Insurers Bristling at New California Aftermarket Parts Rules

New rules in California placing heavier regulations on insurance companies when their drivers use generic parts in car repairs were passed late last week, sparking concern from coverage providers who say those regulations could send repair costs and premiums upward.

The regulations from the California Department of Insurance (CDI), which were approved Jan. 4, contain new provisions including requirements that insurers:

– Base estimates on auto repairers’ “accepted trade standards” set by the Bureau of Automotive Repair
– Warrant that the aftermarket parts used in repairs are at least equal to the original equipment manufacturer’s (OEM) parts in terms of kind, quality, safety, fit and performance
– Do not use, and notify distributors of, parts found to be below OEM quality

Insurance companies value the use of aftermarket parts, also known as non-original equipment manufacturer (non-OEM) parts, because they are less pricey than OEM parts provided by auto manufacturers.

The Property Casualty Insurers Association of America (PCI) estimates that aftermarket parts saved the industry $2.2 billion in insurance costs in 2010. PCI says that OEM parts were between 26 percent and 50 percent pricier than non-OEM parts that year and often have shorter warranties.

The CDI said in a statement said that the new regulations were made after investigations into consumer complaints that led the office to the conclusion that “defective or otherwise non-compliant aftermarket parts continued to infiltrate the repair process due to insurers’ failure to perform the necessary steps to improve public safety.”

Insurance Associations Not Happy with New Regulations

The new set of regulations “micromanages the repair process” according to Armand Feliciano, vice president for PCI affiliate Association of California Insurance Companies (ACIC). He said that the current claims-based repair work encourages a “natural back and forth between the insurers and auto repairers” to arrive at a final estimate for repair costs.

“One of our primary concerns is that these regulations are really designed to take away the flexibility of being able to negotiate a fair price for auto repairs,” Feliciano said in an interview with Online Auto Insurance News (OAIN). “They don’t allow us to deviate from what the auto repairers want—and they’re not necessarily right all the time.”

The rules not only tip that relationship toward auto repairers but completely empowers them over insurers, according to Nicole Mahrt Ganley, PCI’s public affairs director for the western U.S.

“The language in here that says we can’t deviate from ‘trade standards’—it’s basically a blank check,” she said in an interview with OAIN. “It lets auto repairers do whatever they want.”

Feliciano also attacked the regulations’ language as being murky.

“And what are ‘accepted trade standards’?” he said. “The trade standards in LA aren’t the same in smaller cities like, say, Sacramento.”

The warranty provision also places a heavy burden on insurers that will “just complicate things,” according to Feliciano.

“We don’t make aftermarket parts,” he said. “The manufacturers should be on the hook for aftermarket parts. Why you want to extend that to insurers is beyond us.”

Safety a Sticking Point Between Regulators, Insurers

Non-OEM parts generally include the cosmetic parts of a vehicle, also called crash parts, which include bumpers and grills.

Dave Jones, commissioner for the CDI, said that defective non-OEM parts prompted the need for rules strengthening “existing protections” for drivers.

“This also places greater accountability on the insurer when they require use of an aftermarket replacement part so that damaged automobiles are repaired properly and safely,” Jones said in a statement.

Jones laid blame on insurance carriers in letting low-quality, non-OEM parts “infiltrate the repair process,” as complaints from auto repairers and motorists pressed the need for beefed-up regulations.

Those regulations, he said, address “insurers’ failure to perform the necessary steps to ensure public safety.”

But safety issues are where the parties differ most, according to Feliciano, who said that a handful of studies have shown that non-OEM parts have a minimal link to safety because they are generally cosmetic in nature.

According to the Insurance Institute for Highway Safety (IIHS), there’s little correlation between most of a car’s cosmetic parts and the safety of its driver. Furthermore, the Institute’s crash tests that are considered an automotive industry standard showed that non-OEM bumpers, which IIHS said are the cosmetic part that matters most in most collisions, can match OEM bumpers in quality.

For a vehicle’s other crash parts, the difference between OEM and non-OEM parts hold little significance, according to the Institute.

“The source of cosmetic parts is irrelevant to safety because the parts themselves serve no safety or structural function,” the IIHS said in a 2010 newsletter. “They don’t affect how a vehicle holds up in a crash. They merely cover a car like a skin.”

Feliciano said that the new regulations fly in the face of findings like those from the Institute and other established sources.

State Regulations Center on Aftermarket IDs, Disclosures, Consent

Critics of generic parts have pushed hard for more stringent controls of its use in repairs, and the result across the U.S. has been a mixture of rules requiring prior approval and identification whenever non-OEM parts are used.

According to the III, there are typically four requirements placed on aftermarket parts use:

1.  Identification of the manufacturer
2.  Identification of generic parts used during the estimate
3.  Disclosure that such parts are being used in repairs
4.  Prior consent from the driver to use aftermarket parts

Only five states in the U.S. enforce all four regulations—and California is one of them.

The prior consent requirement is the scarcest regulation nationwide, enforced in only 12 states, including California.

The Golden State already has some of the heaviest regulatory environments in the U.S. for aftermarket parts, and the new rules are putting more pressure on insurance companies, according Ganley.

“Insurers are used to operating in a very regulated environment, and we’ll continue to do so,” she said. “But these regulations are unfortunate because they limit consumers’ choices. What happens when an auto repairer requires an OEM part for me and I have an older model car that isn’t compatible? I might have to total the whole car just because of that part.”

Consumers need options during the repair process, according to Feliciano, and those options will narrow if insurance providers lack the authority to propose estimates on their own instead of basing them on repairers’ “trade standards.”

“Think about it like generic drugs,” he said. “Not everyone can afford a Tylenol at $12 a pack, so they should have the right to go to Walgreens at $6 a pack.”

If auto repair costs increase, which insurers predict is likely, the availability of affordable coverage in California is also vulnerable, Ganley said.

“Insurance is based on cost, whether it’s tort cost or repair cost,” she said. “So if the cost of auto repair goes up, that could put upward pressure on premiums.”

Insurers Readying Response, Considering Action

Ganley said that PCI’s official stance against the regulations will be stated in a press release distributed this week.

But that stance will likely repeat what insurance companies have felt about the rules since they were proposed last summer. PCI officials pegged aftermarket parts as a key issue for the industry in 2013.

“A lot of the concerns then are still concerns for us now,” Robert Passmore, a senior director with PCI, said in an interview with OAIN. “These regulations were not necessary.”

The rules go into effect on Jan. 30 and will require compliance by March 30.

In the meantime, PCI and ACIC are exploring options within its “auto committees,” Feliciano said. If action is taken, it will at least partly center on whether or not the regulators have the power to implement such rules.

“Auto repairers have resorted to legislation via the regulatory process,” Feliciano said. “We feel that some of these regulations that have been put into place are outside of what the CDI has the authority to do.”

About Charles Nguyen
Charles Nguyen is an enterprising journalist who reported for Patch.com and the Desert Dispatch and was the editor in chief of the Guardian (the twice-weekly newspaper at the University of California, San Diego) before coming to Online Auto Insurance News.

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