How Aftermarket Parts Affect Your Car Insurance
Everyone likes to save a few bucks these days – including insurance companies. When making car repairs, there’s a temptation to purchase generic parts, often referred to as “aftermarket” or “performance” parts, rather than the parts made by the original equipment manufacturer (OEM), which can be much more expensive.
Before you make your choice on this short-term gain, be sure to review the coverage you have in your car insurance policy. If you or your mechanic have installed aftermarket parts during repairs and your insurer isn’t notified, there’s a chance that your coverage will change. In other words, insurance companies like aftermarket parts as much as the budget-conscious consumer does because they don’t necessarily have to insure them.
This isn’t to say that high-quality aftermarket parts can’t be found or are never the best option. In fact, sometimes they’re the only option. If your car is older, you may have little choice but to use aftermarket parts for some repairs. According to Tom Torbjornsen, the host of America’s Car Show, 80 percent of auto body shops now use aftermarket parts anyway. And while the quality of some parts can be sketchy, most parts are equal to, if not better than, OEM parts and tend to be more readily available.
And it’s definitely true that aftermarket parts can save car owners a lot of money. According to 2012 figures from the National Association of Mutual Insurance Companies, aftermarket parts cost 26 percent to 50 percent less than OEM parts, a price difference that saves consumers between $1.5 billion and $2.4 billion each year in repair costs.
Types of Insurance Coverage
Before getting into more valuation details, let’s first discuss some basic terminology about the kinds of coverage available. In general, there are four broad categories of insurance: bodily injury liability, property damage liability, collision and comprehensive. I’ll go over them briefly here, but you can find a more detailed explanation in TSD’s car insurance guide.
- Bodily Injury (BI) Liability: This pays for medical expenses, legal expenses, and judgments against you when you are responsible for an accident that causes the injury or death of another person.
- Property Damage (PD) Liability: This covers damages your vehicle causes to the property of other people, not to the people themselves. In most cases, the property involves another car, but it can also include another person’s yard, fence or house.
- Collision: Covers the damage to your vehicle resulting from a collision, regardless of who is responsible. This insurance requires the insured to pay an out-of-pocket deductible before coverage kicks in.
- Comprehensive Physical Damage: Pays for damage to your car that is not the result of an auto accident, such as theft, vandalism, fire, hail or natural disasters. This also requires you to meet a deductible, and will only pay as much as the car was worth before sustaining the damage.
In almost every state, all licensed drivers are required to have auto insurance, especially liability insurance. There are also several other types of optional products, such as Medical Payments Insurance that covers the medical bills of you and your passengers after an auto accident, regardless of who’s at fault.
Aftermarket Parts Insurance Coverage
One of these extra insurance products involves the coverage of aftermarket and performance parts, called a Custom Parts and Equipment (CPE) policy. For those with comprehensive or collision insurance, most states mandate that $500 to $1,000 in coverage is provided for CPE parts, which are defined as permanent parts that improve the look and performance of your vehicle but were not installed by the manufacturer.
That $1,000, however, doesn’t go very far for most CPE upgrades. Many insurers will require customers to purchase additional coverage for up to $5,000 in CPE parts. Some of the most common upgrades or additions covered by CPE policies include custom paint jobs, extra chrome detailing, alloy or aluminum wheels and wheel covers, special tires, t-top roofs, camper tops, antitheft devices and permanent upgrades to stereo equipment.
In the event of a claim, contact your insurance company directly, tell the agent what specific aftermarket parts you have installed and what would be covered. Some pertinent questions should be:
- What percentage of the aftermarket parts’ value be covered?
- Will these aftermarket parts be covered at full replacement value, at the actual cost paid for the parts or at the cost minus depreciation to date?
- Is there a dollar limit to the amount of aftermarket parts covered under the policy?
- What is the insurer’s policy on using aftermarket parts for certain repair jobs?
Calculating actual cash value (ACV) is often the trickiest part of the whole claims process, and one that often makes claimants feel helpless when dealing with fast-talking claims adjusters. But there are some things you can do to make sure you get the fairest possible market value out of the very subjective insurance valuation process. Trent discusses in a previous post, ‘Twelve Ways to Make Your Car a Better Investment.’
When claims adjusters examine your car parts insurance claim, they rely on a network of collision repair firms they’ve worked with before, plus their company’s own proprietary formulas, to appraise your vehicle. If, after determining the pre-collision value, the repair estimate falls between 70 percent and 75 percent of the car’s appraised value, they will declare it “totaled,” meaning the cost of repairs is no longer justifiable.
At that point, they can pay you for the appraised value of the total insured loss, but only for the parts that were included on the original policy. If you paid $4,000 for aftermarket or performance upgrades but didn’t notify the insurer, then those parts are not covered, and all you stand to recoup would be the scrap value.
You don’t have to take the adjuster’s word for it, though. Here are some actions you can take if you disagree with the adjuster’s assessment:
- Keep track of the mileage. In case it becomes difficult to determine the mileage after an accident, keep a log of how often you drive.
- Maintain a paper trail. If you have records and receipts that show you’ve had the oil and other fluids changed regularly and had your mechanic perform routine maintenance on your car, copy those records to show the car was in good condition.
- Look at value books. You may have heard about trying to find out the “blue book” value of a used vehicle. That comes from the “Kelley Blue Book,” a well-known guide to help determine the value of your car’s exact make, model and year. Other good sites include the National Automobile Dealers Association (NADA), Edmunds.com or AutoTrader.com.
- Hire your own appraiser. Get someone who is not part of your insurance company’s auto body network to look at your vehicle with fresh eyes for a second opinion.
In general, using aftermarket parts will not be a red flag for an insurance company or an excuse to raise your premiums; although you may need to purchase extra insurance if your modifications are significant. As long as you communicate with your insurer and keep them informed of any modifications you make to your auto, aftermarket parts can lead to big savings for both you and the insurance company should a claim arise.
And as with almost every insurance situation, the regulations are different in nearly all 50 states, so always be sure to contact your local insurance commissioner’s office to find out how your metropolitan area handles aftermarket car part insurance claims. Also, be sure to check out this handy Insurance Information Institute page listing the disclosure requirements for aftermarket part usage in every state.