Inherent Diminished Value Claims for Personal Autos

The History of Inherent Diminished Value

This issue has been with us for a long time. Gary Stephenson of the Oregon State Insurance Division states that a 1941 case is a seminal one. In Dunmire Motor Co. v. Oregon Mut. Fire Ins. Co., 114 P.2d 1005 (Or. 1941), the court ruled that the insured is entitled to the difference between the pre- and post-loss value of the vehicle and the proper repair of the car may not accomplish this. Based in part on this ruling, the Oregon Insurance Division issued the following statement.

The question whether an automobile policy covers diminution of value is resolved by examining the insurance contract language. Diminution of value is considered "indemnification," and barring a specific exclusion, it is covered. Therefore, the contract language must specifically exclude that exposure if the insurance company wishes to avoid paying claims based on diminution of value.

Mr. Stephenson notes that many insurers argue that it is extremely difficult to know if a car has experienced diminished value until it is up for sale. However, he states, "Many insurers do offer a minimal amount of money if pressed by the insured for what is often referred to as a 'nuisance' claim."

Is Inherent Diminished Value a "True" Loss?

Is inherent diminished value a true loss? George Forman with Accident Check, an auto damage appraisal service, stated that this is a true and measurable loss.

There are telltale signs by looking at the frame and the paint that a major accident has occurred. If the car is repaired improperly, the value of a car can be reduced as much as 50 percent. Even if the car is repaired properly, the value can still drop by 20 percent or more. An experienced auto inspector can always tell if a car has been involved in a major accident. And the insurers are not compensating consumers for this.

A car's history impacts its value, and more information is readily available to used car buyers to determine a used car's history. A vehicle history report is a detailed document that offers information about a vehicle's past. The report includes data such as (a) ownership history, (b) mileage, (c) title status, (d) accident history, and (e) service information. Most purchasers of used vehicles procure some type of vehicle history report.

One truism is that if a consumer has an opportunity to buy a 3-year-old vehicle that has never been in an accident or a 3-year-old vehicle that has been involved in a substantial accident but was properly repaired, they still prefer the vehicle that is accident-free. This distinction reduces the value of the vehicle involved in the accident.

However, some insurers and insurer associations maintain that if the vehicle is properly repaired, it does not lose market value, particularly if it is an older vehicle. In addition, insurers argue that for first party claims, the physical damage part of the personal auto policy (PAP) only promises to pay for "direct and accidental loss" to the covered auto (Insurance Services Office, Inc. (ISO), 2018 PAP). The argument is that diminished value, if it exists, is considered an indirect or consequential loss, and thus not payable under the PAP. Courts have generally ruled that an inherent diminution of value claim does not fall under a direct loss category. Certainly, that loss would not be felt right away but only after the vehicle is sold.

In the ISO physical damage limit of liability section, the policy pays for the "lesser of the (1) actual cash value of the stolen damaged property; or (2) amount necessary to repair or replace the property with other property of like kind and quality." Again, there is no mention of any type of inherent diminution in value.

Dave Hurst, a public affairs liaison with State Farm, states that a skilled repair professional can restore the vehicle to its pre-loss condition.

When it comes to resale of a previously damaged vehicle, there are many subjective factors at stake, such as color, mileage, options, and dependability. Some buyers might prefer to avoid buying a car involved in an accident. Others might prefer to avoid cars owned by smokers or by people with young children who can be hard on cars.

Mr. Hurst believes that the bottom line is that the personal auto policy only promises to repair or replace a covered auto involved in an accident.

Who Can Claim a Diminished Value Loss?

Filing a diminished value claim is not an easy assertion, and various factors are involved, including the following.

• The insured was blameless in the accident. It is much easier to assert an inherent diminution of value claim to the liable party's insurer.
• The insured is more likely to be successful if their vehicle is a newer, high-value model.
• Title requirements are met. If the insured has a rebuilt or salvage title, they will not be able to assert a diminished value claim.
• If the responsible party is uninsured, the policyholder may be more successful filing this type of claim with their own insurer under uninsured motorists coverage.
• The rules for diminished value claims can vary by state. Most jurisdictions require the other driver to be at fault for an insured to file a claim, but in Georgia, one can file a diminished value claim regardless of who was at fault for the accident.

Relevant Case Law

How have the courts ruled? In a Texas class action case, Carlton v. Trinity Universal Ins. Co., 32 S.W.3d 454 (Tex. app. 2000), the appellate court upheld the lower court in support of the insurer. The court stated that the insurer, "fully, completely and adequately repaired or replaced the property with other of like kind and quality." The court ruled that any decline in market value not subject to repair or replacement is not considered a component part of the cost to repair or replace.

In a 1988 case, Ray v. Farmers Ins. Exch., 200 Cal. App.3d 1411 (1988), the court stated that car values may fall, but the PAP does not cover this loss. If this was payable, the court reasoned, this could threaten the insurer's first option—to repair the vehicle. Several other courts have reached similar findings and rationales as well.

Class action lawsuits have typically not been successful. In Sims v Allstate Ins. Co., 851 N.E.2d 701 (Ill. App., 2006), the lower court granted certification of the suit. The appellate court, however, eventually ruled that payment of diminished value is not required by a "repair or replace" policy because the repair clearly encompasses only a concept of tangible, physical value. See also O'Brien v. Progressive N. Ins,. Co., 785 A.2d 281 (Del. super. 2001). (In contrast, the minority rule stipulates that because the average person would read a "repair or replace" policy to grant coverage of equal value when a car is repaired, replace or "totaled", the coverage should encompass this diminished value loss. See Moeller v. Farmers Ins. Co. of Washington, 267 P.3d 998 (Wash. 2011).)

In another class action case, Mabry v. State Farm, 556 S.E.2d 114 (GA. 2001), the Georgia Supreme Court interpreted a "loss" to include inherent diminished value. State Farm was ordered to pay $150 million in fees and settlement costs and to develop a claims handling process to evaluate and pay these first-party diminished value losses.

In Bark v Keen, (No. 01-19-00997-CV) Texas App, 2020), the appellant argued that the trial court erred in granting summary judgment in favor of the claimant's diminution of value claim. The claimant contended that despite proper repairs, the value of his Corvette was diminished by over $11,000 due to its collision and repair history. The claimant retained an auto appraiser expert to determine the diminished market value of the repaired Corvette. The Texas appellate court reversed this decision, stating that the trier of facts may not be guided solely by the opinion of experts. It further argued that the expert's testimony was no conclusive and failed to meet the proper burden of proof.

ISO's Response

To deal with litigation of this type, ISO filed an endorsement to itspersonal auto policy, Coverage for Damage to Your Auto Exclusion (PP 13 01), in nearly every jurisdiction in 1999. It was updated in 2018 to properly dovetail with its September 2018 PAP. This endorsement defines "diminution in value" as "actual or perceived loss in market or resale value which results from a direct and accidental loss.") This value is excluded from coverage for "your covered auto" or any "non-owned auto." The use of this endorsement is approved in nearly all states as of September 2024.

Conclusion

So, where are we going with this long-running dispute? Many observers believe that with the ISO endorsement excluding diminished value gaining acceptance, this issue may eventually dry up. In addition, many private insurer forms also include this exclusion. A 2024 search of diminution of value court cases shows a decrease in these types of claims. But inherent diminution of value assertions still continue, and the results vary from state to state. From IRMI's vantage point, this issue continues to be one for us to watch in the future.