to McKinsey’s 1998 P/C Insurance Annual, insurer payments for auto repair amounted to $24 billion in 1995, or about 75% over the overall collision repair market. The 1998 annual statement from the National Association of Insurance Commissioners showed total private and commercial auto physical damage losses incurred by insurers in 1998 totaled over $32.6 billion. With such losses to cover, insurers continually look for ways to keep vehicle repair costs down and in turn, the premiums charged to policyholders for insurance protection.
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 generic parts in courts across the country. A number of legal battles, including class action lawsuits, remain pending 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.
Insurance companies’ view
Insurance companies have been encouraging the use of non-OEM parts to control costs. The expected cost of repairing damaged vehicles typically accounts for about 40–50% of the insurance premium, according to the Alliance of American Insurers (AAI).
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 enjoy a monopoly on the replacement part business, with nothing to restrain pricing. The AAI reports that prior to the introduction of aftermarket parts, OEMs marked up replacement parts as much as 800%. The availability and competition created by generic parts has caused a price reduction in many OEM parts. However, a 1999 study commissioned by the Alliance found that the cost of OEM parts continue to average 60% more than identical parts certified by the Certified Automotive Parts Association or CAPA. (For more information on CAPA, see information provided further down in this section.)
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 $143.33 for a 1996 fender.
Car repairs are costly. Ohio’s repair rates increased by an average of 17% between 1996–2000, as shown on page 20. The use of certified aftermarket parts can greatly affect cost-containment efforts of the industry. An AAI study shows that a 2000 Honda Accord LX retailing at $22,365 costs about $68,066 if rebuilt from car company parts, not including the cost of paint and labor. This is over three times the original cost (see graphic above).
Auto makers’ point of view
Auto makers, according to AAI, control $7.2 billion of the $9 billion crash replacement parts market. 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. 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 AAI literature, auto manufacturers are not necessarily manufacturers of their replacement parts. This business is subcontracted to independent manufacturers in the US and abroad. These subcontractors can also be producers of non-OEM counterparts. 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, the Certified Automotive Parts Association (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 Center for Auto Safety, a national consumer safety group, the body shop industry, an aftermarket distributor and representatives from the insurance industry.
CAPA testing program
The CAPA 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 without sacrificing quality.
In order for a part to meet CAPA certification requirements, a participating manufacturer must first allow a detailed review of its factory and manufacturing process by an independent testing laboratory.
Once the factory has been approved, the manufacturer submits parts for certification. Samples are tested for material properties, fit, finish, paint adhesion, coating performance, weld integrity, adhesive performance and corrosion. The parts are also examined to confirm the identification of the participant, country and manufacture date.
If the sampled parts comply with all CAPA Quality Standards, then the participant is allowed to apply a CAPA quality seal to that part. Currently, two specifications are in place for parts made of metal (CAPA 101) such as fenders, hoods, quarter panels and side moldings; and those made of plastic (CAPA 201) such as bumper covers, header panels, radiator supports, and front and rear fascia.
According to CAPA, it received complaints on .08% of its more than 2.4 million certified parts in 1999.
Changes in CAPA standards
CAPA updated its Quality Standards Manual (QSM) in December, 1998. The major change to the program is the requirement that all CAPA parts manufactured after January 1, 1999 be made of double-galvanized metal.
CAPA also has a decertification program for parts that no longer comply with its standards.
Body shops buy OEM over non-OEM parts 5 to 1. In some cases body shops, who pay full price for OEM parts, receive a 25% discount from original parts manufacturers. This discount is typically not passed on to the customer or insurance company, both of which are expected to pay full list price for parts regardless of their origin.
Generic parts and vehicle crash test results
Another concern raised by OEM parts manufacturers and auto makers is that safety is compromised when generic crash parts are used. According to crash tests conducted by the Insurance Institute for Highway Safety (IIHS) (report released 2/17/2000), 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 with distinction in 40 mph frontal offset impact crashes. Both earned good crashworthiness ratings, with essentially no difference in crashworthiness performance. The findings provide conclusive evidence that front-end cosmetic crash parts such as fenders and bumpers serve no structural or safety function.
This is not the first time the Institute crash-tested a vehicle equipped with generic crash parts. When the controversy heated up in the 1980s regarding whether or not a vehicle repaired with generic cosmetic replacement parts would meet federal motor vehicle safety standards, IIHS conducted a similar test. A 30 mph front-into-barrier crash test of a 1987 Ford Escort without front fenders, door panels and grille, and equipped with a competitive parts hood, far exceeded federal safety requirements.
There are performance standards on parts that affect the crashworthiness of a vehicle such as lights and reflective devices. Such parts must meet requirements, regardless of manufacturer, and are under Department of Transportation compliance standards.
Legislative activity and state laws
At least 25 state legislatures addressed the issue of using generic parts in 1999, usually in response to consumer concerns regarding the equality of these parts and OEM parts in terms of fit, finish and corrosion resistance. Bills introduced proposed to limit the use of generic parts to vehicles older than two model years, allow policyholders to contest their use, and require policyholders to be informed of the types of parts used to repair their cars.
Disclosure regarding the use of generic parts in insurance appraisals is required by Ohio law. The bill, Am. Sub. HB 302, was passed in 1990.
Insurance industry obligations
The parts selection process is determined by availability, cost and quality of crash parts. When a vehicle is damaged, the insurer has an obligation to the policyholder 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 insurance 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. The case’s status at close of publishing finds oral arguments in the Illinois appellate court beginning January 10, 2001.
In the wake of the State Farm judgment, similar lawsuits have been filed against major auto insurers including CNA, Liberty Mutual, Allstate, GEICO, SAFECO, USAA, Hartford, Nationwide and Travelers.
Many insurers rescinded use of generic parts as a result of the flurry of lawsuits. Some industry leaders and consumer group advocates contend that the outcome of these lawsuits could potentially lead to higher auto insurance premiums. The Insurance Information Institute (III) estimates that insurer prohibition in its use of generic parts to repair damaged vehicles could add $4–5 billion annually to the cost of auto insurance.
Sources: Alliance of American Insurers and Certified Automotive Parts Association (CAPA). Portions reprinted from Insurance Information Institute, “Insurance Issues Update,” edited by Ruth Gastel
Contact CAPA at 1518 K St. NW, Suite 306, Washington, DC 20005; 202-737-2212; or via its website at www.capacertified.org