One of the recurring questions Matthiesen, Wickert & Lehrer, S.C. (MWL) is called on to answer involves when and under what circumstances the insured suffering automobile property damage, or his or her subrogated automobile insurer, may recover for diminution in value of a damaged automobile. This article is intended to provide a global answer to many of the questions we have been asked on this subject.
When a vehicle is damaged in an accident and then repaired, the resale value may be less than a comparable vehicle that has not been damaged. In other words, the damage results in a reduction or “diminution” in the market value of the vehicle, even after competent repairs have been completed. An insured’s claim for this reduction in value may be made against a third party that negligently caused the damage to the insured’s vehicle, or it may arise from a first-party claim against the physical damage coverage under the insured’s own automobile policy. The term “diminished value” can be confusing. There are three types of diminished value:
- Immediate Diminished Value: This is the loss in value that results immediately after an accident before any repairs are made. It is the difference in market value immediately before and after an accident caused by a negligent tortfeasor. In many states, this is the measure of damages for injury to personal property.
- Inherent Diminished Value: This refers to the loss in value of a vehicle that remains after it is completely and professionally repaired. It is the loss of value that results from the simple fact that the vehicle has been in an accident. This type of diminished value is also known as “stigma damage.” Given two identical vehicles on a car lot, the one which hasn’t been involved in an accident is preferable to the one which has been damaged and repaired.
- Repair-Related Diminished Value: This refers to the additional loss in value to a vehicle which results from incomplete or poorly-performed repairs. It could include simple cosmetic damages that remain after repair or major mechanical or structural deficiencies.
The most common and widely-used form of diminished value is inherent diminished value. There are two types of inherent diminished value claims, both of which are discussed in this article:
- First-Party Claims: These are claims made by the vehicle owner/policyholder against his or her own insurance company to recover the difference in the value of the vehicle before the collision and value of the vehicle after the damage caused by the collision had been repaired. This type of claim is usually governed by contract law and the terms of the insurance policy. When a vehicle is damaged, a policyholder generally expects to be “made whole” by its first-party property insurer, but an insurer is legally responsible only to pay according to the terms of the policy.
- Third-Party Claims: These are claims made by the owner of a vehicle against a third-party tortfeasor (person other than the insured and insurer) for negligently causing damage to the owner’s vehicle. This type of claim is governed by tort law.
With regard to first-party claims, the Insurance Services Office (ISO) contract language (specifically the Limit of Liability Condition) arguably appears to cover only the Actual Cash Value (ACV) of the damage or the actual cost to repair the damage. There is often nothing in the policy language that would contractually cover any reduction in market value, even if the insured were able to prove the amount of reduction in value. On the other hand, the policy clearly allows the insurer to deduct for “betterment” or depreciation, although the burden of proof is on the insurer to demonstrate such depreciation or betterment. In physical damage claims, the policy allows the carrier to deduct for an “improvement” in value (i.e., betterment) due to repairs with newer parts, but will not compensate the insured for a reduction in value due to the same accident.
There is a disparity among the various states regarding recovery of diminution in value in first-party cases. Insurance claims professionals should be aware of when and how the laws of each state deal with diminution in value. Georgia is in the minority of states which require insurers to pay the diminished value as well as the cost of repair of a vehicle even if the insured does not make a claim for the diminished value.
In third-party claims for property damage to automobiles that are the result of a collision for which a third party was at fault, the measure of damages is traditionally, but not always, the difference between the market value before and after the collision (“diminution in value”) or the reasonable repair value, whichever is greater. Such third-party diminution claims have generally been found by the courts to be covered by automobile insurance since the measure of damage in tort claims (which the insurer promises to pay) is the difference in the value of the property before the loss and the value of the property after the loss. The Restatement of Torts § 928 states as follows:
Where a person is entitled to a judgment for harm to chattels not amounting to a total destruction in value, the damages include compensation for: (a) the difference between the value of the chattel before the harm and the value after the harm, or at the plaintiff’s election, the reasonable cost of repairs or restoration where feasible, with due allowance for any difference between the original value and the value after repairs.
It should be remembered that diminution in value of a vehicle after repairs have been conducted can be difficult to prove and, in some states, the burden is quite high. In some cases it may be necessary to actually sell the vehicle in its damaged condition in order to establish its post-crash market value or, at a minimum, engage an expert appraiser to provide a detailed report.
A comprehensive summary of how first-party and third-party inherent diminished value claims are treated in all 50 states can be found on our website.