American Family loses appeal

Insurer found guilty of not paying for complete repairs

by Anne Koppel Conway

The Missouri Court of Appeals for the Western District has reinstated a $17 million jury award in an aftermarket parts (AMPs) lawsuit – Nicholas H. Smith, et al. v. American Family Mutual Insurance Company. The “et al.” in the class-action is a somewhat lengthy list of plaintiffs, representing some 316,000 Missouri residents who filed repair claims against the insurer between May 1990 and December 2004.

Finding that the Jackson County Circuit Court had erred in its ruling to set aside the trial court’s jury award in the case, the Missouri Court of Appeals decision, signed by Harold L. Lowenstein, presiding judge, said, "The Plaintiffs presented sufficient evidence for a reasonable juror to conclude that aftermarket parts are not of like kind and quality to OEM parts.”

And also significant in the appellate decision: “American Family breached its contracts with policyholders to restore their vehicles to pre-loss condition by devising and implementing a practice that results in payment of claims based on:

“The systematic specification of ’inferior’ non-OEM crash parts for repairs.”

In the ruling, the appeals judges pointed out that even one of American Family’s experts, Dr. Jason Hertzberg, an engineering consultant, admitted that in “salt spray” tests, aftermarket parts consistently developed “red rust” while OEM parts did not. He further testified that the steel in OEM parts was of a higher carbon, higher strength, and higher hardness value than AMPs.

The appeals court said the "evidence established that, because of the nature of the engineering, production, and materials, aftermarket parts were inferior in fit and performance and, therefore, not of like kind and quality to [original] parts."

"That Plaintiffs sought to establish that non-[original] aftermarket parts are categorically inferior because of the engineering and manufacturing process and the materials employed, not that individual parts were individually defective, does not undermine their proof," Lowenstein wrote. The other appellate judges James Smart Jr. and Vic Howard concurred.

The appellate decision states: “American Family now uses computer software to write the estimates. The software automatically specified non-OEM crash parts for automobiles of certain model years.

“The systematic omission of specific ‘necessary’ repairs from estimates.”

This same computer program identifies repairs the vehicle will require. The estimating software systematically excludes from estimates certain repairs deemed necessary by industry standards [I-CAR]. Such repairs include seatbelt safety tests, wheel alignments, adjusting the aim of headlamps and corrosion protection.” . . .

“The record was replete with evidence from which a reasonable juror could find that American Family knew the omitted repairs were required but left undone.”

A possible landmark part of the decision: The breach of contract occurred “when American Family cut a check to its policyholders based on an estimate specifying” the use of AMPs, not upon the actual use of AMPs, as in Avery v. State Farm Mutual Automobile Insurance Co.

This American Family case has been ping-ponged around a bit.

The case was originally filed in 2000 and became a national class action in 2001. However in 2003 the Missouri Supreme Court ruled that the findings could only apply to Missouri policyholders because other states differed in how they regulate insurance company's use of AMPs.

In the March 2007 trial court verdict, jurors determined that American Family allowed repair shops to use inferior, third-party replacement parts to repair their policyholders' damaged vehicles and awarded $17 million to the plaintiffs. Breaking the amount down: For the AMPs breach of contract claim, the jury found damages in the amount of $13,118,325. On the second count, for the omitted repairs breach of contract claim, the jury awarded damages of $4,274,112.

When the Madison, Wisconsin, based insurer appealed the decision, Jackson County Circuit Court Judge Edith Messina overturned the lower court’s jury verdict saying the plaintiffs had not adequately proved that AMPs were inferior.

At the appellate level American Family cross-appealed, asserting evidence and jury instruction error as the basis for a new trial, and asked that the class-action be decertified. The insurer’s cross-appeal was denied by the appellate court.

In ruling that the County Circuit Court judge was wrong, the Missouri Court of Appeals said in its decision, “Plaintiffs’ experts’ testimony was subject to careful consideration by the trial court, and [the appellate court] cannot find an abuse of discretion in the trial court’s disposition of these issues. [American Family’s] point denied.”

The case now returns to the trial court so that this lower court can determine how the $17M is to be distributed. This court will also determine prejudgment interest and attorneys’ fees. The interest in this long-running case could be sizeable.

Regarding the Court of Appeals decision, "It’s super and long overdue. It’s the court’s recognition of the importance of treating insureds in good faith.”—Michael Waldeck

The case has no federal jurisdiction, so if the case goes to Missouri’s highest court, that will be it.

_____________________

Stay tuned to the Collision Standard to see what the Missouri Supreme Court decides to do.