Picture this: you are driving down the road and are involved in a serious
accident. Your car, prior to the accident, had a book value of $23,000. The
damage to your vehicle amounted to $17,000, and this was properly repaired,
and paid for by your insurer.
Now, is your car still worth $23,000? If not, is this loss in value covered
by the personal auto policy? Well, it depends. The plaintiff's bar or the owner
of an automobile appraisal service provides you one perspective. An insurer
provides you a far different one. Which one is right? This is the basis for
the diminished value dispute.
There are three broad categories of diminished or diminution of value, as
respects an auto loss. These include:
- Perceptual or psychological diminished value—the perceptual loss of
vehicle market value due to an accident
- Repair-related diminished value—the loss of vehicle market value due
to inferior quality repairs
- Insurance-related diminished value—the loss of vehicle market value
due to insurance claims practices and/or the failure of the insurer to provide
for proper repairs
This article focuses on the first category: perceptual or psychological diminished
The History of Perceptual 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 Company v Oregon Mutual Fire Insurance
Company, 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."
Perceptual or "True" Loss?
Is perceptual or psychological 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.
He did mention that some insurers pay an additional 10 percent of the damage
for diminished value but only if the consumer vigorously pursues this.
One point that several sources made 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,
he or she would still prefer the vehicle that is accident-free. This 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. 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.
One case against payment of diminished value revolves around the contractual
language. The Insurance Services Office, Inc. (ISO), personal auto policy (PAP)
stipulates, under the physical damage section, that the insurer "pay for direct
and accidental loss". The argument is that diminished value, if it exists, is
considered an indirect or consequential loss, and thus not payable under the
Relevant Case Law
How have the courts ruled? In a 1999 Texas class action case, Carlton v Trinity Universal Insurance Company,
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 Insurance Exchange,
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.
However, some recent class action suits have indicated initial signs of success
for plaintiffs. In a preliminary ruling in December 2000 (Sims
v Allstate Insurance Company), the court granted certification of the
suit. This is a precedent-setting case, as class action suits for diminished
value have never been certified in the past.
Jonathan Shub, Esq., of Sheller, Ludwig and Badey in Philadelphia has experience
in diminished value suits and believes this is a major event affecting future
related class action suits. "This is the first certification of a class action
suit for diminished value; however, I believe that this preliminary ruling will
be appealed by the insurer."
In another class action case in Georgia still in litigation, Mabry v State Farm, the court issued a preliminary
ruling that State Farm notify Georgia policyholders involved in physical damage
losses of this diminished value exposure. Mr. Hurst of State Farm states they
are now advising policyholders of this per the court's order but have appealed
the ruling. He believes that this approach is simply inviting claim disputes
and could lead to higher premiums.
There have been other cases outside class action suits in which the court
has ruled in favor of the insured. In one 1992 case, Delledrone v State Farm, the court ruled that a comparison of actual
cash value of the vehicle before and after the accident should be made and the
To deal with litigation of this type, ISO filed an endorsement to the personal
auto policy, coverage for damage to your auto exclusion
(PP 13 01), in nearly every jurisdiction in 1999. 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 is excluded from coverage.
As of March 2001, the filing results are as follows:
Approved: 38 jurisdictions
Disapproved: 8 jurisdictions
Pending: 3 jurisdictions
Not filed: 5 jurisdictions
The disapprovals in those eight jurisdictions were primarily based on specific
So, where are we going with this long-running dispute? It is not going away
at all; in fact, it may have added strength due to the preliminary ruling in Sims v Allstate Insurance Company in December
2000. Many observers believe, however, that with the endorsement excluding diminished
value gaining acceptance, this issue may eventually dry up. However, Chuck Schlager
in ISO's personal auto division states that the endorsement has not been tested.
Mr. Hurst with State Farm does not see any leveling off of litigation. "It is
still very early in this process," he claims.
From IRMI's vantage point, this issue is far from resolved and one worth
watching closely in the future.