Auto Repair And Competitive Auto Replacement Parts
According to the National Safety Council (NSC), there were about
13.4 million motor vehicle crashes in 2000 causing $201.5 billion
in losses. Costs include wage and productivity losses, medical and
administrative expenses, property damage and employer costs.
Cost of auto repair and innovations
When it comes to repairing vehicles in crashes, insurance companies
pay for the majority. According to the Insurance Information Institute,
vehicle damage claims accounted for $49 of every $100 earned in
private passenger auto insurance premiums in 2000. Based on premiums
written in 2000 for the US private passenger auto insurance market,
insurers paid over $59 billion in vehicle-related claims in 2000.
A.M. Best’s Aggregate and Averages reports that incurred
losses for auto physical damage rose from $26.6 billion in 1995
to $38.5 billion in 2000. Due to the cost of covering 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. By handling automotive
repairs from start to finish, the company expects to expedite the
repair process, benefitting both policyholders and the company’s
bottom line.
Competitive auto 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 generic parts in courts across the country. A number
of legal battles, including class action lawsuits, remain 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.
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 be in a position to create a monopoly in 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 reduced the cost of many OEM parts.
However, a 1999 study commissioned by the AAI found that the cost
of OEM parts averages 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. The competition lowered
the cost of the OEM fender to $143.88 by 1966 and its generic counterpart
to just over $60.00.
Car repairs are costly. Ohio’s repair rates increased by an
average of 17.5% between 1997–2001, as shown on page 20. The
use of certified aftermarket parts can greatly affect industry cost-containment
efforts. An AAI study shows that a 2001 Chevrolet Cavalier LS retailing
at $15,395 costs about $63,240 if rebuilt from car company parts,
not including the cost of paint and labor. This is over four times
the original cost (see below).
Note: Limited space allows for only some of the prices
to be shown
©2001 by Alliance of American Insurers,
used with permission, all rights reserved
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 the AAI, 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, 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’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.
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 .04% of its more than
1.75 million certified parts in 2000.
Generic parts and vehicle crash test results 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 with distinction in 40 mph frontal offset impact crashes.
Both earned 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. When the controversy heated up
in the 1980s, 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.
There are performance standards on parts that affect the crashworthiness
of a vehicle such as lights and reflective devices. Such parts must
meet Department of Transportation compliance standards, regardless
of manufacturer.
Public attitude toward the use and need for competitive auto parts
was recently tested. Survey results released in November 2001 by
the Insurance Research Council 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. 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. For the status of aftermarket parts
legislation by state go to www.iii.org/media/hottopics/insurance/genericauto/.
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 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 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 2002, State Farm has appealed the judgment to the state’s
highest court.
In the wake of the State Farm judgment, similar lawsuits have been
filed against other major auto insurers. 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 on the Web at www.capacertified.org.
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