In Court with State Farm - BodyShop Business

In Court with State Farm

The trial against State Farm for its usage of aftermarket crash parts is underway. Since you can’t be there in the courtroom, we’re doing the next best thing: bringing the courtroom to you.

The State Farm trial — currently underway in Marion, Ill., for the insurer’s usage of aftermarket crash parts — is an event that will, regardless of the ruling, impact the collision repair industry.

Because you can’t be in the courtroom yourself (you’ve got a business to run!), we’ve compiled weekly highlights of the trial to keep you informed. Due to space constraints, some witnesses and their testimonies haven’t been included.

Note: If you’re unfamiliar with the case and need some background, see the September BodyShop Business article titled, "Court Is Now in Session," on pg. 36.

The Week of Aug. 16
• "State Farm has broken its contract with its policyholders five and a half million times,’’ plaintiff attorney Don Barrett said in his opening statement. Barrett, one of several lawyers for the plaintiffs, said State Farm broke its promise to policyholders by specifying non-original equipment manufacturer (OEM) parts on its estimates since it promises to repair vehicles to pre-loss condition. "The imitation parts are inferior. They cannot use them without breaching the contract," he said.

Barrett promised a six-prong approach to proving the inferiority of non-OEM parts: 1. Testimony of collision repair experts; 2. testimony of loss-of-value experts; 3. comparison of OEM and non-OEM manufacturing processes; 4. comparison tests on OEM and non-OEM, including testimony from Bill Anderton, a former Tech-Cor employee; 5. confessions and admissions of past and present State Farm employees; and 6. State Farm’s own documents, which raise concerns about the quality of non-OEM parts over a 14-year period.

In response, State Farm attorneys said there’s no evidence aftermarket parts pose any safety threat.

Barney Shultz, one of about 10 lawyers representing State Farm, said the lawsuit "is not a referendum or popularity contest … [but] about whether State Farm fulfilled its obligation to our policyholders by writing estimates sufficient to restore the car to its pre-loss condition."

• An insurance consultant hired by plaintiffs to study State Farm documents testified on Aug. 17 that internal State Farm memos prove the company promoted the use of inferior replacement parts on policyholders’ cars, despite reservations about their quality. "State Farm has, for several years, used … parts that it knows are inferior,’’ said Tim Ryles, who served as Georgia’s insurance commissioner from 1991 to 1995.

Ryles testified that State Farm sent customers brochures touting the performance and cost savings of "quality replacement parts," as high-level executives circulated dozens of memos suggesting those same parts were inferior when compared to OEM parts. "Quality and fit of non-OEM … parts continue to present problems,’’ said an Oct. 15, 1993, internal memo. The memo cites poorly fitting bumper covers, plastic parts that "do not mirror OEM quality for chroming and fit’’ and a model of an imitation truck hood equipped with safety latches that would not hold. "This presents an obvious safety problem,’’ the memo said of the hoods.

Also, a 1993 memo from the Certified Automotive Parts Association (CAPA) — a group formed by insurers in 1987 to set standards for A/M parts and to oversee A/M parts quality — shows the group felt its initial standards were "only slightly above the ‘lowest common denominator’ approach."

Ryles said the documents show a pattern in which State Farm officials chose the lowest-priced part for their customers’ cars without regard for quality. But outside the courtroom, State Farm spokesman Bill Sirola said the documents reflect the company’s leading-edge efforts to bring A/M parts up to the level of factory parts, not an effort to conceal their flaws.

Another document introduced by the plaintiffs indicated that, as recently as Aug. 5, 1997, State Farm was having reservations about writing for non-OEM parts. In a memo, a State Farm counsel bemoaned the amount of money it was spending to defend lawsuits from its advocacy of non-OEM parts. In addition, the insurer admitted, "Until the aftermarket parts manufacturers have enough competition within their own industry to begin to compete on quality rather than price, there will be parts with quality problems." Also in the memo, State Farm said it was discussing an alliance with the car manufacturers. "We recommend that we try to negotiate some type of discount with the OEMs or body shops to last for an extended period in exchange for our no longer estimating aftermarket sheet-metal parts." Meanwhile, Ed Rust Jr., State Farm president and CEO, issued this statement to his employees, "Let there be no question that we are living up to our obligation to our policyholders. … Yes, problems occasionally occur with all varieties of parts — generic and brand-name."

• State Farm attorney Walter Greenough cross-examinated Ryles the morning of Aug. 19. Ryles admitted to being a State Farm policyholder himself. "I have not had a problem myself with State Farm," he said. "It’s a big auto insurer … and it has paid the claims of some of my family members promptly."

"You knew you were helping to investigate some of State Farm’s practices, yet you renewed your policy? You didn’t switch to another company?" Greenough asked.

"I didn’t see any need to [switch]," Ryles responded.

Ryles called himself an independent, unbiased and neutral insurance expert hired by the plaintiffs. Greenough questioned Ryles’ motives, suggesting his previous testimony was designed to highlight only documents that went against State Farm.

Ryles later said he was aware of at least three studies with results that showed imitation parts were as good as or better than originals, but that he didn’t mention them during his testimony.

As Georgia’s insurance commissioner, Ryles admitted he didn’t recall any complaints regarding the use of imitation parts in connection with a state market conduct survey of State Farm.

• Former Campbell & Co. marketing executive Dennis Bender testified that General Motors (GM) hired his company in 1995 to complete a market study of two identical Chevrolet Cavaliers. Each car was crashed and repaired with hoods, fenders and moldings — one with all OE parts and one with non-OE parts. The two cars were shown nationwide to two main groups: consumers and body shop specialists. Ninety percent of consumers preferred the car with original parts. "Research clearly showed that there was a perceived quality difference" in the two cars, Bender testified.

On cross-examination, Bender said that GM employees oversaw and completed the vehicle repairs for the market study and that one of GM’s motives behind the study was to preserve its share of the replacement crash-parts industry.

• On Aug. 19, automotive industry consultant Paul Griglio testified in favor of OEM parts, while long-time Chevrolet sales manager Ken Gillespie testified that the presence of so-called A/M or imitation parts on used cars lowered the re-sale value of those cars.

Under direct examination by plaintiff attorney Thomas Thrash, Gillespie, who worked for three Chevrolet dealerships in southern Michigan since 1966, said A/M parts were generally perceived as a lesser option to original parts and their use adversely affected his ability to re-sell a used car on his lot.

Under cross-examination by State Farm attorney Robert Shultz, Gillespie admitted that much of the reduction in value could be because many cars repaired with A/M parts had been in wrecks. He also said appraisals often included regional and seasonal variations having little to do with the presence of A/M parts.

The Week of Aug. 23
• An expert on the makeup of metals testified Aug. 23 that galvanized car parts are of higher quality than those without zinc coating, in large part because they don’t rust as quickly.

• Griglio (who testified the previous week as a witness for the plaintiffs) admitted in court Aug. 23 that hundreds of thousands of vehicles with parts developed by OEMs had been recalled. Griglio, who opened a consulting firm after many years of service with the "Big Three" automakers, admitted under cross-examination by State Farm attorney Greenough that Dodges, Cadillacs, Geos and Ford Explorers with original, factory-made parts had been recalled for a variety of reasons related to defects in parts.

The cross-examination appeared to be an effort by State Farm attorneys to discredit Griglio’s six hours of testimony under direct examination on Aug. 19. "You think OEM parts are wonderful, don’t you?" asked Greenough.

"They are made from specific specifications," the witness said. "I don’t know whether I would say they are wonderful."

• Former State Farm Insurance employee Bruce Davis, who worked in a Draper, Utah, office from 1978 to 1984, testified Aug. 25 that the insurance giant intentionally pushed A/M parts on minority groups, retirees and "less sophisticated" individuals. "It was pointed out that I should focus on people who didn’t look sophisticated enough to fight them," said Davis, "while company officials ordered other customers to receive OEM parts."

Over repeated objections by State Farm attorneys, Judge Speroni allowed Davis to explain the company’s alleged selective treatment. Davis said personal friends of upper-level management, as well as people who looked well-off enough to sue the company, were able to have their cars repaired with OEM parts. "We were told to give [friends of upper-level management] an estimate that did not include aftermarket parts," he said.

Davis also said there was a sign in his workplace that read, "Can You Tell The Difference?" He said the sign showed OEM parts on one side and A/M parts on the other. He said it was easy to tell the difference. "Even a lay person could see the deterioration," he said.

Under cross-examination by State Farm attorney Ralph Hunsaker, Davis admitted that he didn’t express any dissatisfaction with the company in his letter of resignation dated Feb. 21, 1984, and that he now works as an investigator for a Salt Lake City law firm that derives much of its income from suing the insurance industry.

• State Farm President Ed Rust Jr., in a videotaped testimony on Aug. 26, said he lacks specific details about his company’s handling of claims involving A/M car parts. Rust was questioned by former attorney G. Patrick Murphy [who’s now a federal judge] in April 1998.

On videotape, Rust told Williamson County jurors that State Farm wanted a healthy A/M parts industry to compete with carmakers. In the mid-1980s, he testified, body shops were starting to use less-expensive parts and billing insurers for more-expensive OEM parts, without telling insurers. But when Murphy tried to quiz Rust about State Farm’s specific policies and claims that A/M parts are of equal quality to OEM parts, Rust was evasive. "Do you think that it’s proper for your company to specify the use of imitation crash parts for the repair of your insureds’ vehicles when those parts have neither been certified nor tested?" Murphy asked.

"I think it is very appropriate … to be involved in bringing competition in the crash-parts business to make sure the lowest possible price is available," Rust responded. (On five other occasions during Rust’s videotaped deposition, Rust answered the question much the same way.)

When asked if he believed that non-tested or non-certified imitation parts are safer than parts produced by carmakers, Rust re-stated that he was a CEO, not a claims specialist or engineer. "Again, I cannot answer that without specifying parts, which I really do not have the expert knowledge on," he said.

During one exchange, Rust said if a car owner asks for original parts, State Farm requires the owner to pay the difference in price between originals and non-OEM parts. "When you say the insured has the option, you mean that if your insureds want the original equipment, they can always purchase it themselves?" Murphy asked.

"That is an option," Rust responded. "There are many things out there that consumers will buy because they see it, be it shock absorbers, be it mufflers, a host of things that are [of better quality or offer a better guarantee] than what the OE provides."

"I’m talking about crash parts in this case, I’m talking about fenders and bumpers and hoods and sheet metal," Murphy countered.

"And, again, I go back to the answer as I expressed it. If somebody wants to put higher quality shocks back on their car … the repair can accommodate that, it’s just that, as the insurer, we will not pay for that betterment," Rust responded.

When Murphy turned to the issue of whether State Farm would pay body shops for the labor it would take to replace a non-OEM part if it didn’t fit properly, Rust said he couldn’t be specific without more detailed information. "Our claims representative would work with the body shop. I would say when it is appropriate to pay, we will pay," Rust said.

Internal documents shown during the first eight days of the trial indicated that State Farm requires the use of non-OEM parts that carry some type of warranty from the manufacturer or distributor. But at least four body shop owners or technicians have testified that labor costs to replace a poorly fit part were not paid by State Farm. Their own shops cover the extra labor costs, they said.

• Also testifying Aug. 26 was Robert Hunter Jr., former Texas state insurance commissioner and current insurance division chief for the Consumer Federation of America. Hunter testified that he poured over hundreds of internal documents from State Farm and CAPA and concluded that State Farm executives believed A/M parts were inferior to factory originals.

He and Ryles (the former Georgia insurance commissioner) have served as the plaintiff’s top two insurance expert witnesses so far in the case.

One key document highlighted by Hunter and Ryles during their testimonies was a 1993 memo from Chicago-area claims representatives copied to Bill Hardt, State

Farm’s assistant vice president for claims. A portion of it states, "I am being told that the quality issue is significant and is receiving negative feedback from repairers and customers."

Another memo from in-house attorney Gregg Mecherle in August 1997 to Frank Haines, vice president of claims, called on State Farm to reconsider using A/M parts because of the rising cost of defending against lawsuits and the "public-relations problems we continue to have with our consumers."

• The jury heard from Michael Avery, one of the 11 named plaintiffs in the case, on Aug. 26 via a 38-minute testimony that was videotaped more than two months before. Avery said he joined the suit because of his belief that State Farm has been "unfair" and breached the trust of its policyholders.

Avery told plaintiff attorney Thrash that he paid $155 beyond the State Farm estimate to have his 1988 Jeep Cherokee repaired with original parts, instead of A/M parts.

Avery said it was his impression that the term "quality replacement parts" used by State Farm was a misnomer and that he didn’t want his Jeep repaired with such parts.

"Why not?" asked Thrash.

"My car is a family car," Avery said. "It’s the vehicle my children travel in."

Under videotaped cross-examination by State Farm attorney Kent Brandon, however, Avery admitted he was still a State Farm policyholder despite his dispute with the company over A/M parts.

• The trial was recessed Aug. 27 due to a juror’s illness. Judge Speroni excused the female juror from further service at the beginning of court Aug. 30 and appointed a female alternate to replace her on the main panel of 12.

The Week of Aug. 30
• As the attorneys for the plaintiffs neared completion of their case, Hunter, who served from October 1993 to December 1994 as Texas’ top insurance official, testified that he didn’t recall anyone complaining about A/M parts and stuck by his testimony from last week — that after reviewing hundreds of internal documents, most exchanged between State Farm officials, he now believes that A/M parts are inferior in quality to factory originals.

But under questioning by State Farm attorney Greenough, Hunter said most of the documents he reviewed were supplied by attorneys for the plaintiffs in the case, suggesting that Hunter failed to read other documents that included favorable opinions of A/M parts.

Still, Hunter said if he had known in 1994 what he knows today — after reading the internal documents — he’d have likely taken some action regarding insurance companies’ mandating the use of non-OEM parts. He testified that, at the time, he believed non-OEM parts were as good as OEM parts and that their existence helped drive down parts costs.

• Jurors heard from two more collision repair shop owners — Chris Medine and Dennis Linderman — who testified that non-OEM parts are consistently worse than OEM. Linderman said that non-OEM sheet-metal parts aren’t galvanized and occasionally come out of the box already rusted.

• On Sept. 1, jurors took a video tour of Guy Bonadio’s Coral Springs, Fla., body shop and, in at least three repair jobs, saw evidence that A/M parts fit "pretty well." The video was shown as part of State Farm’s defense. Bonadio testified that he uses A/M parts "every day" and that, largely, the parts work out fine.

During one part of Bonadio’s video repair work, a factory-original door came shipped with a small dent. Bonadio testified that shipping damages occur to all parts, whether factory originals or A/M parts.

According to Bonadio’s testimony, skilled laborers are a key in making a quality repair, and if a car’s frame is not properly pulled back into place, parts aren’t likely to fit well — whether their OEM parts or imitations.

• Also Sept. 1, Geoff Germane, a mechanical engineer hired by State Farm to crash test two cars with OEM and non-OEM parts, said "there is no difference between non-OEM and OEM parts in terms of safety of the occupants. There’s no greater risk of injury" when non-OEM parts are used.

The Week of Sept. 6
• Ray George, owner of Ray’s Body, Inc. in Tamaroa, Ill., testified Sept. 7 that he’s worked with hundreds of A/M parts in his 15 years as a body technician and that he’s "generally" had good luck with them. "For the most part," he said, "they fit."

George said he completes about $200,000 to $300,000 worth of repairs to State Farm cars a year. He also said that about 10 percent of the A/M parts he orders for repairs don’t fit right. In those cases, he calls the State Farm adjuster, advises him of the problem and gets the OK to order a factory original. George said no one from State Farm ever forced him to use a problem-fitting, non-OEM part.

• Also testifying Sept. 7 was Don Smith, a State Farm independent contract agent for the past 37 years. Smith said that while he’s fielded questions from policyholders about the quality of imitation parts, he never had a complaint about the parts after they were installed.

• Collision center owner John Swyers said he examined 11 cars and repair reports for the lawsuit and found that, generally, non-OEM parts had worked out well. The fit and finish in all instances appeared similar to originals; in some cases, he couldn’t tell a difference.

• On Sept. 8, property claims consultant Don Porter was questioned by plaintiff attorney Thrash and testified that he was unaware of company concerns about the quality of A/M parts. Porter, one of 18 claims consultants based in Bloomington, said he never recalled receiving any complaints about the quality of generic parts.

Porter noted that State Farm, as a policy, started writing estimates that included A/M parts in 1986. By 1990, State Farm guaranteed to re-do repairs if customers weren’t satisfied; the "primary" basis for the guarantee was that body shops would have warranties from suppliers for the parts they purchased. If a part was to be replaced, the supplier would cover the cost, not State Farm or the policyholder.

Two years later, Porter testified, State Farm altered its policy again to require that, when possible, A/M parts included on estimates must be parts certified by CAPA.

Under cross-examination, Porter admitted he wasn’t aware of numerous concerns expressed by State Farm executives between 1990 and 1997 regarding CAPA and of complaints from customers and repairers about the quality of A/M parts.

Porter said he believed all parts that CAPA certifies are tested. He said he was unaware of a memo from CAPA’s testing lab, Entela, which stated that prior to November 1993, Taiwanese plants would buy uncertified parts and sell them as certified to U.S. distributors when supplies ran low.

He also said he was unaware that during one quarter in 1997, CAPA had decertified a total of about 350 parts out of about 1,700 certified parts for various reasons.

• Auto industry consultant Donald Parker, of Failure Analysis Associates, said under cross-examination Sept. 10 that galvanized steel used in OEM parts was 70 percent more expensive than the sheet metal used in A/M or imitation parts.

Parker said the A/M parts industry "has done a great job of increasing its quality over the years" and that his company has done crash tests for State Farm twice in the past five years. He claimed galvanized parts were "functionally equivalent" to sheet-metal parts, but he also admitted that he didn’t have much knowledge of the metallurgy needed to understand why the more expensive parts may work better as crash replacements.

Eileen Benedict is senior 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."

Watch for continued coverage of the trial in next month’s issue. We won’t rest until the lawyers do!

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