Articles

If you have recently been involved in a motor vehicle accident, you may have discussed which repair facility will be fixing your car with either your own insurer or with the insurer of the person who caused the accident. Most people are, thankfully, involved in collisions so infrequently that they do not have a repair facility immediately in mind when it does happen. When there is an accident, however, be careful where you do take the car to be fixed. Simply because an insurer recommends a shop or says that it will “guarantee the work” from a shop in its direct repair program does not mean you will be receiving the best repair.

What are direct repair programs?

A direct repair program, or “DRP” as they are often called, is an automobile insurer’s group of preferred repair shops. Think of a DRP like a health insurer’s circle of preferred provider organizations. Body shops involved in an insurer’s program have a relationship with the insurer. That relationship, however, can be based on many different things, not all of which are good for consumers.

Direct repair programs promote the insurers’ best interests, not the consumers’.

DRP arrangements are initiated by insurers, not body shops, and insurers have their own reasons for desiring to create these circles. To become a member of an insurer’s repair program, repair facilities typically must execute an “agreement” with the insurer. However, this agreement spells out obligations on the part of the repair facility but usually does not contain any reciprocal obligations on the part of the insurer. Some of the key standard provisions require the repairer to write all estimates using aftermarket (non-original equipment manufacturer) or salvage parts; identify “betterment” to a repaired vehicle and collect those monies from the customer; shoulder all liability for repairs performed; and indemnify the insurer from any lawsuit the customer might bring. In other words, the body shop is entirely responsible for any customer dissatisfaction.

In exchange, the repairer receives what exactly? According to the terms of these “agreements”, the insurer promises the repairer nothing in return for all of the obligations it will undertake. The repairers usually do not even have the right to advertise that they are part of the insurer’s direct repair program. For example, State Farm’s Service First Agreement expressly prohibits repairers from using either State Farm’s name or its Service First designation without “express written permission from State Farm” . . . which must be “in the form of a Licensing Agreement, to be executed separately from this Agreement”. (State Farm Service First Agreement, paragraph 9.) However, this same paragraph expressly allows, but does not require, State Farm to advertise to its customers that the repair facility is a member of its direct repair program.

The obvious question raised is: Why would any repairer sign up to be a member of these programs when the insurer has no overt obligation to do anything on behalf of the repair facility? The only sensible answer is that the repairer believes becoming a member of the DRP will drive more work to its shop. And therein lies the rub.

Steering in disguise

Some state laws prohibit insurers from forcing consumers to have their cars repaired at particular body shops. Engaging in that conduct is called “steering”, and there are anti-steering statutes to prevent insurers from removing free choice and free enterprise from customers of the repair industry. Nonetheless, while insurers are quick to say that they do not require claimants to patronize particular shops, they do strongly recommend the use of repair facilities within their provider programs. Claimants are frequently told that, while they are free to select any shop of their choosing, the insurer will only “guarantee” the repair work of a DRP facility. The insurer’s “guarantee” is material to most claimants and has the effect of steering their work to DRP facilities and away from independent shops. So, whether the insurer insists you take your vehicle to a particular shop or lures you there with guarantee promises that sound as if you will get more than taking your car elsewhere, the end result is the same. You elected a shop which has pre-negotiated with the insurer to repair your car using generic or salvage parts, is required to identify and charge you for purported increases in value to your car, and has promised to insulate the insurer from liability for the work performed.

Insurers are not actually guaranteeing repair work.

Although claimants are told the insurer will be “guaranteeing” the repair work, the insurer does not actually guarantee that work. Instead, under these DRP arrangements, the shop is required to perform that repair in a workmanlike manner – which state common law already requires of all repair facilities, irrespective of whether they are DRP shops, and it is the shop, not the insurer, who guarantees the work. Insurers do not guarantee that the method of repair is safe, nor do they guarantee how the repair is performed.

The only aspect of the repair that the insurer actually “guarantees” is limited to the parts used – and then it only covers the generic ones. Under DRP arrangements insurers require repair facilities to write estimates using aftermarket and salvage parts. Parts made by the original equipment manufacturer (OEM) are excluded from the promises insurers make about the repair.

Yet, even these generic parts are not fully covered in the guarantee. Reviewing estimates and documents from several insurers demonstrates that some guarantee only the fit and corrosion resistance of the replacement part, not its performance. Others guarantee the performance of the part, but only after the claimant has exhausted attempts to have the manufacturer repair or replace the part under its own warranty. Makers of aftermarket parts are typically located in Asia and enforcement of a warranty is extremely difficult as a result. This was one of the primary issues in the aftermarket parts case, Avery v. State Farm Mutual Automobile Insurance Company, 321 Ill. App.3d 269, 254 Ill. Dec. 194, 746 N.E.2d 1242 (2001), appeal allowed, 201 Ill.2d 560, 271 Ill. Dec. 922, 786 N.E.2d 180 (2002), in which State Farm was found to have breached its insurance contracts with policy holders by guaranteeing replacement parts and later refusing to honor the guarantee until after the customers exhausted their warranty rights with the manufacturer. In the appellate decision, the Avery court found State Farm’s promise to repair or replace these parts was illusory.

Conflicts of interest

The significant problem with patronizing a DRP facility, however, is the conflict of interest the DRP relationship creates for the repairer in its obligations to customers. State consumer protection laws firmly establish the contract of repair is between the customer and the body shop. The insurer is not a party to that contract. However, DRP arrangements make the insurer more important to the body shop than the customer by virtue of the fact that the insurer will be a constant source of referral business, and the consumer’s interests can become secondary to the facility. For example, DRP arrangements often require the repair facility to look for and determine “betterment” to your vehicle and to collect that alleged increase in value directly from you. Ordinarily, the issue of betterment is addressed between the insurer and the claimant, and the repair facility would not be involved. With a DRP arrangement, however, the body shop is obligated to calculate betterment (which is in the insurer’s interest, not the customer’s) and collect it on behalf of the insurer. These arrangements clearly make the body shop responsive to the insurer, not to you — even though you are the legal customer. It is exactly these types of shifting loyalties and conflicting obligations that have members of the repair industry concerned. According to Wade Ebert, a Regional Director of the Alliance of Automotive Service Providers of Illinois and a principal of American Auto Body in Springfield, Illinois, if you patronize a DRP facility, “Someone is making concessions on your behalf, without your knowledge.”

Advice for consumers

Look warily at any insurer’s recommendation of a repair facility because the insurer is pushing you toward certain shops for its benefit, not necessarily yours. Ask the body shop if it is a member of the insurer’s direct repair program and, if so, to provide you with a copy of the document establishing that relationship and outlining the repairer’s obligations to the insurer. Remember, you are the customer in this repair contract and you are entitled to a proper repair from the shop you elect. If any shop balks at showing you the agreement it signed with the insurer, insist on obtaining a copy from the shop or the insurer directly. If neither party will produce a copy of the agreement for your records, take your vehicle to a different shop. After all, if this arrangement is really such a great thing for consumers, no party to it should have any concerns about showing it proudly to customers.

Awaiting Avery

Awaiting Avery and the Fate of Aftermarket Parts

By E. L. Eversman, Esq. November 26, 2003

With everyone eagerly awaiting the Illinois Supreme Court’s decision reviewing Avery v. State Farm

Mutual Automobile Insurance Company, 321 Ill. App.3d 269, 254 Ill. Dec. 194, 746 N.E.2d 1242

(2001), appeal allowed, 201 Ill.2d 560, 271 Ill. Dec. 922, 786 N.E.2d 180 (2002), the issues raised by

the use of repair parts, other than original equipment manufacture, are again in the forefront of

automobile news. Avery created a sensation when the trial court’s decision was announced holding State

Farm Mutual Insurance Company (State Farm) liable to customers for breaching its contracts of

insurance and for violating the Illinois Consumer Fraud and Deceptive Business Practices Act – in a

cumulative amount of $1.18 billion. The lower court’s decision was upheld on appeal, and State Farm

appealed that decision to the Illinois Supreme Court. The Illinois high court’s decision will have a

material finacial impact on State Farm, as well as the aftermarket automobile industry.

What was Avery all about?

Avery was a lawsuit brought in Illinois by a number of plaintiffs seeking to have their claims against

State Farm certified as a national class action. Plaintiffs sued the insurer on theories of breach of

contract and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (CFA),

claiming that State Farm did not honor its insurance contract to pay for parts of “like kind and quality”

to restore the insured’s vehicle to “pre-loss condition”. The insureds complained that State Farm repaired their vehicles using inferior replacement crash parts rather than original equipment manufacture (OEM) parts and affirmatively misrepresented the quality of these replacement parts. In a nutshell, the insureds argued that State Farm repaired their vehicles with inferior parts and lied about their quality for the sole purpose of saving money.

What are aftermarket parts?

OEM parts are those produced by the maker of the vehicle or the manufacturer’s designated vendor.

Replacement crash parts, often referred to as “aftermarket parts” are those made by a company other

than the original manufacturer or vendor. In other words, these parts are the automobile industry’s

equivalent of the generic version of a brand-name drug. There are also different categories of these parts, including certified and non-certified parts. The certification comes from an organization created and

largely funded by the insurance industry, not any governmental entity. Nonetheless, the majority of

aftermarket parts are non-certified.

According to the Collision Industry Conference’s October 2003 Cycle Time Task Force presentation, using OEM parts in repairs increases body shop productivity due to the availability and proper fit of parts and has a 99.9% satisfaction rate among customers. Using certified aftermarket parts by bodyshops requires more time and attention from repairers as orders must be cross-referenced with OEM part numbers, incorrect parts are shipped, parts are less well packaged and are more likely to be damaged in shipping, or uncertified parts are substituted for certified ones. The CIC task force also determined that many aftermarket parts do not fit properly and require additional time to adjust the product in an attempt to make it function. Customer satisfaction with these parts is only 50% to 70%. Non-certified aftermarket parts have the lowest customer satisfaction and have similar fit and ordering issues like their certified counterparts.

At trial

At trial, plaintiffs presented experts whose testimony supported a finding that all of the aftermarket parts specified in State Farm’s repair allowances were inferior to the OEM parts in terms of “appearance, fit, quality, function, durability, and performance.” Plaintiffs contended that, not only was the quality of the products unsatisfactory, State Farm’s promise to replace the non-OEM part was illusory, as it required the policyholder to resolve the problem with the aftermarket manufacturer or charged its insureds with the cost associated with installing a replacement. Because aftermarket producers are largely located outside of North America, often in Taiwan, forcing the customer to resolve the warranty problem with the manufacturer, essentially, left the customer with no real remedy.

Additionally, the evidence demonstrated that State Farm did not consider a vehicle’s condition immediately prior to the accident when writing estimates and determining which parts it would pay for in the repair. In practice, State Farm recommended the use of aftermarket parts in every repair, provided they were less expensive and available, irrespective of the age, type, or condition of the damaged vehicle. The insurer’s adjustors were required to use a computer system programmed to select the least expensive, available, certified aftermarket part. If the damaged part had no comparable certified one, then the computer would automatically select a non-certified, non-OEM part for use in the repair. Interestingly, the trial testimony indicated that State Farm employees, associates of State Farm executives, and “special customers” were exempted from this practice, and their vehicles were repaired with OEM parts. When the jury (on the contract claim) and the judge (on the CFA claims) applied the evidence of State Farm’s adjusting practices and the expert testimony as to the inferior nature of aftermarket parts to the insurer’s promises and policy terms that it would use parts of “like kind and quality” to return insureds’ vehicles to “pre-loss condition”, the jury found that State Farm breached its insurance contract and the judge ruled that State Farm’s practices violated Illinois consumer protection laws. Accordingly, the jury awarded almost $500,000 million to the insured class members as compensation for their damages. In addition, the judge ordered State Farm to disgorge $130 million in savings realized by mandating the use of non-OEM parts and awarded plaintiffs $600 million in punitive damages.

On appeal

State Farm appealed the verdict on a variety of issues, claiming that the class should never have been certified, that the consumer fraud judgment was incorrectly determined, and that damages were improperly awarded. In a lengthy opinion, the court of appeals found the certification of the class and the determination that State Farm violated the consumer protection statutes were not wrongly decided.

However, the court agreed with State Farm that the order requiring it to disgorge the $130 million in savings from its aftermarket program duplicated damages already awarded by the jury, and it reversed the disgorgement award. The court upheld the remainder of the decision. The Illinois Supreme Court then granted State Farm an appeal of the appellate court’s decision.

What is “riding” on the Illinois Supreme Court’s decision?

The decision by the Illinois high court will materially impact the aftermarket industry. At present, there is legal precedent identifying aftermarket parts as inferior to OEM parts in appearance, fit, quality, function, durability, and performance. Clearly, that is not the type of recognition any product maker desires. If the Illinois Supreme Court upholds the decision, insurers and product makers will have a virtually impossible task trying to convince consumers that aftermarket parts are appropriate for their vehicle’s repair. Upholding the decision, also, opens the door lawsuits by third parties (non-insureds) whose vehicles were repaired with inferior aftermarket parts mandated by State Farm’s estimating system when a State Farm insured caused the accident. On the other hand, if the Illinois Supreme Court agrees with State Farm and reverses the decision, consumers will find that their vehicles will invariably be repaired with aftermarket parts – certified or not – and, if the product fails to perform properly, their recourse will be enforcing a warranty from a potentially unreachable manufacturer. If the insurer is successful in forcing the use of aftermarket parts, it makes one wonder whether State Farm employees, associates, and “special customers” will continue to be entitled to repairs with OEM parts.

Certification - Know what You are Purchasing

Certification: Know What You Are Purchasing
By E. L. Eversman, Esq. February 18, 2004

When manufacturers initiated their “certified pre-owned” vehicle programs, (or CPO as some manufacturers call them) they brought a new dimension to the used vehicle market. By once again accepting product liability for a car or truck that had been out of direct control, manufacturers effectively wrapped a cozy blanket around a segment of the used car market and boosted consumer confidence in purchasing pre-owned vehicles.The programs have largely been successful, doubling in sales between 2001 and 2002 and increasing over 14% in 2003, according to Autodata Corp. and Automotive News Data Center. Because of the effect the manufacturers’ programs have had on the used vehicle market, other interested parties are trying to get into the act.

What is involved in a manufacturer’s certified pre-owned program?

U.S. states’ product liability laws hold manufacturers responsible for design and manufacturing defects found in their vehicles. If a vehicle was not designed properly or if there was a problem with particular components or an element of the manufacturing process, manufacturers can be held responsible for harm which results from those defects. Accordingly, manufacturers operate under great pressure from consumers and governmental bodies to create the safest automobiles possible. Because of the liability auto makers incur whenever they release a product in to the stream of commerce, they warn against making any changes to the car or truck that are not recommended for service or maintenance. If the vehicles are changed due to damage, neglect, enhancement, or other activity not recommended by the manufacturer, the auto maker may be entitled to disclaim ongoing responsibility for them.

When manufacturers undertake the reselling of their vehicles under any certified pre-owned program, they are once again releasing products in to the stream of commerce and will be held accountable for ensuring they are defect-free. As a result, auto makers cannot afford to allow vehicles which have suffered collision damage, have been altered or now carry aftermarket parts, or which have been neglected, stolen, hail damaged, in floods, or have a questionable warranty or service history into the CPO program.
Due to the issues of liability and cost, manufacturers assure buyers that their CPO vehicles have been meticulously scrutinized for damage, service history, wear and tear, and indicia of neglect, alteration, or abuse. Thus, by certifying that the vehicle has met its standards and by offering a new warranty as part of the purchase, the manufacturer essentially gives buyers a guarantee that the car is safe, roadworthy, and dependable.

Who else offers “certification”?

As with the advent of the misnamed extended warranties, insurers and service contract providers have jumped into the certification arena. Certification by these companies, however, means something very different than a manufacturer’s certification. National Auto Care, for example, is a company offering service contracts and programs through dealers. The company has begun advertising a “Certified Program” which it claims will allow dealers to “certify any vehicle [on the lot] not eligible through the manufacturer’s certified programs.” (NAC advertisement, Automotive News, January 26, 2004, p. 40.)
NAC’s program, however, is not the rigorous review of vehicles that the manufacturer ensures. Instead, the program allows the dealers to inspect the vehicles and make a determination as to whether the vehicle can be “certified”. Apparently, the certification is sold to each individual consumer through the dealership’s finance department and is something neither paid for nor underwritten by the dealer. The program appears to be another species of service contract or insurance policy under a new name and is
not comparable to the assurances and product liability risk undertaken by manufacturers

.
Certification: What’s in a name?

Understand that there is an enormous difference between a manufacturer’s certified vehicle and one purportedly certified through some other program. Pay careful attention to the order of the words declaring this certification. If the vehicle is presented as “Toyota Certified”, it is Toyota who is making the certification and offering you the auto maker’s assurances as to dependability. However a claim that the vehicle is a “Certified Toyota” could mean that it has been certified by anyone. If you are seeking reliability and an assurance that the previously owned vehicle has been vetted by the manufacturer, pay
a visit to the auto maker’s website to review the specification checklist and to find locations where you can buy a genuinely manufacturer certified pre-owned vehicle.
As National Auto Care’s advertisement indicates, its certification program will allow dealers to certify those vehicles failing to meet the eligibility standards for the manufacturer’s program. The point to note, however, is that a vehicle failing to meet the manufacturer’s strict eligibility standards has no business being marketed as a “certified pre-owned vehicle”. A representation of certification can only lead to confusion and to consumers paying for a label that does not mean what they believe it does.