What's Diminished Value?

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Maybe You Already Know

Have you or a friend ever owned a car that has suffered from diminished value? Are you familiar with the term? Well the concept, represented by the "diminution in value theory" is gaining strength as a major insurance consumer concern. The theory is that damage to an auto often results in a monetary loss in its market value. In other words, there is a monetary difference between a car's pre-accident value and its value after accidental damage has been repaired.

Martha's Tale

Martha Bye-lemun had a personal auto policy that originally covered her '96 Buick Regal. Martha bought a '99 Lexus and, instead of trading in her Buick, she decided to sell it. Martha notified her agent and both cars were listed on her policy.

Martha's research showed that the car should be worth around $7,500. The evening of the same day that Martha put her Buick on her front lawn with a "For Sale" sign in its windshield, a very heavy branch from her oak tree fell and smashed the Buick's roof. The Buick was repaired for $1,700. However, when Martha later sold the car; the most she could get was $6,300.

Types Of Diminished Value

Diminished Value may exist in several forms which are variously defined, including actual, real, perceived, psychological and others. The following terms describe different types of the Diminished Value (DV) concept:

Inherent DV: This is merely a general conviction that a vehicle which has been wrecked and is then repaired is less valuable. This belief is generally unaffected by:

having information on the scope of the repairs

whether there are any visible signs of repair

Example: Will Prudunt is ready to get a new car. Although his '94 model has served him well, he's ready for a change. Will finds his dream car and is now ready to make the best deal he can on his '94. Will and the sales rep look over his '94 and agree on a $3,950 trade-in. As they discuss the loan papers, the rep asks Will if the '94 has ever been in an accident. Will slaps his forehead and says "Oops, I was rear-ended three years ago. My insurer paid about $2,000 in repairs." The sales rep then picks up the finance paperwork and says that he will have to re-figure the agreement. When he comes back, the rep says that they can only offer him $2,400 on the trade-in. Will points out that he's never had any problems with the car and that it ran even better after the repairs...the rep won't budge on the lower trade-in offer.

Claim Related DV: This is actual diminished value that places responsibility for the reduced value on an insurer. It refers to any instance where an insurer's action or practice results in an inferior vehicle repair. Note that this term is subjective because there are various opinions about what constitutes an inadequate repair. What is considered a below-standard result that is created by an insurer may involve an insurer's:

insistence upon the use of selected auto repair facilities
preference or requirement that a repair facility use after-market, rather than original, equipment and manufacturer parts
refusal to pay for additional repair procedures identified by a repair facility.

Repair Related DV: This is actual diminished value that places responsibility for the reduced value on a repair facility. It refers to any instance where a repair facility's action or practice results in an inferior vehicle repair. Note that this term is also subjective because there are various opinions about what constitutes an inadequate repair. What is considered a below-standard result that is created by a repair facility may involve a facility's:

completed work which includes below standard labor or improper procedures

completed repairs where below-standard parts were used when an insurer authorized standard parts

incomplete repairs when an insurer authorized that all needed repairs be performed.

IS Dimished Valued Covered?

This has long been a great debate among insurance companies, lawyers, state courts, consumers (including activist groups), auto parts manufacturers, auto repairs shops and others. The focus on whether such losses are covered concentrates on claims that a policyholder would make to his insurer for damage to his or her own car. Answering this question is only clear from one's viewpoint. Supporters of the DV theory say that these losses are real and should be reimbursed under an insurance policy whenever there is accidental damage to a covered car. Other groups say that such losses are akin to depreciation and were never intended to be covered. Factors which affect this debate are numerous, including:

Can DV be accurately measured?

What are the financial stakes of the groups supporting each side of the issue?

Should DV be considered only when a vehicle is repaired and then sold?

How is an older car's "pre-accident" value measured?

Should repair shops or insurers bear the responsibility for DV?

The wording of applicable insurance policies.

Current and pending state laws involving DV.

If DV is paid and a vehicle owner sells the car without a loss of market value, does the DV payment have to be returned to the insurer?

What To Do About DV

The only thing that is really important to you is your unique coverage situation. Depending upon the age and value of your cars, you may or may not have a concern over this issue. If you do, your best bet is to discuss your concerns with an insurance professional. You can find out what coverage options may be available or, at the very least, gain a better understanding of your existing coverage.

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