Good As New? - State Farm loses auto parts legal case

Kiplinger's Personal Finance Magazine, Jan, 2000 by Kimberly Lankford

INSURANCE | Billion-dollar verdict puts the brakes on using CHEAPER PARTS to fix crash damage.

IT ALL STARTED in February 1995 at an intersection in Little Rock, Ark., when a driver ran a stop sign and crashed into Leslie Sessions's Ford Bronco. It ended this past October with a $1.2-billion verdict in a class-action suit against State Farm insurance.

Well, it didn't really end, because State Farm is appealing. Still, the landmark verdict has already had a major impact on drivers across the country whose cars are damaged in accidents. But first the case, then the fallout.

Sessions was irked to discover that State Farm--the company that insured both him and the driver of the other vehicle--wouldn't pay for Ford parts to repair the Bronco if cheaper, generic parts were available. Although those parts passed muster with the Certified Automotive Parts Association (CAPA)--a group partly set up by insurance companies--mechanics warned Sessions of problems: "The parts hardly ever fit," Sessions says he was told. "The holes don't match up. The metal won't take paint, and the part takes a lot longer to put on." So, worried that the car would lose value, he ponied up $239 extra to have the body shop use genuine Ford parts.

Although he had been insured by State Farm for more than a decade, Sessions never realized his policy would not cover the cost of original equipment manufacturer's (OEM) parts. "I never saw that in my policy," he says. "It was there in the fine print, but the way it was stated really didn't make sense. They use a different kind of code." Sessions sued the giant insurer for breach of contract and fraud, in a case that was a precursor of the class-action suit brought by his attorney, Thomas Thrash, and others whose clients had similar complaints against State Farm.

In October, a jury in Marion, Ill., delivered its verdict in the class-action case: State Farm was found guilty of breach of contract for its policy of not covering OEM parts when CAPA-certified alternatives are available. The generic parts, the jury decided, were not of "like kind and quality" and didn't restore a car to its "pre-loss condition," as was promised in the insurance contract. The jury ordered State Farm to pay $456 million to policyholders whose cars had been fixed with the cheaper parts, and the judge later slapped the insurer with an additional $730-million judgment, mostly in punitive damages, for committing consumer fraud.

Judge John Speroni said State Farm knew the generic parts were inferior but rather than tell policyholders of "known problems ... including possible safety concerns, State Farm chose to adopt and use ... the misleading term 'quality replacement parts' and to tell its policyholders ... that the parts were as good, or better than, OEM parts."

Among the evidence offered was testimony from body-shop employees who had had problems with the generic parts. "The weight is different; the fit and finish is different," says Greg Kordsmeier, who owns a body shop in Conway, Ark., and gave depositions in the case. He says it can take twice as long to install generic parts, and some still don't fit very well.

Peggy Frey's story, told in a deposition, drives home that point. The Indian Shores, Fla., woman says the generic hood used to repair her damaged 1988 Mustang convertible was "two sizes too small" with about an inch of space on either side. She's afraid it will fly open when she's driving, and the headlights jiggle because they don't quite fit.

State Farm plans to appeal the verdict. Company counsel John Ashenfelter says, "There has never been one policyholder who came forward with any physical or financial harm resulting from the use of parts we specified."

What the verdict means to you. If you are one of the nearly five million State Farm policyholders who made a claim between July 28, 1987, and February 23, 1998, you could eventually get a check for the difference between the price of the generic parts and the OEM parts. For most people, the award will fall in the $50-to-$500 range, estimates Scott Nealey, an attorney at Lieff, Cabraser, Heimann & Bernstein, one of the firms representing the plaintiffs. Some people could also receive a few hundred dollars in punitive damages.

But don't spend the money yet. The appeals could easily take 18 months or more, says Nealey, and even if the verdict sticks, it will take a while to figure out who gets what. (That will be up to State Farm's records; you won't have to dig up your old receipts.)

New rules. But the case has had an immediate and wide-ranging effect. "A lot of companies have backed down from their insistence on non-OEM parts," says Kordsmeier. State Farm changed its rules soon after the verdict and now pays for original manufacturer's parts (at least temporarily). Farmers, too, announced a six-month suspension of its policy to use generic parts whenever possible. Liberty Mutual will pay for OEM parts unless the policyholder wants generic parts to lower his deductible or lives in a state, such as Massachusetts, that requires non-OEM parts for older cars. USAA pays for OEM parts until a car is two years old; damage to older cars may be repaired with generics.