Case considered an attempt to usurp state authority over rate setting
Are insurers violating federal antitrust laws by requiring policyholders to accept repairs using non-OEM replacement parts? Not according to a Georgia judge who sided with insurers in a class action case that began four years ago.
Plaintiffs in the case Gilchrist, et al. v. State Farm Mutual Automobile Insurance Co., et al, spent the last four years arguing in two federal courts that State Farm, Allstate, Nationwide and GEICO conspired to break federal antitrust laws by instituting business policies that restricted policyholders’ repair choices to non-OEM parts. Gilchrist’s original three plaintiffs—Linda Gilchrist, Joanne Zipperer and Jackie Valentine—filed their case in 2000. Along with allegations of conspiring to break federal law, plaintiffs also accused insurers of creating and financing the Certified Auto Parts Association (CAPA) to “promote inferior crash parts as acceptable substitutes for OEM parts, thereby advancing the anticompetitive conspiracy.”
Plaintiffs sought damages for alleged premium overcharges, claiming insurers charged consumers for quality repair work while actually delivering sub-par repairs due to the inclusion of low quality, non-OEM parts.
On Nov. 18, 2004, the U.S. Court of Appeals for the Eleventh Circuit in Atlanta rejected their argument and dismissed their case after siding with insurers who contended that federal antitrust laws could not be applied to insurance companies. Insurers roundly praised the court’s decision.
Dick Luedke, a spokesman for State Farm, stated it correctly reaffirmed the rights of states to regulate insurers. Robert Hurns, manager, legislative database and counsel for the Property Casualty Insurers Association of America (PCI), similarly noted, “State regulators, not courts or juries, have the expertise in these issues and are clearly in the best position to make decisions about these matters.”
Speaking with ABRN, Hurns characterized the case as “part of a trend” of consumers fighting the use of non-OEM parts. “In the past they alleged they suffered diminished value,” says Hurns, “Now they’re focusing on premium ratings.” PCI believes questions surrounding the quality of non-OEM parts should not be the subject of class action suits. “This is an individual issue. It should be treated on an individual basis,” he says.
In November 2002, the U.S. District Court for the Northern District of Florida certified Gilchrist as a class action suit. That decision added 70 million plaintiffs, defined by the court as policyholders who paid premiums to any of the four insurers dating back to April 18, 1996. Insurers appealed this decision to the federal appeals court. During oral arguments, the court decided the McCarran-Ferguson Act—a 1945 federal law restricting regulations of insurance companies to state governments—prevented either federal court from having jurisdiction over the case and instructed the district court to dismiss the suit.
At the core of this decision was the court’s interpretation of language within the McCarran-Ferguson Act. This language outlines three criteria insurance activities must meet in order to avoid falling under federal antitrust laws. McCarran-Ferguson states that insurance activities must (1) be part of the “business of insurance,” (2) be regulated by state law and (3) not constitute a boycott of “unrelated transactions.”
Gilchrist had claimed (and the district court agreed) that the use of non-OEM parts was not a protected part of the “business of insurance.” The appeals court disagreed. In his decision, Judge James Hill noted that the U.S. Supreme Court had “held conclusively that both rate-making and the performance of an insurance contract—including the adjustment of claims—constitute the business of insurance.” Hill added, “Rate-making and the performance of contractual obligations are fundamental to the business of insurance because they focus on the relationship between the insurance company and its policyholders.”
The court also dismissed Gilchrist’s claim that insurers violated the third McCarran-Ferguson criteria by boycotting “unrelated transactions.” Gilchrist argued that insurers boycotted these transactions when they refused to “deal with parts manufacturers selling crash parts of like kind and quality as those originally provided by automobile manufacturers, and capable of restoring class members’ vehicles to pre-loss condition.” The court found that purchasing replacement parts qualifies as a “primary transaction.”
As for Gilchrist’s claim that insurers had engaged in a conspiracy, the court soundly rejected this argument, calling it a “disguised” attempt to avoid McCarran-Ferguson through unfounded attacks on legitimate premium and rate-making activities. Hill called Gilchrist’s charges “an indirect allegation of price-fixing and, therefore, a direct attack on the integrity of insurers’ rate-making.” In his decision, Hill also noted that the court had seen this argument used before and always rejected it.
Plaintiffs have not announced whether they plan to re-file the suit.
