Diminished Value: First & Third Party Claims
Diminished value auto claims are on the rise. Individual cases usually do not capture the headlines because they do not involve huge dollar values. But across the insurance and collision-repair industries, these claims are growing in frequency and collectively having a big impact. Here is what you need to know about these claims.
What is diminished value?
Despite whatever labels are used to refer to such a claim — diminished value, diminution in value, loss in value after repair, or stigma damages — they all mean the same thing: the monetary difference between a vehicle’s pre-accident value and its post-repair value.
A proposed methodology for dealing with DV claims.
At the outset, identify procedurally and substantively what kind of DV claim you’re dealing with. Issue One: what type of DV claim are you dealing with — perceptual or psychological versus repair-related DV (loss of vehicle market value due to inferior repairs)? Issue Two: Is it a first-party or third-party claim? Your answers to these issues will direct the potential discovery and measures of damages.
Perceptual or psychological versus repair-related DV?
Proponents of perceptual or psychological DV claims argue that the vehicle owner should receive additional compensation for the decreased value of a repaired vehicle because the vehicle has lower market values simply because it has been in an accident. The gist of the argument is: if you had your choice of identical vehicles, except that one was repaired after being in an accident, most people would pick the non-accident vehicle.
The inherent flaw in such a general argument, however, is that it fails to acknowledge that a vehicle involved in an accident can be restored to a condition that meets or exceeds its pre-accident condition.
In contrast to the “perception” DV class, there is the repair- related DV claim. This type of claim deals with the less-than-ideal repairs. It also can include anything from minor cosmetic imperfections to more major structural problems.
First-Party or Third-Party?
While it seems overly simplistic, the nature of the claim determines the damages. First-party claims are based on the insurance contract and, therefore, the measure or recovery of damages is governed by the specific terms of the insurance contract, in contrast to general third-party tort damage principals.
Typically, in first-party claims, property damage would be paid out at the least of: actual cash value (ACV), repair, or depreciation. With first-party coverage, the basic insurance industry stand is that current vehicle policies were never intended to cover diminished value. Typical policy language provides coverage for “direct and accidental loss of, or damage to, the vehicle.” The industry argument is that DV is an indirect loss and thus isn’t covered.
The industry’s policy stance was eventually challenged in a class action suit in the Georgia Supreme Court. In State Farm Mutual Automobile Ins. Co. v. Marby,the seminal DV case, the Georgia Supreme Court interpreted “loss” to include DV. State Farm was ordered to pay $150 million in attorneys’ fees and settlement costs. State Farm was also ordered to develop a claims handling procedure to evaluate and pay first-party DV claims.
Ironically, the very day after Marby was decided, the Wisconsin Court of Appeals decided Wisconsin’s own first-party DV case. In Wildin v. American Family Mut. Ins. Co.,the Wisconsin Court of Appeals affirmed a trial court’s grant of the insurer’s motion to dismiss the insured’s complaint against the insurer for failure to pay DV in addition to repair costs. The insured argued that despite the repairs, no repair could have restored the vehicle to pre-loss condition because of unibody structure and/or frame damage. Thus, she argued that the carrier should pay her DV. The court, however, dismissed the insured’s DV claim, holding that the policy language only required the carrier to pay for all necessary “repairs” and “repair,” given its ordinarily understood meaning, did not mean to restore to pre-loss value.
In response to the wave of DV litigation, insurers are reacting by changing policy language. Some insurers are writing exclusions for DV claims. Other insurers, including American Family, are responding by with new endorsements to expressly reiterate that the definition of “loss” does not mean or include any difference in the market value of the insured vehicle immediately prior to the loss and the market value of the vehicle after repair.
Contrary to a first-party claim, a third-party DV claim is governed by the traditional tort measures of damages. In Wisconsin, up until Hellenbrand v. Hilliard,the tort measure of damages to repairable property was the lesser of 1) repairs costs; or 2) the difference between fair market value of the property immediately before and immediately after the loss. In Hellenbrand, however, the supreme court rejected a blanket “lower of the two” rule and recognized that in certain cases, it is theoretically possible to have both types of damages.
In analyzing the prior “lower of the two” authorities, the supreme court noted that it had previously “apparently assumed, as will often be true, that if property is repairable, then repairing the property makes the plaintiff whole.” In ultimately rejecting the legal principal of “lower of the two” for every case, the court went on to rely on a “collapsed basement” case to extrapolate that the mandated disclosure of an adverse condition to prospective purchasers could impair market value of the property. The court ultimately concluded, “[W]hen a plaintiff proves that repairs to personal property have not restored the property to its pre-injury value, and the plaintiff demonstrates that he or she has been or will be harmed by such loss in value, the plaintiff is entitled to damages for the proven lost value.”
The nitty-gritty in defending DV claims.
The pivotal question in DV claims is whether repairs restored the vehicle to its pre-accident value or, alternatively, whether a vehicle’s value decreased in value after a loss despite repairs? This is a question of fact.
So how is a vehicle’s diminished value determined? There is no determinative definitive set of standards. At the outset, however, look at type of damage. Serious frame or engine damage is more likely to resonate with a jury over a simple paint/refinishing complaint with a standard, non-luxury passenger vehicle.
Witnesses will consist of the mechanics or repair folk, as well as an appraiser. There are generally two types of expert-appraisers: 1) the “touch, see & feel” appraisers, versus, 2) national valuation services. Advantages of the TSF appraisers are that they have actually visually inspected the vehicle (the vehicle’s exterior, engine, frame, etc.). They have personally driven the vehicle so can offer testimony to refute the plaintiff’s claim that the vehicle “just doesn’t drive the same.” Local used car managers with trade-in, appraisal, and auction experience are the ideal expert candidates.
In response to rising DV clams, numerous on-line valuation organizations have sprung up. Most often used by claimants, they are low-cost, usually offer 24-hour turn-around time and sometimes are willing to offer expert testimony. They also claim that their valuations are very close in number to the valuation of the “hand-on” appraisers using the same methods of valuation available to the local hands-on appraisers, including NADA, Black Book, Kelly Blue Book, Edmunds, Auto Trader, as well as regional, on-line dealer inventory.
In addition to scrutinizing valuation factors such as vehicle options, mileage, condition, geographical region, age, date of valuation, etc., one also needs scrutinize the basis for the market value figure being claimed. Vehicles are sold in many different types of markets: new/retail, dealer-used, trade-in, auction, private-sale between individuals, etc. The particular market in which the vehicle is being bought or sold may influence alleged market value.
In support of “perception” DV claims, plaintiffs are sometimes attempting to rely on CARFAX reports. CARFAX is an electronic, available-to-the-public database that reports vehicular property damage culled from police reports. Motions in limine may be considered to keep such hearsay from the jury; however, defense counsel should be prepared with effective cross–examination and argument to negate the weight given to such information that is available to the open market.
Finally, there is a much-debated issue regarding whether the vehicle must be sold or traded-in before a DV can accrue. To this end, the timing of any sale or trade-in is also important. If the vehicle owner keeps the vehicle and continues to use it, any alleged DV damages should dissipate as the vehicle continues to age and depreciate. In other words, the DV will diminish as the overall value of the vehicle levels off due to its value as mere transportation. Restated, if the owner drives the wheels off the vehicle until it only has salvage value, is there still a DV claim? Without a sale, are the plaintiff’s damages fixed, certain and ascertainable?
The other school of thought is that damages are considered from the accident date and a sale or trade-in is simply one of many factors to consider in assessing market value and DV damages. Hellenbrand did not address this “required sale” issue because in Hellenbrand there was a sale of the vehicle.
With DV claims on the rise and law still developing, defense counsel will need to gather all available property damage, repair and appraisal information pertaining to a vehicle so as to present these relatively simple claims to juries in a straight-forward, no-nonsense manner.
State Farm Mut. Auto. Ins. Co. v. Marby, 274 Ga. 498, 556 S.E.2d 114 (Ga. 2001); see also 12 Couch on Ins. § 177.19 (3rd Ed., Updated June 2006); “Diminished Value” in Automobile Insurance: The Controversy and Its Lessons”, 12 Conn. Ins. L.J. 39 (2005-2006).
See id., ¶¶12-24, (quoting WI JI – Civil 1804; Nashban Barrel & Container Co. v. G.G. Parsons Trucking Co., 49 Wis.2d 591, 182 N.W.2d 448 (1971); Krueger v. Steffen, 30 Wis.2d 445, 141 N.W.2d 200 (1966)).
Id., ¶ 18.
Mary L. Richards is a Senior Staff Attorney with American Family Mutual Ins. Co. She received her undergraduate degree in journalism/public relations from Northern Illinois University and her law degree from the University of Wisconsin-Madison. Richards served two separate stints as law clerk to Wisconsin Court of Appeals Judges Ralph Adam Fine and Charles Schudson. She is past-president of the Association for Women Lawyers. She is a member of Civil Trial Counsel of Wisconsin and the National Association of Insurance Women. Her practice focuses on general insurance defense and coverage litigation.