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Guilty! State Farm to Pay $1.19 Billion

When the jury for the aftermarket parts trial against State Farm awarded the plaintiffs $456 million and the judge ruled the insurance giant committed fraud and awarded the plaintiffs an additional $730 million, some people cheered, some people jeered and others shed tears. But how will all this ultimately affect consumers — and repairers?

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If you’ve been watching the news or reading the paper at all lately, you’ve probably heard that on Oct. 4, the jury for the Snider vs. State Farm class-action lawsuit awarded $456 million in breach-of-contract damages to State Farm policyholders. Later that same week, Judge Speroni found State Farm guilty of fraud in connection to its use of aftermarket (A/M) crash partsand hit the insurance giant with an additional $730 million in damages — bringing the total damages leveled against State Farm to $1.19 billion.

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The class involves 4.7 million vehicles that had estimates written with non-OEM parts between July 1987 and February 1998, and the consumer fraud count covers the period of July 1994 through February 1998. Speroni’s decision included $130 million based on the savings realized by using non-OEM parts during the ’94-’98 period and $600 million in punitive damages. (Lawyers for policyholders had asked for $1.4 billion in damages for breach of contract and nearly $4 billion in actual and punitive damages on consumer fraud complaints.)

"We think it’s a great victory for policyholders and the body shop industry as a whole," says plaintiffs’ attorney Tom Thrash.

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Bill Sirola, spokesman for State Farm, didn’t think there was anything great about it and promised an appeal saying, "This is a major setback for our policyholders."

"Edward Rust, State Farm’s chairman and CEO, announced a few days after the jury verdict that State Farm is temporarily suspending the use of A/M parts.

The 4.7 million current and former policyholders who could have claims against the company would get an average of $100 each under the breach-of-contract settlement and $730 for the consumer fraud complaint. (State Farm reported a surplus last year of about $42 billion. This pool of money is available to cover one-time costs, such as those associated with catastrophes. This ruling would probably qualify as one.)

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What follows are highlights from the trial, arranged by week and picking up where we left off last month. (For all you impatient people who want to skip the trial and read about the verdict and the industry’s reactions, go to the "The Week of Oct. 4" subhead.)

The Week of Sept. 13
• After nearly four weeks of seeing portions of internal State Farm and car industry documents — some considered damaging for the insurance giant — jurors heard from Bill Hardt, assistant vice president for auto claims, whose name was attached to many of those documents.

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A portion of an Aug. 5, 1997, draft memo by in-house lawyer Gregg Mecherle to Hardt and other executives recommended that State Farm reconsider its policy to have body shops use non-OEM parts. In one portion, the memo stated that until the "A/M part manufacturers have enough competition within their own industry to begin to compete on quality rather than price, there will be part lots with quality problems."

After Hardt said he didn’t agree with that statement, plaintiff attorney Thrash questioned him about the parts’ overall quality. "A/M parts have caused a lot of problems for State Farm, haven’t they?"

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"They’ve caused problems, but I wouldn’t say a lot," Hardt said, adding later that State Farm favors a stronger A/M parts industry to increase competition in the market and drive down prices of factory originals.

Thrash also asked Hardt about a memo, dated April 10, 1997, that he wrote to his boss, Tom L’Hote, about the differences between non-OEM parts made out of primed sheet metal and factory originals made out of galvanized sheet metal. "Regardless of the effectiveness of primers vs. galvanization, the point is that if an OE part is galvanized and we use an aftermarket part that’s primed, there is a difference," Hardt wrote. "We may well say it’s like kind and quality, but the bottom line is that it is not the same."

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Hardt later explained under questioning by State Farm attorney Barney Shultz that he doesn’t take the phrase "like kind and quality" to mean equal.

"It means it’ll perform comparably to OEM, or as good as," Hardt said.

• Jack Gillis, executive director of the Certified Aftermarket Parts Association (CAPA), touted the work of CAPA and its intent to increase competition in the car parts industry. Gillis told the jury that CAPA, which is the only organization that monitors and certifies imitation parts, received about half of its 1999 $3 million budget from insurance companies.

Gillis asserted CAPA parts, mostly produced in Taiwan, were "functionally equivalent" to factory originals. He said primed sheet-metal parts, including A/M parts, are protected just as well against rust as galvanized factory originals — which contradicted earlier testimony by a metallurgist who said galvanized metal will protect against corrosion better than metal that isn’t galvanized or is just primed.

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• Kelly Roe, co-owner of Carty’s Collision Center in Ontario, Calif., testified on videotape. Roe helped coordinate a "blind" test of non-OEM and OEM fenders and headlights placed on her own minivan for a repair-industry evaluation. Results showed that the non-OEM and OEM parts were considered similar in terms of how they looked, fit and whether evaluation respondents would sell the parts to customers.

• John Werner, assistant director of State Farm’s research unit, testified that about 95 percent of State Farm policyholders who filed claims for car repairs renewed with the insurance company. (The renewal-rate information was put forth by State Farm in an attempt to show jurors that customers involved in accidents are satisfied with the company, its claims handling and repair work.) Under direct examination by State Farm attorney Robert Schulz, Werner testified that he reviewed information from a 1993 re-inspection study of estimates written between July 12 and July 23. The study showed that nearly 49 percent of the 290 vehicles repaired ended up with factory original parts, even though A/M crash parts were originally included on the estimates.

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Werner admitted under cross examination that he was given an estimate including OEM parts when his 1990 Cadillac was wrecked. Several plaintiff witnesses had said earlier in the trial that State Farm provided preferential treatment for high-level employees and people who drove higher-priced vehicles.

• Robert Burnett, who publishes the "Black Book" guides for used cars to be purchased wholesale by car dealers, testified that buyers don’t make a distinction between cars repaired with imitation parts and cars with factory originals. "It does not make a difference … provided the fit and finish is done properly," Burnett said.

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• Dr. George Hoffer, an economics professor at Virginia Commonwealth University, said A/M parts have no apparent effect on a car’s value. Hoffer said used-car value books, lease documents and loan applications make no reference to imitation parts, and neither do professional value guides, such as those published by the National Auto Dealers Association (NADA). "If non-OEM parts affected the value, wouldn’t these guides reflect that?" asked State Farm attorney Walter Greenough.

"Absolutely," Hoffer said. "I haven’t seen anything that causes the consumer to make a distinction between aftermarket and original parts."

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The Week of Sept. 20
• Clarence Ditlow, who took over in 1975 as director of the non-profit Center for Auto Safety (CAS), said he believes that parts overseen by CAPA pose no safety risks. Jurors also learned that Ditlow has been a member of CAPA’s board since 1988. CAPA supplies about 3 percent of the parts used in the $9 billion crash parts market. About 80 percent of the body parts used for repairs come from original carmakers, and 12 percent are imitation parts made by plants that don’t participate in CAPA certification. State Farm’s policy specifies the use of CAPA-only A/M parts if such parts are made. If not, originals are ordered. There has, however, been conflicting testimony that State Farm-insured cars are sometimes repaired with non-CAPA-certified parts. Ditlow testified that he agreed with the plaintiffs’ position that non-CAPA certified parts may be inferior to OEMs and has warned consumers to avoid buying uncertified parts.

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Ditlow also took issue with claims in a "Washington Post" story that he persuaded NBC-produced "Dateline" reporters from pursuing a story looking at the safety aspect of A/M parts. He said he merely told "Dateline" officials that he believed CAPA-certified parts are good parts.

• Michelle Vogler, a mechanical engineer hired by State Farm to evaluate the conditions of five Taiwanese car-parts makers, told jurors the manufacturers were producing "good, quality parts," calling them functionally equivalent to automakers’ originals. Vogler’s testimony contradicted the earlier opinions of Paul Griglio, a former GM, Chrysler and Ford die maker and manager. Griglio said it would be by "accident" that Taiwanese plants ever consistently produced parts on par with factory originals. Griglio, a private consultant to the world’s 20 automakers, testified that non-OEMs lack the equipment, expertise and design specifications to make consistently good parts. He visited three Taiwanese manufacturers in May 1998; Vogler visited the same three and two others.

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• More State Farm internal documents and memos from CAPA were admitted as evidence. A potentially damaging document was a 1990 memo addressed to eight regional office employees in Utah by State Farm manager Samantha Bird. (See box titled, "Documents? What Documents?" on page 66.)

Against strong objections by State Farm attorney Barney Shultz, Judge Speroni allowed attorney Don Barrett to introduce the memo as he questioned State Farm Senior Vice President Jack North.

"State Farm has a document-destruction policy in connection with anything related to possible lawsuits, isn’t that correct?" Barrett asked.

"That’s absolutely untrue," North replied.

When State Farm attorney Shultz asked North about the memo, North said it had no specific reference to A/M parts.

The Week of Sept. 27
• Closing arguments wrapped up and the jury began deliberations.

The Week of Oct. 4
• The jury awarded $456 million in damages to State Farm policyholders. "Their own documents said there was a problem with the parts," Thomas Hatley, foreman of the 12-member jury, was quoted as saying in an Oct. 5, 1999, "Washington Post" article written by Warren Brown. "We fairly quickly came to a conclusion that the parts were not of like kind and quality."

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Because Judge Speroni certified the policyholders as a class, the verdict could discourage insurance companies from promoting the use of generic parts and also affect some state laws encouraging the use of A/M parts.

• Speroni found that State Farm defrauded consumers by forcing shops to use non-OEM fenders, hoods and trim parts it knew were inferior to OEM parts and awarded an additional $730 million to State Farm policyholders.

"The issue is whether we will be able to continue offering our policyholders the best available service at the lowest possible prices by using lower-priced quality parts not made by original-equipment manufacturers," said State Farm spokesman Bill Sirola to the "Post." "We feel strongly about this — so strongly that we’re going to appeal."

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If upheld on appeal — which could take several years — Speroni will control how the damage awards are distributed to car owners. He also has control over how much the plaintiffs attorneys will receive in fees and costs — an amount that will be separate from the jury’s and Speroni’s rulings.

Officials at the Dallas-based Automotive Service Association (ASA) said the Illinois ruling should help educate consumers about how parts are chosen in auto repairs. "The biggest problem is consumer ignorance," said Bob Redding, the association’s Washington representative. "Consumers simply don’t know what kinds of parts are being used, and that puts us in the middle of a bad situation."

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"We’re disappointed in this verdict," said North, State Farm’s senior vice president. "State Farm saved its policyholders almost $234 million in 1997 alone by specifying the use of aftermarket parts. In addition, when claims costs have been significantly less than expected, we have returned premium dollars to policyholders. In the past two years, we’ve returned more than $1.5 billion to them." North also noted that State Farm has reduced collective insurance rates more than $2 billion in the past two years.

Robert Hurns, a spokesperson for the National Association of Independent Insurers (NAII) said this about the verdict: "The adverse decision in the class-action lawsuit against State Farm Insurance Co. is a step backward for consumer choice and competition in the marketplace and is a clarion call for class-action lawsuit reform. The true winners here are the auto manufacturers who are in line to reclaim their monopoly on replacement auto parts, along with the trial bar, who have found another novel way of lining their pockets through class-action lawsuits."

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Gillis, CAPA ‘s executive director, agrees. "Even before the verdict, car companies had a monopoly because they supply about 80 percent of the autobody repair parts needed after an accident. This is why a simple 5-mph bump into a pole can cost consumers hundreds, even thousands, of dollars in repairs. The parts needed to fix our cars are just too expensive.

"Hopefully, this verdict will not dissuade insurance companies from continuing their efforts to establish competition and eliminate the car-company parts monopoly."

According to Gillis, if this verdict is upheld, consumers will likely be forced to pay more for crash repairs for the annual 60 million plus accidents and more for insurance to cover the cost of those repairs.

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But not everyone sees it that way. The Insurance Consumer Advocate Network (I-CAN), an Internet based insurance consumer advocacy effort — www.ican2000.com — and the Coalition for Collision Repair Equality (CCRE) — a national network in support of independent collision repair facilities — have said they applaud the insight of the four-man, eight-woman jury. "When State Farm coerced insureds to have their vehicles repaired at State Farm ‘approved’ repair facilities, those shops were required to keep the vehicle owners ‘blind’ to the inherent defects of the repair under threat of that shop being removed from State Farm’s ‘Service First’ job referral program," says Mark Pierson, president of CCRE.

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But, adds I-CAN’s Executive Director Dennis Howard, "State Farm doesn’t stand alone as the sole practitioner of these fraudulent and deceptive practices. There are dozens of other such lawsuits pending against Allstate, Farmers Group, GEICO, Mercury, Nationwide, Progressive and USAA insurance companies for engaging in the same illegal conduct.

"This State Farm case is just the first of many consumer victories that will be won over the next few years."

Says an I-CAN press release issued after the verdict: "In this era of record profits, record dividends and obscene executive bonuses, the insurance industry has lost its credibility when it claims, ‘If we do that … premiums will go up.’ It was clearly shown in this case that State Farm could easily have delivered the full measure of service they had promised without impacting their financial stability."

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Writer Georgina Kajganic is editor of BodyShop Business.

Special thanks to all the fellow journalists who helped provide information for this ongoing update. Portions of this story were re-printed courtesy of "The Southern Illinoisan."

Documents? What Documents?

It’s been said by many that State Farm’s internal documents helped to incriminate the insurance giant. The following is a verbatim copy of a State Farm internal document that was entered as evidence in the trial:

Bird, Samantha F. / GRYL/38- HPDESK Print.

Message Dated: 04/06/90 at 1504.

Subject: PURGING OLD FILES Contents: 2

Sender: Samantha F. Bird/ GRYL/38

Cc: Samantha F. Bird/ GRYL/38

Part 1.

To: Clark Davis /GRYL/38 Marcia Daybell/GRYL/38 Felix Jensen/GRYL/38 Susan E. More/GRYL/38 Jerry L. Stevenson/GRYL/04 Paul L. West/GRYL/38 Carol J. Young/GRYL/38

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CC: Samantha F. Bird/GRYL/38 Robert Dean Noxon/GRYL/38

Part 2.

Yesterday in the staff meeting, we talked about the need to purge our desks of all old memo’s, notes and procedural guides. With the increase of bad faith suits being filed against State Farm, it is important that you get rid of all your old stuff: Know what you have lurking around in your drawers and filing cabinets.

Please get rid of any old memos, claim school notes, old seminar or claim conference notes, and any old procedure guides you may have. They are trying to avoid having to come up with old records when the "request for production of documents" comes in, and they request "all training manuals, memos, procedural guides, etc. that are in the possession of your claims reps and management." Apparently, they had a request like this in Texas, and each person had to surrender all their old junk. I guess corporate is not even going to keep old CPG guides, old claim manuals, etc. We will only have what is currently in effect. That way, if they subpoena our claim manual for U claims for 1987, for example, we will say we don’t have it. This should be easier than trying to produce it or having to defend it.

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So, look through all your old stuff and dump it. You won’t ever miss it.

Also we discussed that every employee has the right to look at his or her personnel file without recrimination. There should be nothing in your personnel file that you don’t already have a copy of. But if you feel the need to see something in your file, it is open to you.

State Farm Doubted Parts Quality

Another verbatim State Farm document that was submitted as evidence:

MEMO TO: Tom L’Hote

FROM: Bill Hardt

SUBJECT: CAPA Galvanization

Tom, I basically agree with everything that Jack Gillis sets out in his CAPA Update on Galvanization. He does, however, slant the emphasis toward his interest, but in essence everything is accurate.

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The only thing I wish to point out is that regardless of the effectiveness of primers vs. galvanization, the point is that if an OE [original equipment] part is galvanized and we use an aftermarket part that is primed, there is a difference. We may well say it is like, kind and quality, but the bottom line is that it is not the same.

Another point Jack makes is in regard to some object penetrating the primer or galvanization and exposing the underlying metal to corrosion. I think it is relatively common knowledge that it is much easier to dislodge the primer than it is the galvanization, thus, the protection is not the same in that situation. A good example might be when it’s necessary for a shop to drill a part. If they drill the galvanizing, the underlying metal is exposed to corrosion just as it would be if there was primer that was drilled through. In that case, the body shop should be spraying a primer coating on the exposed metal to provide the corrosion resistance. In fact, what I am saying is that the collision repair industry uses the primers in reapplying the corrosion resistance when they repair cars, so that it is obviously effective.

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