Lecture 24


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Lecture 24

  1. 1. Auto Replacement Parts <ul><li>Why is this an important issue? </li></ul><ul><li>Types of replacement parts </li></ul><ul><li>History of replacement part costs </li></ul><ul><li>What the policy provides </li></ul><ul><li>State Farm verdict </li></ul><ul><li>Implications of alternative rulings </li></ul>
  2. 2. Why is this an Important Issue <ul><li>Size of market is significant </li></ul><ul><li>$1.2 billion per year spent for these replacement parts </li></ul><ul><li>Consumer fairness </li></ul><ul><li>Insurance companies </li></ul><ul><li>Auto manufacturers </li></ul><ul><li>Impact on price and solvency of insurers </li></ul>
  3. 3. Types of Replacement Parts <ul><li>Crash parts - sheet metal or plastic installed on exterior of car </li></ul><ul><li>Hoods, doors, fenders, trunk lids </li></ul><ul><li>Mechanical parts - involved in operation of vehicle </li></ul><ul><li>Batteries, filters, mufflers, spark plugs </li></ul><ul><li>Original Equipment Manufacturer (OEM) </li></ul><ul><li>After-market parts </li></ul><ul><li>Recycled parts </li></ul><ul><li>Certification </li></ul><ul><li>Certified Automotive Parts Association (CAPA) </li></ul>
  4. 4. History of Replacement Parts <ul><li>Henry Ford is reputed to have said: </li></ul><ul><li>I would give my cars away if I could have a monopoly on selling replacement parts </li></ul><ul><li>Prior to the 1970s, manufacturers did have a monopoly on crash replacement parts </li></ul><ul><li>Inflation started to be a problem in 1970s </li></ul><ul><li>Auto manufacturers started to raise prices on crash replacement parts much more than car prices </li></ul><ul><li>Independent manufacturers started to produce crash replacement parts </li></ul>
  5. 5. History - 2 <ul><li>Car manufacturers were forced to compete on price with after-market producers </li></ul><ul><li>Car manufacturers strategy </li></ul><ul><li>Discredit after-market parts </li></ul><ul><li>Ban after-market parts </li></ul><ul><li>Lawsuits against insurers that required after-market parts </li></ul><ul><li>Insurance companies formed organization to certify quality of after-market parts </li></ul><ul><li>CAPA begun in 1987 </li></ul>
  6. 6. Current Situation <ul><li>Crash parts market </li></ul><ul><li>OEM New 80% </li></ul><ul><li>OEM Recycled 5% </li></ul><ul><li>After-market parts 15% </li></ul><ul><li>Examples of costs </li></ul><ul><li>1997 Ford Contour hood </li></ul><ul><li>OEM $450 </li></ul><ul><li>After-market supplier $266 </li></ul><ul><li>1999 Toyota Camry LE </li></ul><ul><li>Cost new $23,263 </li></ul><ul><li>Cost of OEM parts $101,335 </li></ul>
  7. 7. Studies on Quality of After-Market Crash Parts <ul><li>Insurance Institute for Highway Safety 1987 and 2000 </li></ul><ul><li>No significant differences in crash results </li></ul><ul><li>Possible exception – hoods </li></ul><ul><li>hood latch could fail </li></ul><ul><li>hood may fail to buckle properly in crash </li></ul><ul><li>Ford 1994 </li></ul><ul><li>After-market crash parts inferior to Ford parts </li></ul><ul><li>Thatcham 1995 (British insurance industry test facility) </li></ul><ul><li>No significant difference in crash tests </li></ul><ul><li>Consumer Reports 1999 </li></ul><ul><li>CAPA certified parts rusted more quickly and did not always fit properly </li></ul><ul><li>Bumpers (not certified by CAPA) gave poor low-speed crash protection </li></ul>
  8. 8. State Farm Coverage Limit of Liability Comprehensive and Collision Coverage <ul><li>The limit of our liability for loss to property or any part of it is the lower of: </li></ul><ul><li>1. The actual cash value; or </li></ul><ul><li>2. The cost of repair or replacement </li></ul><ul><li>The cost of repair or replacement is based upon one of the following: </li></ul><ul><li>1. The cost of repair of replacement agreed upon by you and us </li></ul><ul><li>A competitive bid approved by us; or </li></ul><ul><li>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. </li></ul>
  9. 9. What is a Policyholder Entitled To if a 5 Year Old Car is Damaged? <ul><li>New OEM Parts </li></ul><ul><li>Recycled OEM Parts from another 5 year old car </li></ul><ul><li>New After-market Parts of Similar Quality to New OEM Parts </li></ul>
  10. 10. State Farm Replacement Parts Case <ul><li>Class action suit representing 4.7 million policyholders nationwide </li></ul><ul><li>October 1999 verdict </li></ul><ul><li>$456 million for damages </li></ul><ul><li>$730 million punitive damages </li></ul><ul><li>$1.2 billion total award </li></ul><ul><li>April 2001 appellate court ruling </li></ul><ul><li>Upheld verdict </li></ul><ul><li>Reduced award by $130 million </li></ul><ul><li>Currently being appealed to Illinois Supreme Court </li></ul>
  11. 11. Repercussions <ul><li>Insurers are suspending use of after-market crash parts </li></ul><ul><li>Other states are questioning why Illinois law was applied to policyholders in their states </li></ul><ul><li>Other lawsuits against insurers have been filed </li></ul>
  12. 12. If Verdict is Upheld <ul><li>Insurers will be forced to use OEM parts </li></ul><ul><li>Independent after-market crash part suppliers will be driven out of business </li></ul><ul><li>Manufacturers will have a monopoly on crash parts </li></ul><ul><li>Prices of crash parts will increase </li></ul><ul><li>Cost of auto insurance will increase significantly </li></ul><ul><li>Cost of auto repairs, whether or not insured, will increase </li></ul>
  13. 13. If Verdict is Overturned or Modified <ul><li>Insurers could offer: </li></ul><ul><li>OEM replacement parts coverage at a premium </li></ul><ul><li>After-market replacement parts coverage at a discount </li></ul><ul><li>Consumers will have choice on type of coverage to purchase </li></ul><ul><li>Auto manufacturers will still have to compete on crash parts </li></ul>