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Auto Insurance Giants Accused of Pushing Cheap Repairs

April 17, 2015
Auto Insurance, Insurance
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After an accident, you might assume your vehicle will be repaired using replacement parts from the manufacturer. But in many cases, you would be wrong. The insurance claim process is more complicated.

Working under insurance company agreements, auto shops sometimes use recycled or aftermarket parts to make the repair — and thus the insurance claim — cheaper. It’s a practice that’s been around for decades but now is the focus of a lawsuit pitting hundreds of repair shops in 36 states against dozens of auto insurance companies, including giants State Farm, Geico and Progressive.

In the litigation, recently consolidated in federal court in Florida, shop owners claim that some of the recycled and aftermarket parts are substandard and put consumers at risk.

They also accuse insurers like Allstate of illegally “steering” business elsewhere if the shop won’t buy parts from the insurer’s chosen provider and/or repair the vehicle as the insurer sees fit — even if it’s not the best way to do the work.

“Is there a time for used parts? Yes, there is, especially if a consumer wants to save some money on an out-of-pocket repair,” says Tony Passwater, executive director of the Indiana Auto Body Association, one of the plaintiffs in the lawsuit. “But that’s not what’s happening. It’s being dictated each and every time by the insurer that ‘You must use this, or this is all we’ll pay.’”

That kind of interference, Passwater says, is wrong and oversteps legal boundaries.

Insurers say nothing’s improper

The insurers named as defendants have denied any impropriety. They say they’re only trying to rein in repair costs — and drivers’ insurance premiums.

Michael Barry, vice president of media relations for the Insurance Information Institute, an industry-funded group, says it doesn’t make economic sense for insurers to encourage quick or shoddy repair work.

“I don’t know why an insurer would want to put an unsafe car back on the road,” he says. “They’re still insuring the car and any passengers they have.”

The auto insurers are accused of antitrust violations,  having deals with preferred auto body shops in order to keep prices down, and dictating how repairs are done. Shop owners also say they’re being forced, in some cases, to use substandard repair parts.

At stake are billions of dollars in damages. The shops also want insurance companies to change how they operate, says a representative for John Eaves Jr., the lead attorney representing the body shops.

The 92-page complaint contends that auto insurance companies “have successfully created a ‘market’ system that rewards the body shops that will cut corners so they can increase profits and punishes body shops who are unwilling to compromise the quality or safety of the American consumer’s repair.”

Putting consumers at risk?

The insurance industry’s practices have also caught the attention of regulators including  Mississippi Attorney General Jim Hood, who has joined U.S. Sen. Richard Blumenthal, D-Conn., in asking the Department of Justice for an investigation into the allegations.

In particular, Blumenthal wants to know whether insurers are violating a consent decree signed in 1963 intended to stop auto insurers and repair shops from “corroborating and deceiving customers.”

“Contrary to what consumers may be led to believe by their insurers, repair shops preferred by insurers do not necessarily equate with quality repairs,” Blumenthal wrote in a letter to Attorney General Eric Holder in March. “It seems to be common knowledge among auto repair shops that the best way to land a coveted spot on an insurer’s preferred list is not necessarily by delivering consistent, quality service, but by agreeing to charge below-market labor rates and use cheaper, salvaged, used, or even counterfeit parts of questionable quality and safety.”

Louisiana Attorney General Buddy Caldwell, who sued State Farm over similar allegations in his state last year, says motorists could be driving repaired vehicles that aren’t roadworthy. And that, he says, could be a matter of life and death.

“In some cases, we’ve found that these parts are nothing more than used junkyard parts. In others, we’ve found them to be foreign knock-off parts of questionable quality,” Caldwell says. “Auto repair is not an industry where you can cut corners to save a little money.”

For example, in the lawsuit, attorneys for the repair shops allege that some aftermarket windshields are thinner than the originals and not designed to fit a particular vehicle. In an accident, there’s greater risk that such windshields may “shatter rather than providing protection in a rollover or may simply pop out altogether.”

In another example, tests by Ford showed that non-brand replacement parts, including radiator supports and bumper beams, might not resist the force of a crash as well as the original parts, according to Consumer Reports. Replacement panels that don’t fit well also could slow the speed at which an airbag inflates, Passwater says.

“Most of your credible shops will go ahead and do what’s necessary and not even be paid by the insurance companies,” he says. “It’s putting hardship on shops. They’re doing it and not being paid for it.”

Insurers defend policies

State Farm and other insurers named in the lawsuit have denied accusations of steering and have defended their “direct repair” programs for body shops as a way to keep repair costs and premiums under control. The programs, used by most insurers, go by various names but tend to work in the same way. Insurers sign agreements with auto shops, promising to recommend them to policyholders. In exchange, the shops must follow certain cost and repair guidelines.

Insurers like aftermarket parts for one big reason: They typically cost 26% to 50% less than parts from the original manufacturer, according to the Insurance Information Institute. The Property Casualty Insurers Association of America, a trade group, says their use saves consumers an estimated $1.5 billion in insurance costs each year, keeping vehicle damage premiums from rising by about 3.6%.

“We’re looking to make sure competition is preserved and that insurers have the option to call for (aftermarket) parts,” says Bob Passmore, PCIAA’s assistant vice president of personal lines policy.

As for safety, aftermarket parts are strictly exterior parts, like bumpers and side panels, that have “nothing to do with the operation of the vehicle,” Barry says. “You’re not going to get a generic part if you’re talking about a transmission.”

Most states have laws related to the use of aftermarket parts. In Indiana, for example, policyholders have the right to select the type of parts they want used on their vehicle for five years after the year it was made. Other states require an aftermarket parts disclosure statement from body shops, although Passwater says it’s often “on the last page in small print.”

The aftermarket parts issue is one that’s been litigated many times before — with courts sometimes coming down on the side of insurers and sometimes siding with repair shops and/or consumers. The 1963 consent decree came about following a court tussle between body shops and insurers over many of the same issues in the current lawsuit.

The bottom line

In the latest amended complaint filed in Florida, attorneys for the repair shops acknowledge that not all direct repair programs are bad and stress that most employ “honest, hardworking and professional collision repairers.”

It’s the way these programs are being used by insurers, they say, that needs to change.

Case in point? Express Paint and Body, a repair shop based in Lakeland, Florida. Express had been in Geico’s direct repair program for years, according to the lawsuit, but left in March 2013. Geico “immediately” began badmouthing Express to current and prospective customers, alleging that the shop overcharged and took too long to make repairs, among other things, the suit contends.

The impact was quick — and stark. Revenue from repairs for Geico customers fell from $205,077 in March 2013 to just $29,712 the next month, according to the lawsuit. In all of 2014, the shop made just $85,468 from Geico repairs.

“The actual bottom line to the litigation is that the only person who should make decisions in consultation with the consumer or vehicle owner is the collision repair professional,” Passwater says. Insurance companies, he says, should stay out of it.

Ultimately, it’s important for consumers to know they can take their vehicle to any shop they want, not just those in their insurance company’s network. And you have a right to ask about the parts being used — and to request something different, although you may end up paying for it out of pocket.


Image via iStock.