Understanding Diminished Value
By E. L. Eversman, Esq.
Diminished value or "DV" is rapidly becoming a scourge for insurers - partly because there is a lack of real understanding about what causes diminished value and partly because the methods proposed for quantifying it are mind-boggling. On the other hand, consumers are often misled as to their right to recover diminished value after an automobile accident and many are confronted with flawed methods by which some insurers are calculating DV.
So what is diminished value exactly?
Diminished value is the term used to recognize accelerated depreciation experienced by a vehicle in contrast to its natural depreciation. Natural depreciation happens periodically, when a new body style or significant options are introduced, as each new model year is produced, and as mileage accrues. The single largest source of natural depreciation, however, typically occurs when a brand new vehicle is "driven off the dealer's lot", i.e. is titled in a customer's name for the first time. This happens because as a society, we place a premium on being the first -- the original owner - and we are willing to pay for that experience. Being the first owner gives us assurance that we know the vehicle's history and have no need to question its merchantability or its warranty. Thus, the reason we feel this premium is worthwhile is that we anticipate we have purchased a vehicle which will not create aggravation. Natural depreciation, therefore, is uniform, applying equally to all vehicles within a particular class.
Accelerated depreciation, in contrast, is event or circumstance related. An event, like a collision, has the effect of removing a vehicle from its natural class, and accelerating its depreciation to render it more comparable to an older class of the same manufacture or even a less expensive manufacture.
Categories of DV
DV is typically broken into three types: inherent diminished value, repair diminished value, and insurance-related diminished value.
Inherent diminished value is the decrease a vehicle suffers as a result of the mere fact that the vehicle has been damaged - irrespective of how perfectly it may have been repaired.
Repair diminished value is thought to arise from the body shop's failure to effect a "proper repair". In the collision repair industry, "proper repair" is the expression used to identify those vehicles which have been repaired according to accepted customs and practice of the industry without external, i.e. insurer or consumer, dictates. Many members of the collision industry, however, maintain that repair diminished value is a misconception - that a poor repair is just that, a poor repair, and in almost all cases can be corrected.
Lastly, insurance-related diminished value stems from the nature of the parts used or the refusal to compensate for repair action the collision repairer deems necessary to effect a proper repair. An insurer's required use of non-original equipment manufacture ("OEM") parts in the repair process has been the basis for a variety of lawsuits asserting that these "aftermarket" parts decrease a vehicle's value. Additionally, repairers assert that insurers also often refuse to pay for certain activities necessary to effect a proper repair, thereby creating "insurance-related diminished value". The insurance industry and those companies involved in manufacturing aftermarket parts, however, stoutly deny that the use of non-OEM parts adversely affects the value of any vehicle.
Irrespective of the designation, diminished value can significantly impact the value of a person's vehicle. Although not all vehicles experience diminished value when damaged, most do, and the consequences can be devastating on their value.
Elements of DV
DV is the cumulative effect damage has on several elements defining vehicle value. First, there is the loss of pedigree. Second, there is the negative impact on the vehicle's manufacturer's warranty. Third, there is an increase in the amount of sales tax which will be paid to purchase or lease a vehicle comparable to the pre-accident value. Fourth, the insurance premiums charged to insure a previously damaged vehicle is the same as the premium charged for one in perfect condition.
Pedigree Issues
Whether we want to accept it or not, people place a higher value on items the closer they are to original condition. Otherwise, why do certain dolls in original packages or mint condition baseball cards command higher prices than their worn and used counterparts?
One Florida court referred to this phenomenon as a claimed loss realized from "a stigma on resale resulting from 'market psychology". Rezevskis v. Aries Insurance Co., 784 So. 2d 472, 474 (Fla. 3d DCA 2001). Whether it is merely "market psychology" or not, the stigma created by alteration from the original condition is a very real component of "fair market value". If market psychology were not an intrinsic component of fair market value, stock prices would never drastically rise or fall - especially upon the release of economic data.
Clearly, consumers care about a vehicle's history and show that they care in the manner they choose to spend their money. The Insurance Consumer Advocate Network's recently published survey found that 98.15% of the people surveyed would not pay the same price for a vehicle which had suffered collision damage compared with an identical, undamaged one, in contrast to 1.85% who would pay the same price. www.ican2000.com/dvsurvey/results.asp. But perception is not all there is to diminished value.
Warranty Issues
One of the most striking and immediate negative effects on value resulting from collision damage is the loss of part or all of the manufacturer's warranty. Under U.S. law, a consumer might immediately think, "What about the Federal Magnuson-Moss Warranty Act, (15 U.S.C. §2301, et seq.,) and the protections it gives to purchasers of consumer goods?" The Magnuson-Moss Warranty Act does give consumers protection and prevents manufacturers from arbitrarily disclaiming express or implied warranties. However, it does not hold product manufacturers responsible for repairing damage or problems arising from action outside of the manufacturer's control. 15 U.S.C. §2304(c) relieves the manufacturer of the obligations under the warranty if the manufacturer "[c]an show that the defect, malfunction, or failure of any warranted consumer product to conform with a written warranty, was caused by damage (not resulting from defect or malfunction) while in the possession of the consumer, or unreasonable use (including failure to provide reasonable and necessary maintenance)."
Where to now?
So what does all of this mean? Well, the topic of diminished value is far too large to address at length in any one article and future articles will address important issues involving the differences between recovering as a "first party" verses as a "third party"; how diminished value affects lease contracts; and when diminished value accrues. In the meantime, if you keep your eyes on the road, it just may help keep your fingers out of your wallet.
E. L. Eversman
The information provided in this column is for information purposes only and should not be construed as legal advice. You should always consult an attorney licensed to practice in your Country, State, and/or Territory as laws vary from Country to Country, State to State, and Territory to Territory. The author is delighted to share information but cannot be responsible for damage or adversity encountered by reliance upon that information and urges you to consult with local counsel.
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