Perceptual Diminished Value for Personal Autos

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 PAP.

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 difference paid.

ISO's Response

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 case law.

Conclusion

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.