As the collision repair industry evolves and consumers become more educated as to their rights, diminution of value – more commonly known as diminished value or DV – is being talked about more and more. But in speaking with shop owners and managers and reading industry bulletin boards, I’ve realized that there are several misconceptions about DV.
Most people are afraid of things they don’t understand and, generally speaking, it’s a basic human instinct to resist change. No where is this truer than with the collision repair industry. From the introduction of plastic fillers to the first unibody vehicles, to clearcoat and acrylic urethane paint systems, many shop owners swore that these new-fangled things wouldn’t work, would never last and that, quite frankly, they wouldn’t use them.
Well, here we are in the 21st century, and unitized frames, acrylic clearcoats and plastic body filler are all still with us. Along with DV. What I hope to do here is better explain what DV is and, hopefully, eliminate some of the fears repairers have regarding it.
Damaged Goods
DV is pretty much what it sounds like – diminished value means a decrease in worth.
Consumers have long recognized that once something is damaged, it’s not worth as much as a similar, undamaged unit. And this applies to nearly everything in life.
In nearly every city, there’s an electronics store that sells reduced-priced merchandise. You can purchase “Factory Reconditioned” stereo equipment at a dramatically reduced price. (And “Factory Reconditioned” means it was repaired by the manufacturer.) When a company realizes there’s a defect in a component, they often replace the defective part and then reduce the price for sale to the general public.
But DV extends further than manufactured goods. It’s been claimed for the loss of value of a brand name, and in a separate case, the loss of value of a patent. In England, the Farm Animal Welfare Council recognizes the potential of DV in livestock. Everything – art, fertilizer, logs, quality of life, manufacturing equipment, real estate – can incur DV. It’s not exclusive to the automotive industry. It’s a potential factor in nearly everything in life.
DV isn’t new either. It’s been around for quite some time. Claims for diminution of value have been filed – and collected – for decades. The government has long recognized the decrease in worth of real estate when mines are nearby.
DV has been around for quite some time in the automotive industry as well. Claims have been filed as far back as 1922. This isn’t anything new – especially to insurance companies.
Types of DV
Essentially, there are three types of DV in two basic categories. Both “repairer-related DV” and “insurance-related DV” can be grouped under the same subcategory of “claim-related DV.” Inherent DV, however, stands alone in its own category. Each individual type has its own “cause.”
Many repairers mistakenly believe that they’re somehow at fault for all types of DV. This simply isn’t the case. The only type of DV the repair shop is responsible for is repairer-related DV. Once a vehicle has been damaged, however, even the best repairs cannot restore all of the vehicle’s value. Proper repairs serve to reduce the decrease of value, not restore it. The stigma of collision damage is such that the public is unwilling to pay the same amount for a vehicle with a damage history as they would for one that’s never been damaged. Obviously, this is beyond the control of the repair facility. What is within the shop’s control is repairer-related DV.
Let’s take a closer look at all three kinds.
Repairer-Related DV
When a vehicle is repaired as properly as humanly possible, there’s no repairer-related DV. But if the shop performs improper repairs or shoddy workmanship, it contributes to this classification of DV.
I’ve actually heard shop owners say: “If the customer’s happy with the repairs, it’s none of your business.”
Just because a less-than-ethical repairer can pull the wool over the eyes of an accountant or second-grade school teacher (both of whom know nothing about automotive repairs), does that make it right? I’d say not. Emphatically.
I’ve personally inspected vehicles that consumers thought were acceptable – only to show them that the shop never replaced the quarter and rear body panels or to point out the half-inch worth of shims raising the fender off the upper rail so that it lines up with the hood. Quite simply, it’s either right, or it isn’t. This is black and white. The gray area comes from omitted repair procedures and unrepaired damage.
So how can a shop reduce or eliminate its liability when an insurer refuses to pay for certain procedure? What can a shop do when the insurer simply refuses to pay for a necessary operation?
Document, document, document.
The most important thing a repairer can do is put everything in writing – both to the consumer and the insurer. This isn’t to suggest that the shop actually negotiate with the insurance company – to do so would be interfering in the contract of insurance. Call it a courtesy notification.
The best way to do this? A Notice of Deficiencies (NOD). This document clearly explains the procedures the shop needs to perform to properly repair an automobile and explains to the consumer, in layman’s terms, why the procedures are necessary. This way, if the insurance company outright denies payment for something and the consumer doesn’t want to pay out-of-pocket (and the shop doesn’t want to work for free), the shop’s pretty much covered. The shop requested, the insurer denied – so this would then be insurance-related DV.
But if a shop doesn’t have proper documentation, an insurance company can merely claim it wasn’t aware the procedure was necessary. After all, the shop is the repair expert. This argument has occurred more than once in court, and the shop was held liable for the improper or incomplete repairs.
Insurer-Related DV
If the shop has requested compensation for a specific procedure or operation and the insurer declines payment – and the shop doesn’t want to work for free – this would be insurance-related DV. As I mentioned earlier, it’s a good idea for the shop to notify the consumer and insurance company in writing – to prove the insurer knew that the operations were required (CYA, if you will).
Certain insurers commonly deny payment for things such as masking for primer, masking jambs and recessed areas, finesse sanding and polishing, etc. But who can blame a businessperson for not wanting to work for free? The liability incurred is incredible if you stop to think about it. Why would you risk burning the clear or buffing through an edge without compensation? Combine the cost of labor and materials with the amount of lost production that happens when you have to re-do something, and you begin to get a grasp of why you shouldn’t chance doing something for free. Not to mention the fact that if you do something as benign as leave swirls in the finish, you can be held accountable for their removal – even more work for free.
It really is as simple as filling out a form (in duplicate) and faxing or mailing it – certified. This effectively shifts the liability back to where it belongs – on the shoulders of the party who denied compensation, whether it’s the consumer or the insurance company declining payment.
As always, this process requires proper consumer management by the shop, something I’m afraid not many shops are very adept at doing. Perhaps it stems from fear of retaliation by insurance companies in the form of steering, or it could simply be lack of education. Either way, I haven’t found many shops that can fully edify and properly manage their customers so that the consumer can make informed decisions.
Inherent DV (the Misunderstood One)
Webster’s defines inherent as “involved in the constitution or essential character of something; belonging by nature or habit.”
A good synonym in this case is “unavoidable.” The motoring public – consumers – aren’t willing to pay the same for a previously damaged automobile (or anything else) as they would for one that’s never been damaged. The mere fact that a vehicle has been involved in a collision lowers the value.
Always?
Someone once said that the only things in life that are certain are death and taxes. Should inherent DV be added to this phrase? Is it always present?
Maybe not. Arguments have been made that in some cases, the repairs actually increase the value of the automobile. And in some cases, this may be true. A 1992 Escort that had rusted fenders could increase in value if the rusted parts were replaced with non-rusted ones. But this is certainly not the norm. A 2002 Cadillac with $25,000 in damage wouldn’t be worth as much after repairs as it was prior to the loss, at least not to someone who knew of the previous damage.
Insurance companies, and even some shops, believe that if an automobile is restored to serve the same look, purpose and function as it had prior to the loss, there’s no DV. But let’s say you buy a rare art piece by Monet or Picasso at an auction, and you go to an appraiser – who informs you that the paint is cracked due to mishandling. Surely someone can touch it up and blend it in so that it wouldn’t be noticeable, right? It would hang on the wall exactly the same.
So, according to those who don’t recognize inherent DV, the picture is still at full value.
Except that in the real world, it’s not.
What does art have to do with automobiles? Nothing. Let’s use this example instead. Let’s say you just found a 1967 RPO L71 Corvette – 427 with tri-power and a four-speed (435 h.p.!!) – all original. The paint is somewhat faded, but a good polishing will bring it back for the most part. Now let’s say some mindless punk keys the finish and it needs to be re-painted. Is it still worth the same amount with new paint? Some people might try to convince you that it’s actually worth more.
Yeah right.
OK, OK. Not a real-world example. How about this then. Let’s say you just bought a 2002 Cadillac Seville STS, loaded, for somewhere around $50,000. Two days after you buy it, some idiot blows through a red light and crushes the front end to the tune of $25,000. It’s “only” 50 percent of the actual cash value (ACV) in damage, so the insurance company won’t total it.
Do you still want to make the payments on a $50,000 car? Do you believe you still have a $50,000 car? What do you think someone would realistically pay for this particular auto when you disclose the extent and amount of damage? Even with the best quality repairs possible (you did it yourself), this particular vehicle is worth substantially less than it was just prior to the collision.
Face it, you’d be making payments based on $50,000 for something that’s worth maybe only $35,000. Doesn’t seem right to me.
Watch closely as leasing companies mitigate their losses on vehicles that have a damage history. A lease turn-in that has no damage history is a saleable unit – it can go back on the lot and be sold. Damaged goods are another story. In many cases, dealers are compelled by law to disclose known damage (an honest dealer would tell a consumer even if they weren’t legally obligated to). And we all know how consumers are penalized for lease turn-ins that have door dings and paint scratches.
What do you think these leasing companies are going to do when they have to disclose prior damage? Take the loss out of their profits? That doesn’t seem like good business to me, and I’m sure it doesn’t appeal to them either.
Vehicles with a damage history are often taken to an auction, where they’re sold at a reduced price – yet another piece of evidence that DV is real. And even at auctions, certain types of previous damage must be disclosed, reducing the price even more.
So why is all this disclosure required if DV doesn’t exist?
Typical Insurer’s View Of DV
One insurer says, “Proponents (of DV) support their view with the following argument: If you were shopping for a used car and you saw two identical vehicles on the lot and the salesperson told you that one of them had been in an accident and the other had not, which one would you choose?”
This is pretty much a no-brainer.
However, they go on to say (and this insurer certainly isn’t alone; these comments have been mimicked by insurers everywhere): “Furthermore, the proper restoration of a vehicle does not, in and of itself, diminish its value. …”
No one said that the proper restoration of the vehicle diminishes the value. It’s the fact that the unit has a damage history that causes inherent DV. Inherent DV has absolutely nothing to do with the repair process or quality of repairs.
They continue: “Those who reject the theory of inherent diminished value argue that the ‘side by side’ argument is too simplistic. On a used-car lot, each vehicle competes on its own merits for a prospective buyer’s attention. The market value of a car is a combination of many factors including condition, mileage, effect (if any) of any prior damage, nature and quality of any repairs, popularity of a particular model, prior ownership, color, equipment, trim and whether it’s a classic or specialty car.
“Perhaps some customers would prefer a car that’s never been in an accident. Perhaps others don’t want a car that’s had a driver or passengers who were smokers. All of these items could be points of negotiation between the dealer and the buyer, who might be willing to pay less than the asking price for a vehicle that’s not her first choice.”
Maybe someone didn’t understand the meaning of the word identical. Two identical automobiles would be in the same condition, have the same mileage, the same popularity, the same color, the same options and be the same classic or specialty car. Identical would also mean that the vehicles were both either smoked in or not smoked in. The only difference in the proponents’ example is the existence of a damage history.
Inherent DV: Why Some Repairers Doubt It
Perhaps the reason that many repairers don’t understand or agree with inherent DV is because they’re too close to the subject matter. But ask anyone who’s not in the automotive industry about a vehicle with a damage history – especially extensive damage – and you’ll see what the public thinks.
Seriously, ask your cousin the shoe salesman and sister-in-law the bank manager which vehicle they’d rather purchase: a 2000 Honda Accord with 32,000 miles and no prior damage for $14,900, or a 2000 Honda Accord with 32,000 miles for $14,900 that had been involved in a wreck and was repaired at a cost of $9,600. Both have identical options, are the same color and have the same maintenance record. It’s pretty obvious which one they’re going to choose.
As a repair professional, you take great pride in your work, and justifiably so. But the fact remains that a previously damaged car or truck doesn’t have the same appeal to the consumer. Even Ransom Olds or Henry Ford couldn’t undo the fact that the vehicle has been involved in a crash.
DV: Good or Bad for the Repair Industry?
Insurance representatives claim that DV will cause more totals, reducing the number of repairable units in the market, and insurance policies already are being written to specifically exclude DV. Obviously, the insurance industry recognizes the existence of DV – otherwise it wouldn’t have to change policies to disallow claims for it. Changed policies or not, when a claimant (third party) is subjected to the loss of value, he’ll be entitled to settlement for this loss.
No matter what insurers do, DV will be around from here on out. But is that good or bad? For claimants, it’s definitely a good thing. It’s owed to them. Why should they be forced to accept a loss due to the negligence of another party?
From the shop perspective, totaling vehicles isn’t in the best interest of the industry – or is it? If insurers total a vehicle because they know they’ll have to pay DV, they have to pay the consumer the actual cash value of the automobile.
And because people need their cars, what does the average John or Jane Doe do with this money he gets from the insurance company? Goes out and buys another car.
Following the insurance companies “logic,” that means there’d be more newer vehicles on the road – with higher thresholds for repair, meaning more profits to the shop. It would also mean less borderline repairable units and help to eliminate the insurance companies’ act of limiting payment when the job gets close to a total. No more contract repairs. Newer, easier-to-work-on vehicles. More profits. Not entirely bad.
Also, as consumers become more aware of the DV issue, they’ll be more demanding with respect to the quality of repairs. And if insurers know an automobile may be subject to a post-repair inspection, they’ll be more apt to issue proper payment for all required procedures. More profit again.
DV will also help to eradicate “hacksters” in the repair industry. If insurers are forced to pay higher DV settlements due to the shoddy workmanship of shops, how long do you think it’ll be before they begin to take action against these shops? Also, as post-repair inspections continue to uncover fraud, state agencies are going to begin to take more notice. These two factors alone will reduce the number of shops – leaving a larger slice of the pie for quality repairers.
What Should Shops Do?
Go about business as usual and continue running a quality-driven facility. Focus on properly managing and educating your customers and documenting your requests for repair procedures in writing. Control the one-third of DV that you have control over, and the insurance industry will then have to take responsibility for any insurance-related DV.
As for inherent DV, it’s currently being debated by legions of attorneys in nearly every state and is a matter that will, ultimately, be decided in courtrooms across the country.
Writer Patrick Yurek is the vice president of Collision Consulting LLC (www.CollisionConsulting.com). He has 22 years of industry experience and has held every conceivable position in a collision repair facility from sweeper to management. Among his credits are several PPG certifications and General Motors technical certificates. He was also the president of the General Motors Service and Parts Managers Organization of Western New York. Yurek can be reached by e-mail at [email protected] or [email protected] or by calling (704) 821-4190.
|
Inherent DV: Is It Owed? Is a vehicle really worth less because it’s been in an accident? If so, is the vehicle owner entitled to compensation? Bob Hurns, legal counsel for the National Association of Independent Insurers, prefers not to directly answer these questions, even when asked point blank. Instead, he cites state law: “Our position is that you’re entitled to recover for diminished value if it’s provided for in the state law,” says Hurns. “And that’s our entire premise. For example, in Georgia, consumers [are] clearly entitled to diminished value. But if you look at all the states, out of 50, only nine allow for the recovery of diminished value and each of those nine are severely limited. É It’s not like they’re clearly going to be handed a check for the amount of diminished value. In some of those states, they have to go to court and prove there actually was diminished value.” If only nine out of 50 states allow for DV recovery, why the big to-do? According to Hurns, “people who claim to be able to assess diminished value” have been fanning the flames, telling consumers across the country that they’re entitled to DV when, in reality, they may be entitled – but only if state law allows for it. “I see a lot of these entrepreneurs as the ancient alchemist, who’s trying to turn a rock into gold,” he says. “I think they’ve done that in the state of Georgia, but I think in the remaining states, a rock is pretty much still a rock.” Interesting argument – although the idea of a wrecked and repaired vehicle being worth less in the marketplace existed long before post-repair inspectors came on the scene. In reality, it’s consumers who believe a vehicle diminishes in value after an accident. A wrecked vehicle carries a stigma, even if it has been repaired properly. Ask 10 consumers if they’d pay the same amount for a wrecked and properly repaired vehicle as they would for an identical make and model that’s never been in an accident. Even Hurns (sort of) agrees that the stigma exists. “There is a concept called perceptual DV,” he says, “and I think consumers may have a perception that a vehicle that was in an accident does have a lesser value. But you have to balance that with modern technology and a professional who’s capable of using that technology to restore a vehicle to pre-accident condition. I think with the state of the auto repair industry now, they’re perfectly capable, in most circumstances, of restoring that auto. In some cases, betterment may even happen where an auto may be repaired to a better condition than it was prior to an accident.” So if Hurns had to pick between buying a vehicle that had been wrecked and repaired and an identical one that hadn’t been, which one would he choose? “It depends on the extent of the damage,” he says. “I think that an auto that’s being close to totaled, no I wouldn’t. If it was minor damage and primarily cosmetic in nature, I don’t think it would have that much impact on the value.” Hurns cites his own case in point: his recent collision repair experience, brought about when his ’97 Grand Marquis had a minor run-in with the side of a bus. “There was absolutely no damage to the bus at all, but my car on the passenger side was scraped from bumper to bumper,” he says. “I took it into my dealer. I paid out-of-pocket $1,500 [because] I didn’t even want to submit a claim. When I got the car back, it looked like the day I bought it. It was cosmetic damage. They did a beautiful job. I looked at it, and I couldn’t tell that the car had ever been in an accident. When I sell the car, am I entitled to some kind of windfall for that? I think that I was compensated in that the repair shop did a beautiful job on it.” Maybe so. But what if the damage had been more severe? “In states like Georgia, where DV is permitted, the amount of DV is the difference between the value of the vehicle prior to the accident and then the fair market value after the repair and the accident,” he says. Third-party claimants, he adds, are really in a different boat than first-party claimants who are bound by the language in their insurance contract. First-party contracts, he says, can only be re-interpreted by the courts if the language is ambiguous. And not many insurance contracts are ambiguous. So if DV clearly isn’t provided for, it won’t be awarded. “When you’re a third party,” Hurns says, “you’re not a party to that contract so you aren’t bound by its terms. So then that third party, in states that allow it or disallow it, at least has the legal opportunity to go in and prove [his] claim. “When you think about it, that’s a pretty balanced approach. On one hand, you’re saying contract controls this equation, which is the first-party equation. Since there’s no contract in the second, then DV can’t be eliminated there and it has to be looked at.” So DV exists, at least in some cases? Hurns says asking that is akin to asking the age-old question, “Is there life after death?” You’ll get a different answer, depending on whom you ask. “You have three camps. You have true believers, like people in Georgia and the entrepreneurs who are trying to cash in on this … who say yes, yes, DV exists everywhere. “Then you have the middle ground which is, DV might exist if state law says it does – and that’s the NAII’s position. Does DV exist in Georgia? Yes, because the courts have said so. Does it exist in 20, 30, 40 other states? No, because the law doesn’t recognize it. “And then you have people out there who may think, no. They don’t believe that there is anything like DV whatsoever. So you basically have three schools of thought on it.” It’s the “entrepreneurs” in the first camp, the true DV believers, who Hurns says are making an issue out of DV in the first place. “They’re trying to fan the consumer base,” he says. “The more people they can get to believe in inherent diminished value, the more money they might make.” |
Writer Debbie Briggs is managing editor of BodyShop Business.
