What is Diminished value ?

Say your car is worth $5,000, according to the National Automobile Dealers Association (NADA) guide. Say you're in an accident and you have to make a claim on your collision insurance. Your insurer pays for the repairs on your car (minus your deductible) and you decide to sell the car. As you shop your car around, you find that you can't get anything near $5,000 for it because it was wrecked and repaired. What happened? Your car has experienced diminished value (also known as diminution in value). So, can you make a claim for this "loss" under your auto insurance policy?

Policyholders contend that their insurers are obligated to return their automobiles to pre-loss condition after accidents. A monetary value is usually attached to that condition, and policyholders say that a car that's been in an accident will fetch a lower price when sold compared with a similar car that hadn't been crashed — that a car's value inherently diminishes after it's been in an accident, regardless of the quality of the repair. Consumer advocates have long held that policyholders are entitled to a diminished-value check from their insurers if they can document that their vehicles have not been returned to pre-accident condition.

The diminished value debate has raged for years because most auto insurance contracts have been silent on the issue of whether the insurer is liable for any real or perceived decrease in a vehicle's value after a crash, even if the vehicle has been repaired to its original condition. Insurers argue that diminished value is not covered, but consumers disagree — and court battles often result when policyholders clash with their insurance companies over diminished value payments.

But the Insurance Services Office (ISO), which provides insurance forms and data, has authored policy language that insurers can use in 36 states and Washington, D.C. (see sidebar) that officially takes insurers off the hook for diminished value payments. Here's how insurance policies sometimes come into being: The ISO submits sample property/casualty policy language to state insurance departments across the country that help insurance companies alter and clarify their own insurance policies. Some state insurance departments must approve the ISO's filings before an insurance company can adopt any policy language proposed by ISO.

One ISO filing specifically excludes payment for "diminution in value, mean[ing] the actual or perceived loss in market or resale value which results from a direct and accidental loss." So, if you live in a state where the insurance department has approved this filing, called PP 13 01 12 99, and your insurer has adopted the language, you'll have no chance of getting money for the "diminished value" of your car if you're in an accident.

So far, one individual insurer, State Farm, has filed its own policy language that excludes diminished value, but won't say which states have approved the filing, if any. "We have been in the process of filing an endorsement of our own," says State Farm spokesperson Dave Hurst. "It is not the same language as ISO's filing, but is designed to reinforce what we consider already clear policy language that says that there is no coverage for diminished value," Hurst says.

Collision-repair industry has mixed feelings

The Automotive Service Association (ASA), an auto industry group, contends that "your vehicle can and should be restored to pre-accident condition." The ASA outlines several steps repair facilities should take to ensure a "proper" and "quality" repair of your vehicle: Repairers should use the best refinishing and paint products and specialists; repairers should use only highly skilled welders who do repairs in accordance with the vehicle manufacturers' recommended procedures; and repairers should be able to pinpoint all damage. In short, the ASA contends the "repair should be a comprehensive reconditioning to original specifications."
"You can't recreate the manufacturing process," contends Sheila Loftus, publisher of Hammer & Dolly magazine, a Washington, D.C.-based auto body publication. Loftus says many auto repairers strive to make "invisible" repairs — repairs that truly put the vehicle back to where it was before the accident — but most end up remanufacturing the cars to a degree, which isn't the same as returning the car to its pre-accident condition.

Auto manufacturers spend hundreds of millions of dollars on equipment that precisely aligns car parts and paints car surfaces. Auto repair shops, even the most advanced, cannot afford and do not have the space for manufacturer-type equipment; therefore, the repairer is never going to return your car to the way it was when it came off the factory assembly line, says Paul Griglio, a Lake Orion, Mich.-based consultant who tests the quality of auto manufacturer vehicle assembly and paint processes. "Body shops can't afford the techology that the auto manufacturers possses," Griglio says. "Body shops do the repairs by hand, and when you do it by hand, you have to eyeball it." The average person may not be able to tell the difference in the quality of the repair, but auto appraisers can, Griglio says.

Neither Loftus nor Griglio, however, is convinced that policyholders always deserve diminished-value payments. "Every time somebody has an accident, is that person due money in his or her pocket? Or is he or she due money only when after trying to sell the car he or she finds out that it's worth less because of the accident?" Loftus ponders. Whether or not consumers think they deserve a diminished-value payment, Loftus says, they should at least be aware of the possibility. "Insurers have paid for diminished value in the past, and that speaks volumes," she says. Griglio adds that your particular insurance policy will determine whether or not you can collect a diminished-value payment.