Diminished Value: The Secret Your Auto Insurance Company Hopes You Never Learn

Diminished Value is the best-kept secret your auto insurance company is likely keeping from you, and one it probably hopes you will never learn.

To consumers the term, diminished value, may be a relatively new one.  But, after having paid claims to both insureds and claimants for more than eighty years, you can bet insurers are well aware of its existence - even if they won’t readily admit it.

Diminished Value Defined

The term given to the loss in market value a vehicle loses as a result of an accident and repair is Diminished Value. It is a simple concept - one that insurers try to talk their way around to prevent paying.  Diminished value is rooted in the foundation that once goods become damaged they are never as valuable as they would be had they never suffered injury.  The majority of people believe this and it is the underlying argument driving diminished value claims.

For example, you go to purchase a used car and find two identical vehicles sitting next to each other on a car lot.  They are both beautiful down to the last detail; the price tag is $20,000 each.  The cars are equipped with the same amenities, the odometers’ mileage readings are equal, as is the wear and tear on the vehicles. The salesperson tells you that the only difference is that the car on the left has been involved in an accident at some point in its history.  The choice is yours, the price is the same, which car would you purchase? 

You will have chosen the car on the right, the undamaged car, if you are like most people who have answered that question on surveys, unless, of course, you could negotiate a significant reduction off the selling price of the repaired car. How much would the price of the repaired car have to be lowered in order for you to consider its purchase?  The amount the price would have to be dropped to entice you is the amount of diminished value that car has suffered.

 Diminished Value – The Causes

There are many factors that cause repaired cars to lose their market value, making them less desirable to buyers.  Although far from an exhaustive list, the following five are, perhaps, the most widely recognized : 

1. Use of inferior parts made by sources other than a vehicle’s original manufacturer.
2. Poor quality workmanship.
3. Loss of eligibility for inclusion in manufacturer’s pre-owned certification programs.
4. Loss of factory transferable warranty coverage on damaged and repaired cars.
5. Increased title and disclosure obligations.

Diminished Value Categories

When preparing diminished value reports, auto valuation experts usually itemize flaws and defects they find into one of three categories. The categories are:

Insurance Related Diminished Value

An example of insurance related diminished value occurs when insurance company claims adjusters omit payment for needed repairs from an accident victim’s settlement.  Sometimes this is by accident; other times omissions are intentional in an effort to save insurance companies money. 

Insurance related diminished value may also occur when insurance companies specify a generic method of repair instead of the repair mandated or endorsed by the carmaker.  This is best exemplified when insurance company claims adjusters specify the use of poor-fitting aftermarket parts instead of original equipment manufacturer’s (OEM) parts.  Because insurance companies routinely make settlements based on the use inferior crash parts and substandard repairs, they indirectly cause diminished value when cars are not restored to their preloss condition.  Their contribution to a car’s lost market value is usually placed in the category of Insurance related diminished value.
 
Shop Related Diminished Value

Shop related diminished value is usually the result of poor quality workmanship on the part of repair shops.  Some examples of shop related diminished value are rattles and wind leaks, mismatched paint and ill-fitting parts.  Shops have an obligation to perform repair work correctly when they accept money from consumers for doing so.  Sadly, evidence of their shoddy job is often visible for all to see. These obvious flaws and defects caused by haphazard workmanship makes a car less desirable, ultimately causing a decrease in the price a potential buyer would willingly pay for a repaired automobile. When shops diminish a car’s value in this way, experts often report their contribution in the shop related diminished value category

Inherent Diminished Value

This type of diminished value considers factors beyond the power of insurers and shops to rectify.  People’s perception to distrust a repaired car is a perfect example.  Perceptions are the fault of no particular party, yet are still believed to be real, still exist in people’s minds and cause thousands of dollars in losses for consumers who wish to sell their repaired automobiles.  It is simply not possible to talk some people into the purchase of a repaired car at any price when they are not open to taking a risk.  Thus, the inherent diminished value category exists to report these losses.  Inherent diminished value losses can even be found on cars which have been expertly repaired. 

Insurers Reluctantly Admit That Diminished Value Exists

Insurers understand diminished value and, when their backs are to the wall, reluctantly admit to its existence.  A lawsuit that caused insurers to begin paying diminished value claims in the state of Georgia was State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 501; 556 SE2d 114 (11/28/2001).  State Farm provided testimony under oath confirming that the potential for diminished value exists in every claim, even when cars appear properly repaired.  The following is a recount of the testimony of State Farm’s witnesses and documents it presented during discovery written by Georgia Supreme Court Justice Robert Benham. 

“…The first question, whether diminution in value occurs even when physical damage is properly repaired, is one of fact. The trial court found that there is a potential for a diminution in value loss in every event of loss, and that diminution in value can occur even when a vehicle is repaired properly. In support of those findings, the trial court relied primarily upon documents produced by State Farm during discovery and upon the testimony of State Farm’s witnesses. The documents from State Farm acknowledged that there is a common perception that a wrecked vehicle is worth less simply because it has been wrecked. Witnesses for State Farm testified that a potential for diminution in value exists in every automobile accident, and that the public perceives a loss of value in any wrecked vehicle and would choose an unwrecked vehicle over a wrecked one, assuming the vehicles are otherwise the same…”

Diminished value is a reality, even in cases where repairs eliminate all visual evidence of damage.  This was proven true in Georgia’s highest court in 2001, and is still true today.

Misconceptions about getting paid for diminished value

Three misconceptions abound when it comes to getting paid for diminished value.

1. Many believe that courts across the land have banned diminished value claims, labeling them as bogus. The truth is that some diminished value class action cases about ten years ago got tossed from courts by judges only because the lawyers could not show sufficient commonality to sustain a class of members, NOT because diminished value claims have no merit. There were a few additional cases that failed simply because claimants didn’t attempt to prove that their repaired cars were in some manner compromised despite best efforts to repair them correctly.

2. Many believe that a claim for diminished value is distinct and separate from the claim paying for actual physical damage like dented doors and bent fenders. The truth is diminished value is an element of recoverable damage in the same claim that occurred during the same event, at the same time. An insurer that accepts liability and pays for any damage, must, where proof exists, pay for all the loss, exception being, where exclusion of diminished value in the policy exempts insurers from doing so.

3. Many errantly believe a car must be sold to collect diminished value from an insurer. This is another falsehood. Insurers deviously keep this myth alive to stall the payout of claims as long as possible, hoping the statute of limitations will run out preventing a consumer from ever pursuing recovery. Like other elements of loss, diminished value is owed as of the date it actually occurred, not at some unidentifiable point far in the future.

Conclusion

The burden of proof is on you to authenticate your loss, if you want to collect on a claim for diminished value.  Sadly, the threat of litigation is what most often prompts settlement of any claim including that of diminished value.  Insurers pick and choose their fights.  An insurer may consider you a threat and pay your claim for diminished value without too much resistance, if they think you have the means to hire a lawyer and pursue a recovery.  On the flip side, the claims adjuster will likely try confusing you with slick memorized phrases, ultimately stalling you for as long as possible, if an insurer considers you to be a weak opponent. 

If you’d like a quicker resolution, you may take the loss against income taxes you owe and forgo the diminished value claim with an insurer.  Your loss will still have to be substantiated by an expert.  

Despite insurer’s obstinacy to the contrary, diminished value is owed where a loss can be proven and those who are persistent stand the best chance of being paid!

If you or someone you know needs an expert to substantiate a diminished value claim, you may contact automotive collision consultant, David Williams to direct you to an expert in your geographical location.