Lately, a number
of newspapers have been citing a recent court decision involving
State Farm and its use of generic auto replacement parts as an example
of a "frivolous" lawsuit, of "what is wrong"
with America's civil justice system.
While these
columns are long on pro-business agendas, the one thing that's consistently
missing is the truth. The following information about the
case in question -- Avery v. State Farm -- should make clear
that this case is a victory for consumers everywhere, and is a solid
example of how how civil justice system works to make America safer
***
Nearly seven
weeks of trial, some 70 witnesses, and hundreds of exhibits added
up to the largest class action verdict in the history of the state
of Illinois.
On October
4, 1999, a 12-person jury unanimously held that State Farm Mutual
Automobile Insurance Co., headquartered in Bloomington, Illinois,
had breached its insurance policies with 4.7 million policy holders
by using inferior or non-original equipment manufacturer (non-OEM)
crash parts to repair insured vehicles, rather than restoring vehicles
to their original "pre-loss condition," as promised in State Farm's
insurance policies.
The jury awarded
damages of about $456 million.
A few days after
the jury verdict, the court -- which was responsible for deciding
the claims of consumer fraud decided State Farm had indeed committed
consumer fraud by specifying use of cheaper non-OEM crash parts
in settlement of insurance claims filed by its own policyholders.
The court awarded the plaintiffs an additional $130 million in compensatory
damages and $600 million in punitive damages.
All told, the
award was slightly less than $1.2 billion. The award amount was
about one-third of the amount the plaintiffs requested. State Farm,
the nation's largest auto insurer, has more than $40 billion in
reserves.
The court did
not issue an injunction requiring State Farm to stop using non-OEM
crash parts. However, State Farm announced a temporary halt shortly
after the verdict. At least one other insurer (Nationwide) announced
it would stop specifying non-OEM parts, demonstrating the deterrent
effect of the court ruling. Several other insurers, though, have
stated publicly that they will continue to specify non-OEM crash
parts in their vehicle repair estimates.
The court's
decision
On the consumer
fraud count, Judge John Speroni wrote: "Rather than telling its
policyholders of the known problems with the non-OEM crash parts,'
including possible safety concerns, State Farm chose to adopt and
use on its estimates the misleading term Quality Replacement Parts,'
and to tell its policyholders, in various written documents which
were admitted into evidence, that the parts were as good, or better
than, OEM parts. Further, the written disclosures stamped on or
attached to the repair estimates or which were delivered with the
repair estimates, did nothing to advise the State Farm policyholder
of the inferiority of the parts. Finally, State Farm's Guarantee'
improperly and unfairly placed the burden of securing a quality
repair on the policyholder, not State Farm."
Damaging
internal State Farm memos
Internal State
Farm memoranda between high level personnel and from the Certified
Automotive Parts Association (CAPA) admit to problems with the quality
of non-OEM crash parts being specified by State Farm. CAPA is an
organization created by State Farm and other insurance companies
to "certify" the quality of non-OEM crash parts. In fact, State
Farm executives served on CAPA's board and as CAPA's president,
and were intimately aware of the serious quality problems of so-called
CAPA "certified" crash parts.
A memo from
State Farm's Assistant Vice President of Property Claims to State
Farm's Vice President of Auto Claims, April 10, 1997:
Compelling
testimony convinced the jurors
A well-respected
tool-and-die engineer who has evaluated several non-OEM manufacturing
plants in Taiwan (where virtually all non-OEM crash parts are made),
testified that the non-OEM manufacturers lack the quality procedures,
technology and materials to "reverse-engineer" and produce parts
of "like kind and quality" to original equipment manufacturers'(OEM)
products. Auto body mechanics from around the country testified
that the parts were of poor quality overall, that the materials
used to manufacture them were poor, and that they experienced frequent
and considerable difficulties getting the parts to fit.
No evidence
of savings for policy holders
State Farm claimed
that its non-OEM crash part practices saved policy holders money,
and that an adverse judgement would result in higher premiums. This
questionable assertion was not confirmed by the facts as developed
at trial.
