Aftermarket Auto Parts: Shifting Gears

Legal action against insurance companies in the U.S. for alleged unauthorized use of aftermarket parts in vehicle repair have bubbled up into Canada. Within months of a successful $1.2 billion class action in Illinois against State Farm Insurance, similar suits have been filed in Quebec against AXA Canada, Groupe Desjardin and ING Canada, and in Ontario against Liberty Mutual for the use of non original equipment manufacturer (OEM) crash parts. Claim managers see this “additional cost factor” as being the single biggest obstacle to curtailing auto expense claims. CU investigates.

Aside from the obvious threat of increased auto repair costs, legal action against the use of aftermarket parts, in other words non-original manufacturer vehicle components, raises questions over the need and effectiveness of third party certification among suppliers of aftermarket parts in Canada. “From a Canadian perspective, I’m a bit concerned about what has happened in the U.S.,” says Terry Squire, president and CEO of Co-operators Insurance.

But, as Squire points out, the Illinois litigation was not so much putting aftermarket parts on trial as it was determining whether State Farm had authorized the use of “like kind and quality” parts to restore damaged vehicles to “pre-loss condition.” The clear answer to that one from the Illinois jury was a resounding “NO”.

At least one Toronto-based lawyer familiar with the case suggests otherwise. The court received a paper trial of internal State Farm memos uncovering incidents of substandard parts at several Asian manufacturers. The so-called “Taiwanese tin.” “You can’t control quality without investigating and putting things down on paper,” he observes. “If anything, State Farm was, perhaps, overly cautious.”

Cautious or not, the most damaging memos in the State Farm litigation centered around a clumsy attempt to purge desks and files of old memos linked to the substandard quality of aftermarket parts prior to pre-trail discovery. State Farm is appealing the verdict. Nevertheless, the chill against non-OEM parts is setting in on both sides of the border. State Farm and Liberty Mutual, for example, have each voluntarily suspended the use of some, or all, aftermarket crash parts, an action which State Farm estimates has already cost an additional US$4.8 million in the first month of the ban (State Farm is estimated to have saved US$234 million in 1997 through the use of alternative parts).

Sam Mercanti, president and CEO of Carstar Automotive Canada, a chain of 90 body shops, estimates that up to 12% rests on aftermarket parts. “If we’re not allowed to use aftermarket parts, the cost of the average repair would go up,” he bluntly states. In addition, the threshold for writing off older vehicles would be lowered as a result.

Keeping a cost perspective

The Alliance of American Insurers (AAI) recently reported that the cost of rebuilding a 1999 Toyota Camry with parts supplied by the car company would cost just over US$100,000, compared with an average sticker price of approximately US$23,000. It’s a statistic that Al Webe, general manager of Pro Body Parts in Winnipeg, suggests should be taken with a “grain of salt”, but says that it points to the high cost differential in aftermarket versus OEM parts nevertheless. “Prior to aftermarket parts, OEM manufacturers had total control over pricing. They didn’t start keeping an eye on price increases until they had to compete with the aftermarket,” Mercanti recalls.

Costa Kaskavaltzis, manager of automotive engineering and research at ICC, argues this is only part of the story. “What people are ignoring is that a very good case can be made that the presence of alternatives to OEM parts are keeping the price down. Where there is no aftermarket supplier for a given part, the price of that part is naturally going to be higher.”

According to the AAI, the cost of an OEM fender for a 1992 Toyota Camry has dropped steadily from US$253 in 1992, when no aftermarket alternative was available, to US$146 in 1999, compared with $56 for the generic. The cost of the OEM fender actually increased in 1993 and 1994 when it would have still been considered improper to replace a damaged manufacturer’s part with a non-OEM crash part. “When a car is one year old, the aftermarket part is not like minded quality because the original part is still new,” says Jerry Dalla Corte, vice president of claims for the Dominion of Canada. “I don’t think anybody will argue about using a quality aftermarket part for a car that is eight years old. The issue is the difference between one year and eight years. There’s a lot of room in between.”

Dispelling the myths

Adding space to the “in between room” of the debate – and further fuelling the potential for more lawsuits in the future – is the general lack of understanding of the aftermarket auto parts market. “The biggest problem is the perception of aftermarket parts, propagated by our competition in all of their marketing and advertising strategies,” Weber claims.

Kaskavaltzis agrees. “It’s a lack of information similar to the [scare] when mandatory seat belting was introduced in Ontario and Quebec in the 1970s. There’s room for more information. The Insurance Bureau of Canada (IBC) has asked its Ontario claims committee to develop a position on the issue. But Kaskavaltzis argues that scientific investigation of OEM versus generic parts is also needed. “Nobody has really studied a large sample of OEM parts,” he adds.

His argument appears to be supported by the fact that once all the dots have been connected, claims on both sides of the parts issue can be linked to specific interests. For example, the Insurance Institute for Highway Safety (IIHS) recently reported that the source of a car’s cosmetic crash parts is irrelevant to crash worthiness. The institute tested a 1997 Toyota Camry from which the front fenders, door skins, and front bumper cover were removed. The original equipment hood was replaced with a certified hood from an aftermarket supplier. The test results then were compared with results from an earlier test of a 1997 Camry with its original-equipment parts intact. Both the Camry vehicles tested performed well in 40 mph frontal offset impacts. Both earned good crash worthiness ratings according to the institute’s evaluation procedures (earlier tests have been conducted on a 1987 Ford Escort, and a 1995 Vauxhall Astra in England with similar results). “There essentially was no difference in crash worthiness performance. In both cases, the vehicles were rated good. The cosmetic parts didn’t influence the results,” Brian O’Neill, president of the IIHS says. Naturally, the institute is wholly supported by automobile insurers.

Cost-saving or efficiency loss

According to a recent survey by Industrial Marketing Research in the U.S., 400 independent and 100 dealer affiliated collision repair shops claim that non-OEM parts take 34% more time to fit correctly, and have a return rate for vehicles repaired that is nearly twice that of OEM crash parts. This study was commissioned by Ford and General Motors.

Clearly there is an opportunity in Canada for some organization to step up and set standards for parts in general, so consumers will know exactly what they are getting, although most would caution against provincial legislatures smothering the industry with regulation. “I don’t think the government can do a better job policing than the industry can,” Dalla Corte says. “You can’t wander in piecemeal. You’re either in or out, and they’d have to be in all the way. I don’t see the advantage.”

Squire argues that government intervention could lead to a regulated monopoly. “If you take the position that you are never going to use anything but original parts, the OEM manufacturer has a monopoly. That’s not a good practice. We have an obligation to safety, and we’ve got to control pricing.”

Squire says that policing is up to the industry. Co-operators, for example, backs the use of alternative crash parts with a warranty, which is not included with OEM parts. “We make the effort t o do the right thing and then we guarantee it. There’s no incentive to use [inferior] parts.”

Still, a national certification program similar to the Washington-based Certified Automotive Parts Association (CAPA) is a good idea according to Mercanti, provided that it is weighted by an independent third party such as Anderson Consulting or KPMG. “This would make the business easier,” he says.

Last year, the ratio of complaints to the 2.4 million parts CAPA certified amounted to .08% according to the association’s 1999 annual report. Approximately 78% of complaints were filed by body shops, with close to 25% of all complaints involving poor fit.

But, while a national certification program may make business “easier”, it is by no means “liability proof” as the State Farm case clearly illustrates. Described positively as the “grand daddy” of certification programs by Kaskavaltzis, CAPA, which certifies a broad range of non-load bearing metal and plastic parts, was founded in 1987 by approximately 24 insurance companies and is reported to receive close to 50% of its funding from the insurance industry, making it an easy target in litigation.

In the State Farm case the jury heard of at least one known incident where a non-certified part received a CAPA label, and read a rough draft of the memo from State Farm to CAPA saying, “look through all your old stuff and dump it. You won’t ever miss it.”

Testing beyond certification

Dominion Insurance insists on CAPA certification. But even here there are strict limitations. “We want to make sure aftermarket parts have gone through some testing,” Dalla Corte says. “As a minimum, CAPA certification brings a certain level of confidence. But it shouldn’t be relied on singularly as a means of determining whether the part should be used. It takes a skilled technician to know whether a part fits. If the part doesn’t fit, even if it is CAPA certified, don’t use it.”

It is unclear what the impact of Canadian litigation will have on the use of aftermarket parts in this country. The standard to launch a class action suit is higher in Canada, and most of the award against State Farm was punitive in terms of communication. “If everything follows the State Farm decision, there will be a price increase that customers will have to deal with. But there is a lot of road to travel,” Dalla Corte notes.

How much of an increase is open to speculation.

In the meantime, one of the more positive aspects of the State Farm judgement is an obligation to communicate. “The onus as insurers is to communicate better with our customers,” Dalla Corte points out. “There needs to be a little more time spent saying, ‘here’s your estimate, here’s what we’re going to do, and here’s what we’re going to use’.”

Of course, even communication can be a double-edged sword. “You talk to one body shop who will say these parts are no good. Another will swear by aftermarket parts,” according to Kaskavaltzis. “The consumer doesn’t want aftermarket parts until they are the ones paying for the repair.”