No easy fix for California’s replacement parts regs
Why is it that certain parts – bumpers, for instance – are such a headache to repair? The root of the problem is related to something simple: expectations.
Insurers that sell automobile insurance policies agree to return the covered vehicle to its pre-loss mechanical condition in the event of a claim. What, exactly, such an agreement entails is subject to debate.
By way of example, contemplate a scenario in which your car’s bumper has had an unexpected rendezvous with a parking lot lamppost. The bumper is left misshapen and in need of replacement. Parts like your car’s bumper are considered “crash parts.” These are parts of the vehicle that are non-mechanical, non-structural and non-safety related. That means that crash parts tend to serve a cosmetic function and are made of sheet metal or plastic.
Secondary manufacturers around the world are able to reverse-engineer and manufacture your damaged car’s bumper. Replacement parts makers that have the blessing of the vehicle manufacturers are referred to as “original equipment manufacturers,” or OEM, for short. Other crash part manufacturers must be content with being referred to by the less poetic and negative term “non-OEM.”
Names aside, the bottom line is that non-OEM crash parts typically cost between 20 percent and 65 percent less than OEM crash parts. This cost difference makes non-OEM crash parts extremely attractive for cost-conscious repair. To combat their bottom-line disadvantage, OEM manufacturers maintain that the non-OEM parts are not of the same “like, kind and quality” as OEM crash parts.
The cost/quality debate forms the background to expectations and disputes regarding an insurer’s contractual obligation to return your car to its pre-loss condition. For years, meeting expectations concerning crash part replacement has been a flashpoint between insurers, automobile manufacturers and repair shops.
Since 2005, the Legislature in Sacramento has witnessed the introduction of 10 pieces of legislation designed to bend the cost curve away from one industry and toward another. The powerful interests aligned on each side have seen repeatedly that most of these attempts fail in the first step, with the first committee to hear the issue.
Thus, it was with alarm that insurers reacted to a regulatory decision by the California Department of Insurance (CDI) to create a new auto claims world, using its existing scope of devolved authority, by promulgating regulations that remove the incentivize to use non-OEM crash parts.
Regulatory usurpation of legislative matters works real political violence and undeniably is dictatorial in effect. Moreover, the nature of regulatory promulgation allows debate only on the details on a legal product created by government. Regulation can be a premeditated, non-market-based, government-originated effort to create winners and losers by fiat. In contrast, legislative debates are more likely to preserve fairness. For those apparently selected to be losers by the flex of regulatory muscle, the legislative process is understandably preferable.
Yet, before going further, consider again your car’s damaged bumper. When the car goes in for repair there are a variety of options available when it comes to replacing the damaged parts. By law, you have the right to determine where the car is taken for repairs and what specific repairs/parts are used on your vehicle. Thus, you can elect to order replacement parts directly from the factory of the vehicle’s manufacturer. This option tends to be expensive, but in theory, it could be a guarantor of quality.
Given that OEM crash parts are more expensive than non-OEM crash parts, an insurer’s estimate of the appropriate cost of repair may only cover a portion of the cost necessary to install OEM parts. This is because the insurer believes that it can discharge its obligation to return your car to pre-crash condition by using less expensive non-OEM parts.
The CDI characterizes instances in which an insurer’s estimate covers only the cost of less expensive non-OEM parts as “requiring” the use of such parts. The significance of this distinction is borne out by the regulations. The regulations oblige any insurer that “requires” non-OEM parts to guarantee the quality of those parts. The obligation is puzzling, because insurers do not certify, manufacture, replace or otherwise interact in a legally-significant way with parts themselves. Instead, insurers maintain a contractual relationship with their insured to return vehicles to pre-loss condition; a relationship which is only incidentally related to the repair shop/part manufacturer industry’s work on vehicles. Without a concrete nexus to the part itself, insurers are ill-suited to shoulder liability for defects.
By purposely conflating a warranty for repair and a warranty, the CDI has heavily burdened insurers, at the expense of their policyholders.
At the time they were promulgated, insurers speculated the regulations, in effect now for a little over a year, would cause a decline in the use of non-OEM crash parts and an increase in the cost of repairs. Though data bearing out those claims does not yet exist, the merit of those claims is apparent.
For instance, hindering the use of non-OEM parts would be expected to lead to an increase in the use of OEM parts, in turn, leading to an increase in the number of vehicles which reach the dollar threshold at which vehicles are declared a total loss. This is undesirable when one considers that, depending on the value of your car, faced with the prospect of repairing that bumper using an expensive OEM part, it could end up totaled.
To rectify the perceived problem with non-OEM crash part quality, insurers repeatedly have proposed systems by which such parts could be certified as equivalent to OEM quality. These proposals have consistently been opposed by automobile manufacturers and body shops alike. The great irony of their opposition is that it is commonly known that both non-OEM and OEM parts are manufactured overseas, often at the same plant!
Whether intentional or not, the CDI, having acceded to the agenda of the automobile manufacturers and the body shops, has set a course for higher costs and no discernable increase in consumer protection. It is time for the Legislature to step in and to create a uniform system by which crash parts of all kinds are rendered regulatory identical. Perhaps then a bumper repair would be an easy fix.