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Illinois Jury Levies $456M Fine Against Auto Insurance Firm

By Davan Maharaj
LOS ANGELES TIMES -- In a major setback for the auto insurance industry, an Illinois jury Monday ordered the nation’s largest car insurer to pay $456 million for allegedly cheating millions of customers by ordering body shops to fix their cars with low-cost generic replacement parts.

The award against State Farm Mutual Automobile Insurance Co. could grow even larger if the judge in the case grants lawyers’ request for an additional $4 billion to satisfy fraud claims. The judge is expected to rule later this week.

The trial is being closely watched by plaintiffs’ attorneys, government regulators and consumer activists who during the last decade have challenged the auto insurance industry’s preference for so-called aftermarket parts to repair damaged vehicles.

Many car owners say installing generic parts does not restore their vehicles to pre-loss conditions after accidents, which hurts the resale value. Others have claimed in lawsuits that aftermarket parts often look shabby, perform poorly and fail to meet manufacturers’ safety standards, thereby increasing the risks of injuries to passengers.

State Farm, which argues that generic replacement parts are not substandard and save consumers money, vowed to appeal.

“We consider this a major setback for our policyholders,” said Bill Sirola, a State Farm spokesman. “If this verdict is allowed to stand, automakers will have monopoly power to price their parts at whatever price they want. The cost of repairs going up will lead to higher premiums.”

State Farm, which has 37 million policyholders, insures one out of every five vehicles on the road.

If the award against State Farm remains intact, analysts and insurance groups say consumers can expect to see their insurance premiums rise in the next few years.

“If our society requires insurers to use (factory original parts), then society will be required to pay the difference in cost,” said Harry Fong, an analyst with Deutsche Bank in New York.

The Illinois case was the first to go to trial, but Monday’s verdict by the Marion, Ill., jury could bolster more than a dozen pending lawsuits.