"Look beneath the surface; let not the quality of a thing nor its worth escape thee."
Source: Marcus Aurelius Antoninus
Imagine this nightmare: your brand new Mercedes is struck by an oncoming car that swerves into your lane. The hood and one of the front fenders are ruined. Now, your insurer pays to repair the car, but it instructs the body shop not to use the original equipment manufacturer (OEM) parts, but after-market (non-OEM) parts instead, saving it 40 percent in parts costs. How would you feel about this? Is this putting your car back to where it was beforehand? Is this true indemnification? Not surprisingly, some say yes and some say no.
Many insurers and industry groups believe non-OEM or after-market parts are the same quality as OEM parts. Dave Hurst, a public affairs liaison with State Farm, states that non-OEM parts are equal to OEM parts and the use of these parts results in cost savings passed on to consumers. Mr. Hurst cited various crash test studies by the Insurance Institute of Highway Safety (IIHS) in which the non-OEM parts performed equal to the OEM parts.
In addition, various body shops participated in blind tests. According to the study, in the blind test, the body shop technicians were provided the OEM part and the non-OEM part not knowing which was which, and they simply could not tell the difference through visual inspection or the installation process. According to Mr. Hurst, State Farm was also involved in the development of the Certified Automotive Parts Association (CAPA). The purpose of this organization is to test non-OEM parts for quality and to provide competition in the auto parts market.
The IIHS Perspective
This debate was discussed with IIHS Senior Vice President Steve Oesch. He said the focus of the IIHS is solely on the safety of non-OEM parts. IIHS performed two separate tests of non-OEM parts. "Our first test in 1987 compared two frontal barrier crashes at 30 miles per hour. One involved an OEM hood and the other a non-OEM hood. The frontal barrier crash with the non-OEM hood met all safety standards. The after-market hood buckled and reacted just like the OEM hood," he said.
The second test in 1999 compared two 40-miles-per-hour frontal offset crash tests. (A frontal offset test consists of the front driver's side of one car colliding with the front driver's side of another car; this is considered a good structural test. One car had an OEM hood and front fender and the other had a non-OEM hood and front fender. According to Mr. Oesch, "The results were again the same for each."
The NAII Perspective
Robert Hurn, counsel for the National Association of Independent Insurers (NAII), said the OEM/non-OEM debate arises each year among state legislative bodies and insurance departments. He stated that since 1995, state legislatures have introduced bills forcing requirements onto insurers concerning non-OEM parts.
"There were 25 state bills introduced in 1999, 18 in 2000, and 18 in 2001, and not one of these bills have passed. We see no safety issues with these parts. Not one after-market part has been recalled by the U.S. Department of Transportation. But thousands of OEM parts have been," he said. Note, however, that most states require the insurer to disclose the use of non-OEM parts.
Mr. Hurn added that some member companies use only OEM parts, some try to always use non-OEM parts, and some require insureds to pay the difference if they insist on OEM parts. (Note: the NAII advocates the use of CAPA certified non-OEM parts rather than non-OEM parts not certified by CAPA.)
The Automotive Industry Perspective
What do the skeptics of non-OEM parts say about this issue? Plaintiff's attorneys involved in this dispute refer to a February 1999 Consumer Reports study showing non-OEM bumpers and fenders could cause more damage to cars as compared to OEM parts. These attorneys claim body shops often refer to these parts as "Taiwan trash." They argue these parts do not restore the car to its pre-loss condition, as they are not of "like kind and quality."
Steve Schock, the owner of Europarts, Inc., says some aftermarket parts may be equivalent. "However, the fenders and bumpers are not the same quality as the same OEM parts. Most of these come out of Asia and sometimes they do not use the same gauge of metal," he said.
Mr. Schock has heard some body repair people say they feel flimsy. "The main complaint I hear is that creases and lines stamped into them don't always line up so neatly. The repair technician often has to massage it into place and this increases his labor time," he said.
When asked whether he would accept repairs with non-OEM parts if his new Mercedes were in an accident, he replied, "If it were my own car, I would request OEM parts. I would feel more comfortable with these compared to after-market parts."
How does a typical body repair shop view this issue? Tom Dance, one of the owners of Herb's Paint and Body Shop in Dallas calls this is a "tough issue." He said a major insurer asked his company to perform blind tests on OEM parts and the same non-OEM part. "In 75 to 80 percent of the cases, the non-OEM hoods and fenders did not fit correctly. They would require some massaging of the metal to make them fit," he said.
Mr. Dance's company avoids using non-OEM parts that do not fit properly. He said some insurers insist that the metal be massaged to make it fit, and some body repair shops accommodate these insurers because they need the business. In his experience, these tend to be smaller insurers and body shops, as compared to the major players.
Mr. Dance's chief concern is the fit. "They don't always look cosmetically correct to the trained eye, maybe even to the untrained eye," he explained. He is not totally impressed with CAPA parts. "I have no more luck with CAPA non-OEM parts than those without the certification," he said.
Conversely, he says consumers benefited from the introduction of non-OEM parts in the mid-1980s. Mr. Dance mentioned a $400 OEM part. "When the aftermarket part was introduced, the cost of the same OEM part was cut in half," he explained.
Fred Hyler, product public relations manager with Mercedes USA, says, "The best quality can only be assured using original equipment parts. There may be some good after-market parts but we certainly cannot stand behind these products."
Illinois Court Decision
So, how have the courts ruled on this issue? In a recent class-action suit, Avery et al. v State Farm, 746 NE2d 1242 (5th Dist 2001), the policyholders' vehicles, insured by State Farm, were repaired with non-OEM parts. The policyholders' attorneys argued that all non-OEM parts are inferior to the original manufacturer's parts and are thus incapable of returning a car to its pre-loss condition as required by the insurer's personal auto policy. They provided evidence from body shops and other witnesses alleging that non-OEM parts are inferior to OEM parts in such areas as fit, finish, and ability to stand up to corrosion. These attorneys argued OEM parts are galvanized for years longer than non-OEM parts. Although none of the plaintiffs suffered physical harm, their attorneys believe the use of non-OEM parts raises safety issues.
State Farm argued that non-OEM parts are quality parts, that there are few customer complaints, and that a State Farm guarantee insures policyholders' satisfaction. State Farm further stated that there are no safety issues with non-OEM parts, citing the IIHS studies.
The Illinois appellate court affirmed the district court ruling in favor of the policyholders. While reducing the verdict by $130 million, the court let stand the remaining $1.05 billion judgment. Note that since this verdict, State Farm has agreed not to require non-OEM parts until the appeal to the Illinois Supreme Court had been decided, which may not be addressed for several months or longer.
Texas Court Decision
This case is in marked contrast to a Texas case. In Berry v State Farm Mutual Automobile Insurance Co., 9 SW3d 884 (Tex App 2000), the plaintiffs argued that the insurer violated article 5.07-1 of the Texas Insurance Code by refusing to cover the full cost of original manufacturer replacement parts. State Farm argued that the non-OEM parts were effectively the same and were not in violation of the insurance code. Both sides moved for summary judgment. The lower court granted the insurers' motion, and the case was appealed to the Texas appellate court.
The policyholders' attorneys argued these parts are often made according to different specifications and frequently do not fit the automobiles for which they are intended. They are more likely to rust or corrode due to inadequate priming and corrosion protection. Furthermore, opponents of non-OEM parts state there are cases in which the use of these parts can void existing warranties as well as reduce the car's resale value.
State Farm cited correspondence in 1996 from the Texas Department of Insurance (TDI) concerning this issue. TDI stipulated that a correct interpretation of article 5.07-1 leads to "neither the extreme of requiring original equipment manufacturer parts, nor the extreme of allowing the insurer to specify parts." TDI reiterated that insurers need only pay for the reasonable cost of parts of like kind and quality. In addition, it claimed that the use of these parts saves consumers millions of dollars each year.
The Texas appellate court ruled in favor of the insurer:
Although we are sympathetic to appellants' concerns regarding the quality of some non-OEM parts, we do not construe article 5.07-1 as requiring insurers to pay for new OEM parts in every instance—including those situations where non-OEM parts of like kind and quality are available. Such a holding would overstate the insurers obligations under both the policy and statutory scheme and would require insurers to pay for new OEM parts in all situations, regardless of the age or condition of the vehicle prior to the accident or the quality of available non-OEM parts.
Note, however, that the appellate court focused solely on statutory construction:
At the outset, we emphasize the limited scope of our decision. We do not decide here whether the non-OEM parts on which appellants' insurers based their estimates satisfy the insurer's contractual obligation to provide for replacement parts of like kind and quality … Rather, the only issue before us is the proper construction of article 5.07-1 of the Insurance Code.
Quality or Compromise?
This debate has many wrinkles and rough edges to it. According to most observers, not all non-OEM parts are necessarily substandard. Thus, there may be a place for some non-OEM parts as they can reduce the cost of auto insurance. Perhaps an option the industry should explore is the use of a physical damage credit endorsement in which the insurer will repair the vehicle with a non-OEM part when the quality and the fit is the same. The insured would thus share in the savings of non-OEM parts. Another option might involve the waiving of the deductible if non-OEM parts are used.
It does appear, however, that non-OEM parts are not always the same quality as OEM parts, particularly concerning the fit. Although some studies show there are no safety differences, this is not the only issue. If some insurers require non-OEM parts that must be massaged into place to fit, the insurance consumer is not being properly indemnified; these are simply not like kind and quality. This problem is exacerbated if the hood is replaced with a poor-fitting non-OEM part and later the adjacent fender needs replacement. The problem of replacing the adjacent part then becomes even trickier.
Those insurers who force these parts onto body shops, and the body shops that acquiesce, are performing a disservice to consumers. Insureds would be well advised to question their insurance companies concerning their auto repair practices before the repair process begins and follow-up with their body shapes so they know whether OEM or non-OEM parts were used during repairs.
Apparently, this is an issue that will not go away anytime soon and is certainly one worth monitoring closely in the future.
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