Nearly four years ago, the Illinois Supreme Court dealt whatmany perceived to be a fatal blow to a wave of putative classactions concerning automobile insurers' specification ofnon-original equipment manufacturer parts in the repair of motorvehicles. In Avery v. State Farm Mut. Auto. Ins. Co., 835N.E.2d 801 (Ill. 2005), the Illinois Supreme Court overturned averdict of more than $1.1 billion in a national class actionchallenging State Farm's practice of specifying non-OEM parts thatwere purportedly “categorically inferior” to OEM parts. In vacatingthis verdict, the Illinois Supreme Court held that the merespecification of non-OEM parts in a repair estimate wasinsufficient to establish liability for breach of a contractualpromise to use “like kind and quality” parts, absent evidence thatnon-OEM parts were actually used in the repair of the vehicle, andthat such parts failed to restore the vehicle to its pre-losscondition. The court further noted that the determination of theseissues would require an individual analysis of each vehicle, makingclass certification entirely impracticable.

At the time it was released, the Avery opinion waswidely perceived to be an influential decision that would leadother courts to reject similar efforts to certify class actionspertaining to the use of non-OEM parts. However, a recent decisionby a Missouri appellate court demonstrates that acceptance ofAvery in other jurisdictions may not be as widespread asfirst thought.

Case Review

In Smith v. American Family Mut. Ins. Co., — S.W.3d —,2009 WL 1181490 (Mo. Ct. App. W.D. May 5, 2009), the Missouri Courtof Appeals for the Western District reviewed a class actioninvolving a similar challenge to an automobile insurer's practiceof specifying non-OEM parts in the repair of vehicles, while alsochallenging the insurer's purported practice of failing to specifycertain repair procedures in estimates. The plaintiffs initiallysought to represent a multi-state class. Following an appeal of thetrial court's order certifying the multi-state class, the MissouriSupreme Court narrowed the scope of the class to Missouripolicyholders only, due a conflict in state insurance laws andregulations pertaining to the specification of non-OEM parts.State ex rel. American Family Mut. Ins. Co. v. Clark, 106S.W.3d 483, 485 (Mo. 2003).

After a three-week trial in 2007, a jury returned a verdict ofmore than $17 million in damages. Based upon reasoning similar tothat applied by the Avery court, the trial court in Smith grantedthe defendant insurer's motion for judgment notwithstanding theverdict, holding that the plaintiffs had failed to establish breachof contract or the existence of damages. The trial courtspecifically observed that “to show class-wide breach and damages,”the plaintiffs were “required to compare the aftermarket parts tothe pre-loss condition of parts that the aftermarket parts werereplacing on the class vehicle,” but that the evidence “failed toshow that any aftermarket part was inferior to any part it actuallyreplaced on any class vehicle or was inferior to any part on anyclass vehicle for which an aftermarket part was specified as partof the repair estimate.”

The Missouri Difference

The Missouri Court of Appeals began its analysis by noting thata state insurance regulation required that “where insurers elect topay for non-OEM replacement parts, the parts must be 'at least likekind and quality in terms of fit, quality, and performance to theoriginal manufacturer parts they are replacing.'” The court alsonoted that the Missouri Department of Insurance has interpretedthis rule to create “a legal obligation that insurers pay the costnecessary to return a vehicle to its condition before the damage,that is, to its pre-loss condition.”

Applying this rule, the appeals court concluded that the trialcourt erred in concluding that the plaintiffs were required tocompare the non-OEM parts used on each vehicle to the pre-losscondition of each part being replaced. The court observed that inits review of the class certification decision, the MissouriSupreme Court identified the predominate issue in the case aswhether the defendant insurer “breached its contracts with eachprospective class member when it made payment on policyholders'claims based upon estimates … specifying the use of non-OEM crashparts.” The court therefore opined that under the Supreme Court'sdecision in Clark, “the question of pre-loss condition was not thepredominate question but, rather, an issue of damages and defensesto be addressed after the jury rendered its verdict on thepredominant question.”

The court subsequently noted that in order to “meet the burdenof the predominant question,” plaintiffs were “required toestablish that aftermarket parts were universally inferior to OEMparts; that [the defendant insurer] had a practice of basingestimates for cars older than three years on the cost ofaftermarket parts; and that, in so doing, [the defendant insurer]breached its contract to pay to return the car to its pre-losscondition.” As the insurer did not contest that it based estimateson the cost of aftermarket parts and based the amount it paid torepair vehicles upon these estimates, the court observed that thesole relevant question to be addressed at trial was “whetherplaintiffs established sufficient evidence that aftermarket crashparts are not of like kind and quality to OEM crash parts.”

The court determined that the plaintiffs were able to establishthis point by presenting expert testimony of an engineeringconsultant and professor of mechanical engineering. Viewing theevidence in the light most favorable to the jury's verdict, thecourt held that “such evidence established that, because of thenature of the engineering, production, and materials, aftermarketparts were inferior in fit and performance and, therefore, not oflike kind and quality to OEM parts.”

The court opined that as “plaintiffs' theory was one ofuniversal inferiority, the trial court erred in finding that theplaintiffs were required to demonstrate that any particularaftermarket crash part was specifically inferior to thecorresponding OEM part.” Rather, the court determined that theevidence presented at trial was sufficient “for a reasonable jurorto conclude that aftermarket parts are not of like kind and qualityto OEM parts and that American Family breached its contacts withits policyholders when it paid to return the damaged vehicle topre-loss condition based on the nature and cost of aftermarketparts.” Accordingly, the court reversed the trial court's holdingthat the plaintiffs had not proven breach of contract.

Apples to Apples?

The court next reviewed the trial court's determination that theplaintiffs had failed to prove damages, as “'[t]here could be noshowing of actual damage … unless the aftermarket part that wasinferior to the existing part in its pre-loss condition wasactually used to repair the vehicle's damage.'” The trial court'sdetermination was based upon the Illinois Supreme Court's analysisof the same point in Avery.

The Court of Appeals opined that the present case wasdistinguishable from Avery, as “the breach [in Smith]occurred when [the insurer] cut a check to its policyholders basedon an estimate specifying aftermarket parts, not upon the use ofaftermarket parts, as in Avery.” The court observed thatthe defendant insurer “paid the insured a sum based on a repairestimate,” and that “[w]hether the vehicle was repaired at all, or,if repaired, what materials were used in the repair, was left up tothe policyholder.” As the insurer's contractual obligation wassatisfied upon payment, the court concluded that damages to theclass members were sustained “upon payment of an insufficient sumto return the vehicle to pre-loss condition.” Accordingly, it heldthat “[t]he trial court's ruling asserting that plaintiffs couldonly show damages upon establishing whether an aftermarket part wasactually used was in error.”

In addition to concluding that the trial court erred in grantingjudgment notwithstanding the verdict (JNOV) with regard to thespecification of aftermarket parts, the court also held that thetrial court erred in granting JNOV with regard to the jury'sdetermination that the insurer had omitted certain necessary repairprocedures from the class members' estimates. On this point, thetrial court held that proof of these allegations “require[d] ashowing that the omitted repair procedures were actually not doneand that, as a result, the repair to all the class vehicles was notdone completely satisfactory.”

The trial court concluded that the plaintiffs failed to present“evidence that the repairs were not actually done, only that someof the estimates did not contain an amount specifically designatedfor one or more of these repair procedures.” Similar to itsanalysis of the aftermarket parts claim, the court concluded thatas “the breach occurred at the payment to the insured based on theestimate” and the omission of certain repairs “meant that theestimate did not include the labor and materials necessary toperform the repairs,” the question of “[w]hether the repairs wereactually done is not relevant to whether [the insurer] breachedtheir contract with the insureds by failing to include sufficienttime and materials to pay for all necessary repairs to return thecar to pre-loss condition.” It further observed that testimony bythe insurer's own witnesses was sufficient to support the inferencethat the repairs not specified on an estimate were not actuallyperformed.

In addition to reversing the trial court's decision to grant thedefendant insurer's JNOV, the court also rejected the insurer'scross-appeal of numerous issues decided in the plaintiff's favor,including the insurer's denial of plaintiff's motion to decertify.The insurer contended that decertification was warranted due to theneed to “compare each individualized vehicle's pre-loss conditionto the vehicle's post-loss condition to determine whetheraftermarket parts were, in fact, used to repair the vehicle, and todetermine whether the omitted repairs were actually performed.”Given its rejection of this theory of liability, the court heldthat the insurer's arguments regarding class certification werewithout merit.

Final Comparisons

As noted above, the Missouri Court of Appeals held thatSmith was distinguishable from Avery becauseAvery concerned the installation of aftermarket partsrather than the specification of such parts. In so doing, theSmith court failed to recognize that while the allegationsset forth in the Avery complaints indeed focused upon theinstallation of aftermarket parts (and these allegations remainedan element of plaintiffs' case at trial), the Averyplaintiffs shifted their focus at trial to the specification ofaftermarket parts by the insurer in an effort to make the case moreamenable to class-wide proof. The Illinois Supreme Court rejectedthis theory of liability on the grounds that “any injury resultingfrom non-OEM parts would be inflicted, not by the merespecification of such parts in an estimate, but by the useof the parts in the repair of a vehicle.” Avery, 835 N.E.2d at831.

Therefore, notwithstanding the Missouri Court of Appeals'assertions to the contrary, Smith cannot be viewed asanything less than a repudiation of the Avery court's conclusionthat litigation pertaining to an automobile insurer's designationof aftermarket parts on repair estimates is not amenable to classcertification. Given the amount of damages at issue, it isreasonable to assume that Smith will be appealed to theMissouri Supreme Court. If the court accepts review of the case,then its ultimate disposition of the matter may ultimatelydetermine whether Smith has the potential to encourage a“second wave” of class-action litigation against automobileinsurers pertaining to the repair of insured vehicles.