Disclaimer: This article is for informational purposes only and should not be construed as legal advice.
For the collision industry, the last millennium ended with a real firecracker: Snider vs. State Farm Mutual Automobile Insurance Company opened a floodgate of litigation by consumers who were shocked over the way automobile collision repairs were being made and paid for by their insurers. Along with that almost $1.19 billion bombshell has come increasing concern about just what the Snider decision means, not only for State Farm, but for the entire industry.
The Snider case was a class-action suit filed on behalf of the owners of 4.7 million vehicles that had estimates written by State Farm requiring non-original equipment parts during a specific time period. The plaintiffs in Snider alleged a breach of contract, urging that aftermarket (A/M) crash parts were basically inferior to original equipment (OE) parts and thus their use didn’t return the vehicles to pre-loss condition as required by the policyholders’ insurance contracts. The plaintiffs basically put A/M parts on trial, offering testimony from numerous body shop owners and safety experts concerning the inferiority of the parts to OEM parts. These allegations were apparently believed by the jury, who awarded the class $456 million in damages. The trial judge also ruled the insurance company had committed fraud and hit the defendant with another $730 million in damages. State Farm has since filed an appeal.
What’s the wider effect of Snider vs. State Farm? It now has the attention of almost every insurance company in the industry, since copycat suits have already been filed against such companies as AIG, Allstate, CNA, Colonial Penn, Farmers, GEICO, General Accident, The Hartford, Liberty Mutual, Metropolitan, Mid-Century, Nationwide, Progressive, Safeco, Travelers and USAA.
State Farm’s Take
And what of the immediate effect on State Farm? The company has temporarily discontinued writing estimates for repairs that require A/M parts. "We don’t want our policyholders caught in the middle of the lawsuit-driven confusion and the misinformation about the quality of the A/M parts we specify," says Edward B. Ruse, chairman and chief executive officer of State Farm.
"We still support the use of A/M parts," says Suzanne Dizon, State Farm public affairs specialist and spokesperson. "We have temporarily suspended their use because it’s causing confusion at present. The case is, of course, on appeal. If the appeal fails, then we can expect costs to go up because of the additional expense of OEM parts.
"Most people don’t realize that there was always a guarantee in place regarding the A/M parts for as long as the customer owned the vehicle. We have had less than 1 percent of the persons receiving A/M parts make a complaint."
In addition to its appeal, State Farm is fighting back publicly through the Internet, presenting a continuing argument of its position on its Web site (www.statefarm.com). The site includes documents the insurance company said it wasn’t allowed to present to the jury "because of court rulings," but is providing the information to the public "so our customers can better understand the benefits of non-OEM parts."
A New Lawsuit Involving CAPA
With the inclusion of evidence in Snider on the quality dispute between the two types of parts, attention has also turned again to the Certified Aftermarket Parts Association (CAPA), which monitors and certifies the quality of A/M parts. In fact, a new lawsuit was filed in November by the plaintiffs’ attorneys in Snider. This lawsuit against seven insurance companies will go beyond the prior suit’s allegations of breach of contract and consumer fraud to add a new wrinkle: an allegation of conspiracy to commit fraud through the formation of CAPA.
While CAPA hasn’t been named as a defendant, the suit alleges the insurance companies funded and participated in the formation of CAPA "largely to avoid the passage of proposed laws in many states that would have limited the use of A/M parts," according to Tom Thrash, a Little Rock, Ark., lawyer who was one of four trial attorneys representing the plaintiffs in Snider. Thrash says this lawsuit will differ from Snider because in addition to showing how bad A/M parts are, the plaintiffs’ evidence will also show the defendants conspired to use the "CAPA certified" notation on parts to cover up what they knew were inferior products.
Jack Gillis, executive director of CAPA, testified for the defendant in the Snider case, describing the CAPA certification process in an effort to dispute the plaintiffs’ allegations of the inferiority of A/M parts. Calling the Snider verdict "an extraordinarily unfortunate situation" and the "poster child for the bad class-action lawsuit," Gillis says the case has been a double-edged sword for CAPA.
"On the one hand," says Gillis, "this case has contributed to the perception that alternatives to car-company parts are inferior." On the other hand, it’s focused a tremendous amount of attention on his organization. "We hope to capitalize on that and let the public know who we are, what we do and the benefits of competition," says Gillis.
The competition issue wasn’t addressed in Snider because the trial judge ruled that the jury wouldn’t hear evidence concerning any potential financial benefits to consumers through the use of non-OEM parts or evidence that makers of OEM parts would benefit by the absence of competition.
Gillis says he thinks there’s "no question" that the ruling in Snider will be overturned on appeal.
As to the pending lawsuit alleging a conspiracy by the insurance companies led to the formation of his organization, Gillis says he "just can’t imagine any reasonable judge and jury finding any evidence of fraud or inappropriate action on the part of the insurance companies in creating CAPA."
Gillis bemoans what he calls a chilling aspect to the legal environment and result of the Snider decision, which could encourage insurance companies to "just throw up their hands and stop trying to keep down the prices of replacement parts, which would ultimately hurt consumers."
An FYI for DRPs
There’s also concern that the verdict in the Snider case will have particular implications for direct-repair program (DRP) shops. Chuck Sulkala, owner of Acme Body and Paint in Boston, explains: "In the direct-repair relationship, the shop owner agrees to hold the insurance company harmless from any action the insured might have as a result of repairs made at the shop. In that arrangement, it appears that the body shop is acting and functioning on behalf of the insurance company."
Sulkala poses the question that if the insurance company requires the use of A/M parts as a provision in the agreement and some lawsuit, like Snider, is filed that attacks the use of those parts, couldn’t the individual body shop become a target defendant, having to spend many hours and dollars on a legal defense?
"The question is whether there’s enough of an agency relationship [between the body shop and the insurance company] to go right on down the line with a lawsuit," says Sulkala. "I’m concerned there’s no firewall there."
Sulkala says this opens the door to a potential dilemma. The body shop, particularly one new to an area and in need of business, may want the advantages of the DRP arrangement, but might not want to take on the liability of a potential lawsuit that names the shop as a defendant if the shop followed the insurance company’s requirements to use certain types of parts.
"I’m not trying to play doomsday for the DRPs, but it is a caveat to look at," says Sulkala, suggesting that individual body shop owners may wish to consult their own attorneys to get a release that can be signed by the customer when the insurance company requires a particular part be used in a repair and the shop owner doesn’t fully agree with that direction.
Allaying some of those fears, attorney Thrash says the plaintiffs he represents "have no plans to sue the individual body shops," and that "we look at the body shops also as victims of insurance companies.
"In fact," adds Thrash, "we’d like to represent the body shops against the insurance companies. [The shops] are the real experts on these parts."
Alluding to some of the shop owner witnesses who testified for the class in Snider, Thrash adds, "They’re the ones who came out and spoke against the use of A/M parts."
While Thrash’s comments may be reassuring to DRP shops, Patrick McGuire — a Chicago attorney who represents a number of shop owners, including some who testified in the Snider case, and who frequently gives seminars concerning various legal aspects of the business — says "shops have an independent duty to the consumer, independent of their agreements with an insurance company."
McGuire suggests that it may be the insurance companies that implicate the shops as third-party defendants, particularly with billion-dollar verdicts on the line. "Shops need to understand their rights and liabilities, and then they’re much better equipped to make decisions about how they want to proceed."
McGuire echoes the need for disclosure by the shops to consumers of exactly what types of parts are being used in order to limit liability. "Shops are different," says McGuire. "They often have different marketing strategies. But they can be consistent in having an attorney in their state draft a document which includes disclosure language, usually mandated by state statute."
Class Actions: Lawsuits for the Masses
If insurance companies, trade organizations, body shops and attorneys have been affected by Snider, then the general public has been similarly affected. One body shop owner recently said that his customers only used to care about how much the repair would cost. Now, he says, "little old ladies who don’t even know what a core support is want to know if I’m going to use an OEM or an A/M part.
"People have been watching too much TV."
Television advertising touting original parts and various investigative news reports are frequent sources of information for consumers. Another big reason for this sudden knowledge by the general public is the class-action lawsuit, a litigation vehicle that makes millions of people potential plaintiffs in lawsuits they never knew existed until they read about them in a newspaper.
A class-action lawsuit, by its very nature, invites huge numbers of people, often through broad media advertising, to determine if they’re similarly situated as the few named plaintiffs. In Snider, for example, there were only six named plaintiffs who ultimately went to trial, but they claimed to represent about 6 million present and former State Farm policyholders in 48 states. While State Farm attempted to contest the class-action nature of the lawsuit, the trial court confirmed the certification. And State Farm received no relief on this issue in its pleas to both the Illinois Supreme Court and the United States Supreme Court.
Not that familiar with class actions? You will be. Class actions are becoming a more prevalent means of settling widespread plaintiffs’ claims. The theory is that the issues can be decided in one lawsuit and applied to everyone with characteristics similar to the named plaintiffs, thus saving the time and money inherent in multiple lawsuits. Recent class actions have involved recipients of defective breast implants, tobacco smokers, buyers of certain laptop computers and airline travelers, to name a few.
A potential class member has the opportunity to opt-out of a class and bring litigation on his own behalf. But millions of people who would have been unaware of the lawsuit if not for the advertising, and those with minimal claims who don’t want to employ their own attorneys, are frequently quite willing to go with the flow of the class, thinking if they get something, great; if not, they haven’t lost anything.
Most class members never even follow the case, don’t know the attorneys, don’t know the issues and may have forgotten the incident that gave rise to the formation of the class in the first place. Their only tangible touch with the lawsuit is when, if it’s successful after all appeals are exhausted and considerable attorneys’ fees are deducted, they get a small check in the mail years later. Or, in future cases of this nature, they may receive some type of credit on the next repair job or insurance premium.
Whether Snider is a good result for consumers remains to be seen. Gillis emphasizes the financial aspect of the decision and contends that consumers will see increased insurance policy costs and an increase in the number of cars totaled by insurers because the expense of using all OEM parts will outweigh the value of the car. "This puts the consumer in the position of having to replace his car with the $10,000 he gets for a totaled vehicle. Most consumers don’t want that," Gillis says.
Thrash, on the other hand, looks at the safety issue. He emphasizes that consumers weren’t getting their vehicles returned to the condition required by the contracts for which they paid premiums. "We now have a decision of record from at least one American jury that these parts are inferior and constitute a breach of contract."
Sulkala observes, "Assume a year from now the insurance company decides that salvage air bags are OK. Are we [body shops] going to risk a family’s whole future on that decision because that’s what’s required by the insurance company?"
But attorney McGuire perhaps sums up the situation best. "The dollar figures alone are making attorneys from all corners of the country scrutinize this industry. There are real problems with the way property damage claims are being settled. The days of back-door agreements are over."
In other words, Snider has opened up all estimates and parts recommendations to potential litigation. "While an insurance company could weather the storm of a huge verdict, most small shop owners could not," says McGuire. "Now is the time for shops to take a very hard look at limiting their liability."
Writer Susan Martin has her own law practice in Miami and is licensed to practice in the state and federal courts of Texas, Florida, Hawaii and Nevada. She’s married to a body shop owner.