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Diminished Value is the best-kept secret that your auto insurance company hopes you never learn. While the term, diminished value, may be a relatively new one to consumers, insurers are well aware of its existence, having paid claims to both insureds and claimants for more than eighty years.
What is Diminished Value?
Diminished Value is the term given to the loss in market value a vehicle suffers as a result of an accident and repair. It is a loss based on the beliefs of most people, that once goods become damaged, they are never as valuable as they would be had they never suffered injury.
Let’s say you are in the market to purchase a used car and run across two beautiful cars sitting side by side, both identical down to the last detail, offered for sale for $20,000 each. They are equipped the same, have equal mileage, and equivalent wear. The only exception, you are told, is that the car on the right has been involved in an accident at some point in its history. Considering that both cars are equally priced, would you rather purchase the damaged and repaired car or the one that has never been damaged?
If you are like most people who have answered that question on surveys, you will have chosen the car on the left - the undamaged one - unless, of course, you could negotiate a significant reduction off the selling price of the repaired car. How much of a reduction would it take to make you want the repaired car over the undamaged one? Figure that out and you will have determined the amount of diminished value that particular car suffered because of its damage history.
Causes of diminished value
There are many factors that cause repaired cars to become less desirable to buyers and lose market value, the most obvious being poor quality workmanship and use of inferior parts made by sources other than a vehicle’s original manufacturer. But there are a host of other, less obvious, factors that contribute to diminished value as well. Some of these are the loss of factory transferable warranty coverage on damaged and repaired parts, increased title and disclosure obligations, and the loss of eligibility for inclusion in manufacturer’s preowned certification programs.
Categories of diminished value
While an exhaustive list of causes would be too lengthy to include in this article, most fall into one of three categories.
Inherent Diminished Value:
The first is inherent diminished value, which considers factors beyond the power of shops and insurers to rectify. A perfect example of this is the perception that people carry in their minds that makes them distrustful of repaired cars. While these perceptions are the fault of no particular party, still they exist in people’s minds and are believed to be real, causing thousands of dollars in losses for consumers who wish to market their repaired automobiles. It should also be noted that inherent diminished value could occur even when cars are expertly repaired because in many cases 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.
Insurers, too, understand diminished value and reluctantly admit to its existence when their backs are to the wall. During State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 501; 556 SE2d 114 (11/28/2001), a lawsuit that caused insurers to begin paying diminished value claims as a normal course of business in the state of Georgia, State Farm provided testimony under oath confirming that the potential for diminished value exists in every claim, even when cars appear properly repaired. Georgia Supreme Court Justice Robert Benham wrote the following November 28, 2001, recounting the testimony of State Farm's witnesses and documents it presented during discovery:
“... 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 ...”
What was proven true in 2001 is still true today. Diminished value is a reality, even in cases where repairs eliminate all visual evidence of damage.
Shop Related Diminished Value:
Shop related diminished value is usually the result of poor quality workmanship on the part of repair shops. Mismatched paint, ill-fitting parts, rattles and wind leaks are example of shop related diminished value. If shops accept money from customers for performing particular labor functions, they have an obligation to perform the work correctly. When they don’t, evidence of their shoddy job is often visible for all to see, helping decrease the price a potential buyer would willingly pay for a repaired automobile.
Insurance Related Diminished Value:
Insurance related diminished value results when insurance company claims adjusters, either intentionally or unintentionally, omit needed repairs from an accident victim’s settlement. It may also occur when sufficient payment isn’t made to allow shops to perform repairs as a carmaker intended. As an example, poor-fitting aftermarket parts may cause insurance related diminished value when insurers specify their use instead of original equipment manufacturer’s (OEM) parts.
This information is general in nature and should not be relied upon as a substitute for legal or insurance advice. Readers are encouraged to consult specialists in these fields who have an understanding of legal and insurance issues on a local, state, and national level.