Auto Replacement PartsWhy is this an Important IssueTypes of Replacement PartsHistory of Replacement PartsHistory - 2Current SituationStudies on Quality of After-Market Crash PartsState Farm Coverage Limit of Liability Comprehensive and Collision CoverageWhat is a Policyholder Entitled To if a 5 Year Old Car is Damaged?State Farm Replacement Parts CaseRepercussionsIf Verdict is UpheldIf Verdict is Overturned or ModifiedAuto Replacement PartsWhy is this an important issue?Types of replacement partsHistory of replacement part costsWhat the policy providesState Farm verdictImplications of alternative rulingsWhy is this an Important IssueSize of market is significant$1.2 billion per year spent for these replacement parts Consumer fairnessInsurance companiesAuto manufacturersImpact on price and solvency of insurersTypes of Replacement PartsCrash parts - sheet metal or plastic installed on exterior of carHoods, doors, fenders, trunk lidsMechanical parts - involved in operation of vehicleBatteries, filters, mufflers, spark plugsOriginal Equipment Manufacturer (OEM)After-market partsRecycled partsCertification Certified Automotive Parts Association (CAPA)History of Replacement PartsHenry Ford is reputed to have said:I would give my cars away if I could have a monopoly on selling replacement partsPrior to the 1970s, manufacturers did have a monopoly on crash replacement parts Inflation started to be a problem in 1970sAuto manufacturers started to raise prices on crash replacement parts much more than car pricesIndependent manufacturers started to produce crash replacement partsHistory - 2Car manufacturers were forced to compete on price with after-market producersCar manufacturers strategyDiscredit after-market partsBan after-market partsLawsuits against insurers that required after-market partsInsurance companies formed organization to certify quality of after-market parts CAPA begun in 1987Current SituationCrash parts marketOEM New 80%OEM Recycled 5%After-market parts 15%Examples of costs 1997 Ford Contour hoodOEM $450After-market supplier $2661999 Toyota Camry LECost new $23,263Cost of OEM parts $101,335Studies on Quality of After-Market Crash PartsInsurance Institute for Highway Safety 1987 and 2000No significant differences in crash resultsPossible exception – hoods hood latch could failhood may fail to buckle properly in crash Ford 1994After-market crash parts inferior to Ford partsThatcham 1995 (British insurance industry test facility)No significant difference in crash testsConsumer Reports 1999CAPA certified parts rusted more quickly and did not always fit properlyBumpers (not certified by CAPA) gave poor low-speed crash protectionState Farm Coverage Limit of Liability Comprehensive and Collision CoverageThe limit of our liability for loss to property or any part of it is the lower of:1. The actual cash value; or2. The cost of repair or replacementThe cost of repair or replacement is based upon one of the following:1. The cost of repair of replacement agreed upon by you and us2. A competitive bid approved by us; or3. An estimate written based upon the prevailing competitive price. ....We will include in the estimate parts sufficient to restore the vehicle to its pre-loss condition. You agree with us that such parts may include either parts furnished by the vehicle’s manufacturer or parts from other sources including non-original equipment manufacturers.What is a Policyholder Entitled To if a 5 Year Old Car is Damaged?New OEM PartsRecycled OEM Parts from another 5 year old carNew After-market Parts of Similar Quality to New OEM PartsState Farm Replacement Parts CaseClass action suit representing 4.7 million policyholders nationwideOctober 1999 verdict $456 million for damages$730 million punitive damages$1.2 billion total awardApril 2001 appellate court rulingUpheld verdictReduced award by $130 million Currently being appealed to Illinois Supreme CourtRepercussionsInsurers are suspending use of after-market crash partsOther states are questioning why Illinois law was applied to policyholders in their statesOther lawsuits against insurers have been filedIf Verdict is UpheldInsurers will be forced to use OEM partsIndependent after-market crash part suppliers will be driven out of businessManufacturers will have a monopoly on crash partsPrices of crash parts will increaseCost of auto insurance will increase significantlyCost of auto repairs, whether or not insured, will increaseIf Verdict is Overturned or ModifiedInsurers could offer:OEM replacement parts coverage at a premiumAfter-market replacement parts coverage at a discountConsumers will have choice on type of coverage to purchaseAuto manufacturers will still have to compete on crash