Diminished Value

Diminished value is the loss of financial worth of a vehicle due to damage. When a car is damaged in an accident and then repaired, the resale value may be less than a comparable car that has not been damaged. The damage results in a reduction or diminution in resale value of the auto.

Let’s assume you are shopping for a used vehicle. You find a dealer that has two identical vehicles that match what you are looking for. These vehicles are the same year, make, and model. They have the same mileage and options. They appear to be in the same general condition and the sticker price for both vehicles is $20,000. You ask the dealer if either vehicle has sustained damage and he tells you that one of the vehicles had $6,000 in collision damage. The repairs were expertly completed and you cannot tell there was ever any damage. Would you still give equal consideration to each vehicle? How much of a discount in the price would have to be offered in order for you to give the repaired vehicle equal consideration?

A reasonably intelligent consumer will not pay the same price for a damaged, then repaired vehicle, as they would for a vehicle with no prior accident history. Even if the repairs are done well, the vehicle still loses value.

The auto manufacturers’ pre-owned certification contributes to diminished value. While paint work on a vehicle has a negative effect on its value, some paint work usually will not exclude the car from being certified as a certified pre-owned vehicle, which the manufacture will resell with its own warranty. The operative word in that description however is some. If one part, a door or a fender, has been repainted, that repair is likely to be acceptable for certification provided that it has been properly repainted and exhibits an excellent paint color match. When many parts have been repainted, or if underlying structural damage was caused, even if properly repaired, the vehicle will not meet pre-owned certification standards. Even the most skilled repair specialist will not be able to exactly duplicate factory welds, caulk and seam sealer applications. Unfortunately, that means if you have recently had an accident and the collision caused any type of body or frame damage your vehicle will not be eligible for certification, and that results in decreased value. Vehicle manufacturers are strict on their certifications especially on high-end vehicles such as BMW, Mercedes, Porsche, Aston Martin, Lamborghini, Ferrari, and Bentley.

Has my vehicle suffered diminished value:

The newer the vehicle, in better pre-loss condition, with no significant prior damage history, with significant current damage, the more resounding a yes answer becomes. The older the vehicle, in lesser pre-loss condition, with significant prior damage history and minor current damage, the more appropriate a no answer becomes. The more the circumstances moderate between these two extremes the more the diminished value will fluctuate.

Types of Diminished Value:

There are three basic types of diminished value and the extent that each determines the overall depreciation.

Inherent Diminished Value: Inherent DV is the automatic and unavoidable loss of market value simply due to the fact that the vehicle has been involved in an accident. In many cases it is mandatory that the previous damage be disclosed to a prospective buyer. The difference in the amount you would be willing to pay for an undamaged automobile versus the price you would be willing to pay for one that has been repaired would be considered inherent diminished value.

Repair Related Diminished Value: Repair related DV is the loss of market value due to the fact that the repair facility performed improper and incomplete repairs to your vehicle during the repair process. The items on the repair order of record are either not completed and/or completed improperly. This type of diminished value will not only decrease the value of your automobile but in many cases effect the safety and drivability of your vehicle.

Insurance Related Diminished Value: Insurance related DV is a loss of value due to the insurer’s failure to indemnify the consumer for items and procedures owed under the contract of insurance. In many cases it is to your advantage that you review and understand your policy provisions before you begin the repair process to your vehicle. Also you should be aware of the use of terms such as quality replacement parts, quality recycled parts, and industry standards. You should ask questions if you do not understand the estimate of record. Professional Adjustment Services’ diminished value assessment does not address insurance related diminished value because in most cases the insurer does not elect to indemnify you for the cost of the repairs and not to take part in the repair process.

How will anyone know my vehicle has been in an accident:

State disclosure laws require full disclosure upon sale of a vehicle; you are no longer able to hide or fail to disclose the facts of an accident and subsequent repairs. The serial number on your vehicle is listed in places such as Carfax showing damage and causing the vehicle to diminish in value. Even if the vehicle is traded in, the dealer will likely require the completion of a disclosure form and will likely do a Carfax history report that will reveal all the history on the vehicle. You will not get a good trade-in-value because your vehicle has a history of collision damage.

Let’s assume your vehicle is worth $6,000 according to the National Automobile Dealers Association(NADA) guide. Your insurer pays for the repairs on your car, (minus the deductible) and you decide to sell the car. As you shop around, dealers inform you that you cannot get anywhere near $6,000 because the car has been in an accident and they have to disclose this information to their customers. This can impact your auto value by as much as 40%.

Do not let the insurance company tell you that they don’t pay for diminished value or the state does not recognize it. Get the compensation you are entitled to as a third party claimant. Ask the experts at Professional Adjustment Services to provide you with a professional appraisal and the documentation needed to get compensated for diminished value.

What are first parties and third parties:

When it comes to automobile accidents and claims under insurance policies, it is important to differentiate the relationship of the parties. First parties are those in direct contractual relationship with an insurance company – the insured. The third parties are those outside the insurance relationship – claimant. In diminished value matters the first party is typically the person responsible for the collision, causing damage to the third party.

As a third party you have the right to recover against the person causing the accident. Based on tort law, a third party’s recovery is not limited by the terms of an insurance contract to which that person has no connection. It does not necessarily depend on where you live. That may be true when you are trying to recover diminished value under your own insurance company.

Tort law demands that the injured party be made whole and a decrease in the third party’s vehicle’s value is part of the damage caused by the first party. The third party is certainly entitled to seek compensation for the decrease in value, which means putting you back in the position you were in immediately before the accident. Simply paying for the repairs can almost never do that. If you have been told the state law or the insured policy does not allow payment for diminished value, demand it in writing. The policy is between the insurer and the insured and has no application to you.

You can collect for the loss in value of your asset. Your net worth is now lower. The insurance carrier is responsible for protecting the interest of their insured only. There are millions of people who have collected loss in value claims; they just don’t want you to know about it.

Truth is, all insurance companies look out for their interest first. That includes paying you as little as possible to settle a claim. Ask the experts at Professional Adjustment Services to provide you with a professional appraisal to determine how much value your vehicle has lost. Having your own appraiser will usually improve your settlement by thousands of dollars.

Can I collect from my own insurance policy for diminished value:

The diminished value debate raged for years because most car insurance policies were silent on the issue of whether the insurer is liable for any real or perceived decrease in a vehicle’s value after an accident, even if the vehicle has been repaired to its original condition. Insurers argue that diminished value is not covered but consumers disagree and there is a long list of court cases where policy holders clashed with their insurance companies over diminished value payments. The insurance services office (ISO) which provides insurance forms and data, authored policy language that insurers can now use in 45 states and Washington, DC that officially takes insurers off the hook for diminished value payments in physical damage coverage claims. The ISO exclusion has not been approved in Georgia, Hawaii, Kansas or Maryland. Massachusetts has not adopted ISO policy language. Hawaii in a May 2002 advisory board opinion from the department of insurance states that diminished value is not covered under collision policies in the state. Hawaii and Massachusetts are both under independent insurance bureaus.

When does diminished value accrue:

There are different arguments as to when any diminished value loss should be paid. The two dates creating confusion are the date of the loss or accident date, and the disposal date.

Date of loss is the established date the insurance industry uses for determining value and loss issues. Many insurers contend diminished value compensation is not owed until the vehicle is sold, traded-in or returned on a lease. This opinion focuses on the point at which the decrease in value is realized as opposed to when the decrease in value is caused. This suggests that the cause and effect are not yet complete.

As a result, any prior payment of diminished value loss is either unnecessary or a windfall to the claimant. However, this analysis is flawed, and the date the accident occurred is the appropriate date for calculating diminished value loss.

Automotive Value Relativity: As a vehicle ages its natural depreciation accumulates, reducing its fair market value. Collision or other damage accelerates that decrease in value and makes that vehicle worth significantly less today, in contrast to its peers. At some point the natural depreciation will catch up to the loss in value of the collision accelerated depreciation. The natural depreciation remains constant. External factors alter the premature loss in value. If a vehicle has been damaged, the depreciation will become integrated within it. In other words, the vehicle’s value will inevitably reach a point that it simply will not matter to the purchaser if it has been damaged.

Perceived Economic Benefit:

Using disposal date as the date of payment, if a person sells, trades in, turns in at lease end or the vehicle is declared a total loss prior to the time when natural depreciation has alleviated the accelerated depreciation, diminished value would then be determined and paid. The obvious reason insurers argue that the disposal date, rather then the date of the loss, is the proper time for determining and paying diminished value is one of cost. The newer a vehicle is when damaged, the greater the diminished value will be using the accident date for determination. As the vehicle ages, the collision damage will have a lower impact on overall value and any diminished value payment will be equally lower.

This is preferable in two ways for insurers. It results in a delayed payment, allowing the money to be retained and invested, and it creates the virtual certainty that the diminished value payment will ultimately be less. Instead of a windfall for a claimant, the insurer gets the benefit of the delay. This is a shortsighted approach, however. It is not economically feasible to keep a claim open for another five years or to have a second claim opened and processed at a later date. Imagine the confusion and difficulty apportioning the diminished value payment between responsible parties if the vehicle is involved in a second accident before the disposal. While the insurers and attorneys may have forever to argue about these issues, using the disposal date as the valuation point leaves the insured’s and third parties alike, unhappily stuck in the middle without any clear or immediate resolution.

Furthermore, date of loss is the insurance industry standard for valuing claims. Do the insurers really want to suggest that a latter date in time can be substituted for valuing and paying losses? Consider if your house burned down today, but you decided to wait ten years to have it rebuilt. Will you be allowed to use the actual rebuild date, with all of the possible inflationary cost and unknown price variables, to determine what your insurer must pay to replace your home?

Tort Law:

Under traditional tort law, which applies to third party claimants, the date of the accident is used to determined loss. Although part of the argument for using the alternate date is that the element of the diminished value aspect of the negligence claim has not occurred until the vehicle is disposed of, this is not legally correct. While varying among jurisdictions, property damage negligence claims are subject to statutes of limitation. That means that a person has a limited amount of time to file a lawsuit to recover loss associated with the accident. The date of the accident is the traditional legal starting date for the filing time within which a lawsuit must be filed to recover damages. Just because diminished value is intangible at the collision date, does not mean that it has not occurred, cannot be calculated, or should not be paid. Furthermore, negligence claims are not divided into sub-claims based on some portion of the damage being realized at a later date.

For example if a person has been badly injured in an accident and will require additional medical care for years into the future that person does not submit new claims for damages every time treatment cost is incurred, instead the anticipated costs are calculated, assigned a present value, and paid.

So the final answer is, date of loss. The date the accident occurred is the date the law uses for starting the statute of limitation for an action to recover damages negligently caused to property. Unless the legislators and the courts are willing to remove the diminished value loss exception to their jurisdictions statutes of limitation, we are certain to dramatic increases in the lawsuits filed against at-fault insured for these losses. That will hardly be satisfactory results for anyone. It is a no-win situation in terms of time, money and goodwill for insurers to contend that the disposal date is the suitable date for determining diminished value losses. If for no reason than finality, date of loss is the appropriate date for determining diminished value.

Owners vs. Bank:

A damaged vehicle suffers diminished value, irrespective of the relationship or ownership in which it is held. The only issue to be addressed is who is entitled to claim and recover for the diminished value? This question is easily answered when a vehicle is owned outright. Obviously, the owner is entitled to the diminished value.

Even when the automobile is financed though a bank or lender, the answer is straightforward. The owner is still the party entitled to the diminished value. The finance company may be in possession of the title, but it only has a security interest in the vehicle, not an ownership, as collateral against default and to ensure repayment of the money it has lent. This arrangement gets slightly more complicated if the vehicle is in default and the vehicle is repossessed.

As an example, imagine the situation in which John owns a car and is hit by another driver who is at fault. The car is taken to a body shop for repair. However, John has not paid his car loan for several mouths, and the bank has authorized repossession of the vehicle. When the bank discovers the car’s whereabouts, it takes possession of the vehicle upon completion of the repair and makes a claim for inherent diminished value against the at-fault driver. Because the bank is, typically, legally entitled to sell the vehicle and transfer good or clean title to a subsequent buyer to satisfy John’s outstanding debt, the bank is entitled to apply the diminished value payment to the loan, as well. This occurs because the diminished value payment represents a monetary value taken from the collateral by the at-fault driver that would, otherwise, have been sold with the car and applied to John’s debt.

Diminished Value and Leased Vehicle:

A separate category of interest in the diminished value debate is the ability of parties to a lease arrangement to successfully claim and recover for diminished value. Leases are simply arrangements by which an owner allows someone else to have legal possession and use of property for a price and usually for a set period of time.

Lease contracts are governed by the same principles as other contracts and operate according to their individual term. A lease car is no different than one financed though a bank or owned outright for the purpose of claiming diminished value.

A car is a depreciating asset by its very nature, which is increased by use. The leasing price is set by considering the natural depreciation associated with age, mileage, and ordinary wear and tear. The anticipated value of the car at the end of the lease is known as residual value.

The person in possession of the vehicle is charged with the responsibility to protect and preserve the property and is responsible for compensating the owner for any damage.

Furthermore, vehicle leases typically state that when the vehicle is returned at lease-end there will be additional charges for any excessive wear and use and the excessive wear clause includes payment for any damage to the body, lights, trim, paint, interior, glass, and for any missing equipment, parts, and accessories. These clauses do not restrict charges to only un-repaired damage or allow for aftermarket parts to be substituted for original ones. Accordingly, the person turning in a car at lease-end, which was severely damaged in a collision caused by another party, can still find him/herself liable to a bank or leasing company for thousands of dollars in diminished value. If the vehicle had not been leased, there would have been little question about the owner’s entitlement to payment for the vehicle’s diminished value or that the at-fault driver was responsible for the payment. The situation is not any different with a lease.

Avoid internet scams offering free diminished value reports:

Popping up on web sites all over the internet are offers to provide free diminished value reports on cars and trucks after collision damage have been repaired. Generally speaking, a consumer enters some basic information about the repaired car and amount of crash damage it sustained, and in return receive an e-mail that states the diminished claim is worth between $X and $Y.

Though it seems a straightforward service for people to pursue who don’t have money to waste, free diminished value reports on the web are worth exactly what they cost – nothing. The reports cannot be used to substantiate a claim for diminished value because these sources have no specific knowledge of the consumer car, their accident or their insurance claim aside from information that’s been provided to them. If consumers want to be paid for diminished value it is their responsibility to prove the amount of loss. Courts have established guidelines regarding how this should be done and the credentials of the expert. It is imperative that an expert have hands-on knowledge of the car in question in order to provide a diminished value figure that will withstand scrutiny.

The numbers on these reports are not reflective of a specific car and accident. They are generalized and artificially low in comparison to what consumers will find they are truly owed after their car has been inspected by a legitimate diminished value expert. Without seeing the car firsthand, internet companies cannot compute losses consumers are entitled to be paid for such things as un-repaired damage, poor workmanship, aftermarket parts, and a host of other things that make the car unsightly or unsafe.

The report and information consumers receive from internet diminished value companies may be used against them if and when they pursue a legitimate diminished value claim against an insurance company.

Consumers have everything to lose and nothing to gain by providing information to obtain free diminished value reports from internet resources. Most legitimate vehicle inspection and valuation experts will honestly tell consumers upfront when the cost for pursuing a diminished value claim is outweighed by the potential recovery one might expect to receive. Professional Adjustment Services will provide you with a diminished value report qualified for any court proceeding.

Your loss in diminished value may be tax deductible: [Notice: review this information with your tax advisor to see if you qualify for a tax deduction.]

Diminished value can be and oftentimes is claimed as a tax deduction. If you itemize your deductions, you may be able to deduct your un-recovered diminished value. If your property is covered by insurance you must file a timely insurance claim, otherwise you cannot deduct the loss as a casualty or theft loss. However the part of the loss that is not covered by insurance is still tax deductible. Additionally you can deduct the cost of the professional diminished value assessment report.

Elements of a diminished value assessment report:

1. Free consultation

2. Visual inspection of the vehicle

3. Photograph the vehicle and existing damage

4. Formulate an on-site condition report to determine if diminished value exists

5. Review repair order, insurance estimate and other relevant documents

6. Perform vehicle specific research

7. Document comparable values

8. Prepare a diminished value report explaining the pre-accident condition value and post accident condition value.

9. Forward copy of appraisal report to a third party

[Note: this service does not include removal of vehicle body parts and/or placing the vehicle on a frame bench and alignment equipment to determine improper frame repair. If the visual inspection determines a need for this service, a cost will be established.]