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Friday, 21 March 2014 01:22

Testimony on MD Parts Bill Involved Reps from WMABA, PCI, LKQ, CAPA, Shops

The MD House Economic Matters committee, on March 14, 2014, voted 16 to 7 for an unfavorable report on HB574. No action has yet been taken on SB487. This article provides some background on the testimony pro and con in front of the committee.

On February 21, 2014, the Washington Metropolitan Auto Body Association (WMABA) testified at the Maryland House Hearing on Economic Matters in support of House Bill 574 (companion to Senate Bill 487), entitled Motor Vehicle Liability Insurance – Replacement Parts for Damaged Motor Vehicles.

During the hour-and-a-half that this bill was discussed in committee, House delegates heard from several panels representing various segments of the collision repair industry.

The first panel consisted of Jordan Hendler, Executive Director of WMABA, Mark Schaech of Mark’s Body Shop, and Joe Tucker of JQ Restorations. Hendler began by expressing her belief that HB574 would provide collision repair shops with the ability to service vehicles with what they deem to be the highest quality parts, stressing the need to trust the collision repair professionals to know what’s best for their customers. “As an industry, collision repairers are the first line of defense and considered the professional when it comes to fixing your car and doing what’s right for you,” she said. Support of this bill is important, Hendler continued, because use of aftermarket parts can impair warranties on newer vehicles, especially those that are less than three years old. Before a collision, a consumer’s warranty is 100 percent intact, but if their vehicle is repaired with aftermarket parts, the warranty is no longer 100 percent intact; portions of the warranty will not be valid because OEM parts were replaced with parts not recommended by the factory warranty.

Additionally, even when the parts vendor or insurer offers a warranty on aftermarket parts, it is non-transferable should the car be sold to another consumer. “Aftermarket parts, in our industry’s perspective, are inferior to genuine parts. We have fit, finish and functionality issues, even just for cosmetic purposes,” Hendler reiterated. Another problem Hendler cited with the use of aftermarket parts is that they aren’t full vehicle crash-tested, and according to IIHS 2010 Chief Research Officer, there is a lot of engineering that goes into making a crash protection system, so changing parts may result in the system being unable to function as intended by the manufacturer.

MD code requires shops to inform the consumer when aftermarket parts are used, and most insurers permit customers to opt for using OEM parts instead; however, the customer must pay the difference in price between the parts options.

Speaking to claims that HB574 will lead to higher insurance premiums, Hendler pointed out that though Rhode Island and West Virginia have a three-year prohibition on aftermarket parts and historically higher rates, Indiana has a five-year prohibition and Minnesota has a complete prohibition on aftermarket parts, and both of these states enjoy lower premiums than Maryland. Furthermore, insurers admit that premiums are mostly predicated on the individual driver, their driving record and where the live, in addition to state bodily injury laws. A report by the Property Casualty Insurers Association (PCI) indicates that a complete ban on aftermarket parts would affect premiums by 2.6 percent, or US$24 per year on average. Thus, Hendler concluded, there is no evidence of a correlation between using OEM parts and increased insurance premiums.

Schaech provided an example of installing an aftermarket radiator which fails and ruins the vehicle’s engine. The engine will not be covered under the manufacturer’s warranty because the failure was caused by the aftermarket part.

Tucker addressed the parts procurement portion of the bill, explaining how DRPs work and comparing insurer-mandated parts procurement to steering, an activity prohibited by MD law.

When asked who is responsible for faulty parts, Schaech noted the shop is liable, and though a shop can ask the consumer to sign a “Hold Harmless” letter if they know they are going against OEM recommendations, he believes it’s not right for shops to be put in this position at all. While Maryland law requires shops to disclose use of aftermarket parts, giving the consumer the option of spending more money to repair their vehicle with OEM parts, many DRP shops are rated on how often they use aftermarket parts in their repairs.

The next panel called to testify consisted of insurer representatives. Noel Patterson began by arguing that half the cost of insurance premiums is dictated by the cost of coverage; if the cost of repairs increases, so will the price of the premiums. She also believes that the use of aftermarket parts promoted competition in the marketplace while allowing insurers to control costs even as they strive to restore the vehicle to its pre-accident condition.

On behalf of USAA and the Maryland Insurers Alliance trade association, Kimberly Robinson said she opposed HB574 because many insurers offer consumers the choice to pay for OEM parts in their repair, allowing for competition between insurance companies in Maryland, but this law would shift the cost of parts, increasing insurers’ expenses and translating into higher premiums “despite other states’ experiences.”

A representative from Liberty Mutual also objected, arguing that customers can get an extended warranty on aftermarket parts by going to DRP shops. This led to a delegate questioning how the insurers can claim that they are restoring a vehicle to its pre-loss condition when they’ve already acknowledged that using aftermarket parts may lead to diminished value, to which the insurer replied that their goal is to restore the vehicle to its previous condition, not its pre-accident value.

Several representatives from LKQ-Keystone were called to testify next, and Bruce Barriano argued that aftermarket parts are the same as OEM parts essentially; the term “aftermarket” simply means the part was made after the vehicle was manufactured. He insisted that the term is not a connotation of inferior quality as aftermarket parts are built brand new and to specifications. Barriano said that aftermarket parts are only cheaper in price, not in quality or safety, and using these parts benefits consumers by keeping insurance costs down.

In contrast, HB574 creates a three-year monopoly which is anti-competitive, allows OEMs to charge whatever they want for these parts, and will clearly lead to increasing rates—“this bill is not without financial implications,” Barriano insisted. Additionally, consumers receive a warranty on the life of LKQ aftermarket parts, plus the shop that repairs the vehicle receives indemnification from LKQ who will defend the collision repair facility if a lawsuit is filed.

Two General Managers of LKQ-Keystone facilities in Maryland, Jim Lohan and Marcel Hoover, spoke about how the businesses they run contribute to the state’s economy, and they claimed that many customers call them seeking an alternative to high-priced OEM parts.

Jack Gillis, executive director of CAPA and on behalf of the Center for Auto Safety, opposes the bill because it limits consumer choice, protects an unfair monopoly, restricts competition, and will increase crash repair costs for Maryland consumers.

In addition to arguing that competition lowers prices, Gillis points out that using OEM parts doesn’t necessarily mean restoring the vehicle to its pre-loss condition, and because OEM parts are frequently recalled, he doesn’t think they should be the only option. Arguing that “there’s nothing wrong with generic products,” he asked why aftermarket parts aren’t banned altogether if they’re substandard and suggests a middle-ground option of requiring aftermarket parts to be functionally equivalent to OEM parts.

The final portion of testimony began with Laura Marta Harding of State Farm who focused on the parts procurement portion of HB574, noting that PartsTrader has only been in effect in Maryland for two weeks. She argued that the collision repair shops control the inputs in PartsTrader, specifying the type of parts they use, and indicated that shops who object to interference in this business are welcome to opt out of the State Farm Select Service Program.

Testifying on behalf of the opposition was Laura Gay, owner of Fort Washington Auto Body and Sullivan’s Auto Body. Gay discussed the decrease in the collision repair business due to advancing technology, admitting she cannot afford to refuse PartsTrader because she needs the business generated by being on State Farm’s DRP.

Lawrence Christiansen of Nationwide estimated that HB574 would increase Nationwide’s premiums by US$12 million over the next six months, and as this insurer only writes around 10 percent of Maryland insurance, the bill would seriously impact the Maryland economy.

Oyango Snell, counsel for PCI, concluded the testimony by pointing out that the bill’s advocates haven’t provided proof of consumer complaints, thus aftermarket parts usage poses no threat to the consumer in his opinion. Aftermarket parts only represent 10 percent of the parts market, so he feels the goal of HB574 seems to be creating even more of a monopoly. He finishes his testimony with the double-edged reminder that “insurance companies don’t sell parts.”

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