Illinois Supreme Court Reverses Class Action Against State Farm

August 19, 2005

The Illinois Supreme Court has reversed a prior state court’s $1.06 billion judgment in a class action against State Farm Insurance over the use of so-called aftermarket auto parts for repairs.

The high court decision overturning the lower court ruling in (Avery, v. State Farm) held that the national class was improperly certified in 48 states. It threw out all of the monetary damages awarded by lower courts and ruled that the use of aftermarket auto parts did not breach the insurance company’s contract with its policyholders.

Avery – a nationwide class action lawsuit – originally was filed in Illinois state court during 1998 on behalf of all automobile insurance policyholders (in Illinois and nearly every other state). The complaint involved insurer use of generic auto collision repair parts, which are also known as “aftermarket” or “non-OEM” (original equipment manufacturer) parts.

In the 1998 class action suit, a Williamson County, Illinois judge awarded a total of $1.18 billion in damages: $456 million for breach of contract, $600 million for punitive damages under the consumer fraud law and $130 million for disgorgement damages – representing direct savings realized by State Farm from use of non-OEM parts.

An intermediate appellate court later reversed the award of disgorgement damages and upheld the rest, for a total judgment of $1.06 billion.

The class claims were based on the allegation that the insurers specified non-OEM parts in preparing estimates for repairs – even though other states (e.g., Hawaii and Massachusetts) in which the insurers issued auto policies permitted or even required the use of non-OEM parts.

Insurers and business groups hailed the reversal.

The American Insurance Association called the decision is “a win for all consumers,” claiming it will foster price competition in automotive repair costs.

“Today the court addressed all of the harm that was done to consumers in the state of Illinois and in states nationwide, including the many issues arising out of the establishment of the national class action, and Illinois imposing its public policy on the legislatures and insurance regulators of other states,” stated David Snyder, AIA vice president and assistant general counsel.

“What this ruling means is that, under Illinois law, use of like kind and quality, competitively priced aftermarket repair parts is recognized by the insurance code and not categorically prohibited.”

Snyder maintained that aftermarket parts have helped inject competitive pricing into physical damage coverages, both collision and comprehensive, that account for over one-half of the premiums paid for by consumers.

“Illinois consumers will now benefit as consumers in other states where regulators and legislators made the determination to allow non-OEM parts to assist in keeping down repair costs,” said Snyder.

Snyder claimed that the costs of some sheet metal parts rose by nearly 300 percent within a few months of the original decision, and car companies were charging 60 percent more than the distributors selling identical certified aftermarket parts.”

The United States Chamber of Commerce also welcomed the ruling.

“This is a victory for businesses and it sends a strong signal that class action abuse won’t be tolerated,” said Robin Conrad, senior vice president of the National Chamber Litigation Center, the Chamber’s public policy law firm, which filed an amicus brief supporting class decertification. “The aggregation of 4.7 million claims in one lawsuit defied common sense and violated State Farm’s due process rights. Had this case gone forward as a class action, it would have been a travesty of justice.”

“This case represented an extreme departure from the permissible use of the class action device,” Conrad said. “The improper certification of this case as a class action was responsible for turning Southern Illinois into a class action haven. Hopefully, today’s ruling by the Illinois Supreme Court will signal the end of this long history of exploitation.”

The National Association of Mutual Insurance Companies (NAMIC) used the occasion to call upon lawmakers to establish safeguards for preventing further instances of class action abuse.

“In overturning the trial court’s ruling that State Farm’s use of non-OEM parts violated Illinois’ consumer fraud act, the state supreme court effectively vindicated insurers’ use of non-OEM parts as a cost-effective alternative to OEM parts, the use of which benefits consumers by lowering repair costs and, thus, premiums,” said NAMIC Public Policy Director Robert Detlefsen. “But what is equally significant, from a legal and public policy standpoint, is the supreme court’s core ruling that the case should never have been tried as a class action in the first place.”

The court pointed to glaring differences among the members of the plaintiff class with regard to such fundamental matters as the language in their policy agreements and whether they had actually had non-OEM parts installed in their vehicles. “Accordingly,” the Supreme Court averred, “it was an abuse of discretion for the circuit court to certify plaintiffs’ breach of contract claim as a class action.”

“It’s wonderful that the Illinois Supreme Court has declared that the Avery case should not have gone to trial nearly six years after the trial court’s decision,” Detlefsen said. “But it’s appalling to think that in the meantime, State Farm was forced to spend millions of dollars defending itself from what was essentially an illegitimate lawsuit. Because State Farm is a mutual company, those dollars came directly from the pockets of its policyholders. Even worse was the nationwide moratorium on the use of non-OEM parts that the illegitimate decision effectively imposed, contravening the laws of 47 states that had independently approved insurer’s use of non-OEM parts.”

“All of this could have been avoided,” Detlefsen continued, “if Illinois had a law allowing either party to immediately appeal an adverse class action certification ruling to the state supreme court, with a requirement that the supreme court issue a definitive ruling on the appeal before the case could go to trial. Texas passed such a law three years ago, and the Avery debacle should serve notice to other states that they ought to follow Texas’s lead.”

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