Berry v. State Farm Mut. Auto. Ins.

• Decision Date: 06 January 2000
• Citation: 9 S.W.3d 884
• Parties: (Tex.App.-Austin 2000) Robert D. Berry and Andrew Dudney, Appellants v. State Farm Mutual Automobile Insurance Company; Texas Farmers Insurance Company; and Mid-Century Insurance Company of Texas, Appellees NO. 03-98-00718-CV
• Court: Texas Court of Appeals

Page 884

9 S.W.3d 884 (Tex.App.-Austin 2000)

Robert D. Berry and Andrew Dudney, Appellants v. State Farm Mutual Automobile Insurance Company; Texas Farmers Insurance Company; and Mid-Century Insurance Company of Texas, Appellees

NO. 03-98-00718-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

January 6, 2000

From The District Court Of Travis County, 53rd Judicial District, No. 96-02899, Honorable F. Scott McCown, Judge Presiding

Affirmed

[Copyrighted Material Omitted]

Before Chief Justice Aboussie, Justices Kidd and B. A. Smith

Mack Kidd, Justice

Appellants Robert D. Berry and Andrew Dudney sued appellees, State Farm Mutual Automobile Insurance Company, Texas Farmers Insurance Company, and Mid-Century Insurance Company of Texas (collectively, "the insurers"), for allegedly violating article 5.07-1 of the Texas Insurance Code by refusing to cover the full cost of original manufacturer replacement parts pursuant to the claims appellants filed under their standard Texas personal automobile insurance policies. See Tex. Ins. Code Ann. art. 5.07-1 (West Supp. 2000). Both sides moved for summary judgment. The trial court granted the insurers' motion for summary judgment and denied appellants' motion on grounds that Berry and Dudney had failed to plead facts establishing a cause of action under article 5.07-1. Berry and Dudney now appeal the trial court's decision, challenging its construction of the statute. We will affirm the judgment.

Statutory Background

The sole issue in this appeal involves the proper construction of article 5.07-1 of the Texas Insurance Code, subsection (a) of which provides as follows:

Repair of Motor Vehicles; Disclosure of Consumer Information

(a)Except as provided by rules duly promulgated by the commissioner, under an auto insurance policy that is delivered, issued for delivery, or renewed in this state an insurer may not, directly or indirectly, limit its coverage under a policy covering damage to a motor vehicle by specifying the brand, type, kind, age, vendor, supplier, or condition of parts or products that may be used to repair the vehicle or by limiting the beneficiary of the policy from selecting a repair person or facility to repair damage to the motor vehicle covered under the policy.

Tex. Ins. Code Ann. art. 5.07-1(a) (West Supp. 2000). This provision was an amendment to a 1991 insurance reform bill designed to restructure the regulation of the insurance industry in Texas. See Act of May 2, 1991, 72d Leg., R.S, ch. 242, 1991 Tex. Gen. Laws 939. Article 5.07-1, in particular, was enacted in response to the perceived unfairness of the claims-settlement practices of many automobile insurance companies. Specifically, it appears that insurance companies were regularly forcing policyholders to patronize only certain designated repair shops as a condition of coverage.¹ Thus, policyholders could not choose where to have the repairs made if they wished to have the bill paid by their insurance company. The Legislature's committee hearings and floor debates indicate that article 5.07-1 was largely motivated by a desire to stop this practice and thereby provide policyholders with the freedom to choose where to have their automobiles repaired, as well as to encourage competitive bidding among various repair shops. See Hearing on Tex. H.B. ² Before House Comm. on Ins., 72d Leg., R.S. (April 2, 1991) (tape available from House Committee Coordinator's Office); Hearing on Tex. S.B. 1303 Before Senate Comm. on Econ. Dev., 72d Leg., R.S. (April 4, 1991) (tape available from Senate Staff Services Office); Debates on Tex. H.B. 2 on the Floor of the House, 72d Leg., R.S. (May 1 and May 27, 1991) (tapes available from House Committee Coordinator's Office).

A secondary motivation behind article 5.07-1, and the one with which we are concerned here, was a desire to give policyholders a choice of what parts to use in making the repairs. In the automotive industry, there are three general classes of replacement parts. The first class is comprised of new parts made by or on behalf of the automobile's original manufacturer. These are commonly referred to as new Original Equipment Manufacturer parts or "OEM parts." The second class of parts, including used, reconditioned, recycled, and salvaged OEM parts, is normally referred to as used parts. The third class includes aftermarket parts or those parts that are not made or used by the automobile's original manufacturer. These aftermarket parts, along with used parts, are normally collectively referred to as "non-OEM" parts.2

Until recent years, repairing automobiles with non-OEM parts was not an option because as a practical matter, the only available replacement parts were those produced by or on behalf of the automobile's original manufacturer. But recently, the aftermarket parts industry has flourished and insurers nationwide have since routinely used the price of non-OEM parts as a basis to calculate the amount they will pay for the replacement parts used in repairs. Because these non-OEM parts are often significantly less expensive than new OEM parts, insurance companies are able to save millions of dollars each year by this practice.³

Although the use of non-OEM parts in automobile repairs has been economically beneficial to insurers, the widespread use of these parts has raised many concerns that are important in framing this dispute. Many of the serious problems associated with the use of non-OEM parts were presented to the Legislature in committee hearings and floor debates during the 1991 legislative session. The House and Senate committees heard substantial testimony indicating that many non-OEM parts consistently fail to provide the same fit, quality, and safety as their new OEM counterparts. See Hearing on Tex. H.B. 2079 Before House Comm. on Ins., 72d Leg., R.S. (April 2, 1991) (tape available from House Committee Coordinator's Office); Hearing on Tex. S.B. 1303 Before Senate Comm. on Econ. Dev., 72d Leg., R.S. (April 4, 1991) (tape available from Senate Staff Services Office). According to many of the witnesses and the sponsors of each bill, these parts are often made according to different specifications and frequently donot fit the automobiles for which they are intended; are more likely to rust or corrode due to inadequate priming and corrosion protection; and are often structurally inferior, providing less safety protection in collisions than new OEM parts. See Hearing on Tex. S.B. 1303 Before Senate Comm. on Econ. Dev., 72d Leg., R.S. (April 4, 1991) (tape available from Senate Staff Services Office). Of particular concern is the use of non-OEM "crash parts" such as hoods, bumpers, and fenders. Apparently, these parts often are not tested in accordance with federal safety regulations, and their inferior performance in collisions is potentially life-threatening. Furthermore, it appears that repairs made with non-OEM parts often void existing warranties and reduce the vehicle's resale value.

At the time the Legislature first heard these concerns, it was considering two related pieces of legislation, House Bill 2079 and Senate Bill 1303. See Tex. H.B. 2079, 72d Leg., R.S. (1991); Tex. S.B. 1303, 72d Leg., R.S. (1991). Although both bills ultimately failed to pass, they were important precursors to the amendment to House Bill 2 which became codified as article 5.07-1. See Act of May 2, 1991, 72d Leg., R.S., ch. 242, 2.11, 1991 Tex. Gen. Laws 939, 958, since amended by Act of April 28, 1997, 75th Leg., R.S., ch. 399, 1, 1997 Tex. Gen. Laws 1637, 1637-38, codified at Tex. Ins. Code Ann. art. 5.07-1 (West Supp. 2000).

Procedural Background

This specific controversy arises out of two separate insurance claims appellants Berry and Dudney filed with their automobile insurance companies for damages their vehicles sustained in two unrelated traffic accidents. The claims adjusters for the insurers evaluated the damage to Berry's five-year-old van and Dudney's three-year-old car and prepared estimates reflecting the amounts they would pay for the necessary repairs. These estimates included itemized breakdowns indicating the amounts the insurers were willing to pay for each part that needed to be replaced.

Some of the parts listed on the estimates were accompanied by the notation "LKQ," an abbreviation for "like kind and quality." This notation indicated that the insurers were basing the amount of compensation they would provide for the designated part on the price of a non-OEM replacement part rather than a new OEM part. Upon realizing the significance of the "LKQ" designation, Berry and Dudney protested and requested that they be paid the amount of money necessary to have their vehicles repaired with new OEM parts. Mid-Century and State Farm refused and advised Berry and Dudney that if they wanted new OEM parts, Berry and Dudney would be responsible for paying the difference in price. Faced with the choice of accepting non-OEM parts or making up the difference in cost, Berry opted to pay the extra money and have his van's rear bumper and taillight replaced with new OEM parts. Dudney, on the other hand, elected to have his car's front grill, bumper, and pinstriping replaced with non-OEM parts.

Berry and Dudney proceeded to file separate suits against State Farm, Mid-Century, and Texas Farmer's Insurance on their own behalf and on behalf of a proposed plaintiff class of policyholders, alleging, inter alia, breach of contract, breach of the duty of good faith and fair dealing, and violations of the Deceptive Trade Practices Act and the Unfair Claim Settlement Practices Act. See Tex. Bus. & Com. Code 17.46 (West Supp. 2000); Tex. Ins. Code Ann. art. 21.21-2 (West Supp. 2000). They eventually consolidated their suits and abandoned their claims for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Deceptive Trade Practices Act and the Unfair Claim Settlement Practices Act.

Thereafter, a...