It’s not everyday we get to witness the opening of Pandora’s Box, but with the Insurance Services Office’s (ISO’s) recent diminished value (DV) exclusion –– PP 13 01 –– made to its member companies, that lid may soon be thrust wide open, making the climactic scene in "Raiders of the Lost Ark" seem like a game of chess in the park.
And if you’re a shop owner (in fact, if you’re a human being) this latest recommendation that excludes compensation for loss in market value due to DV–– if widely accepted by insurance companies –– will have some sort of an effect on you. Like an octopus playing the piano, the DV exclusion hits on a lot of notes, but it probably plays an unfamiliar tune. No coverage for DV? Is this a new thing, or is that how it’s always been? How, and why, did this come about? And, most importantly, what does it all mean?
The Way We Were
Diminished value has many definitions, but one commonly agreed on states that DV is "the decreased market value of a wrecked vehicle even after having been repaired." Three categories of DV exist: inherent, which says that a repaired vehicle, no matter how well-serviced, will still be worth less than before the accident because it’s "damaged goods"; claim-related, which theorizes that a car will lose value because an insurer either specifies inferior parts or refuses to pay for particular procedures recommended by the shop; and repair-related, which theorizes that a car loses market value due to substandard shop techniques. In general, the shop is responsible for rectifying repair-related DV. But who’s responsible for rectifying DV as it relates to the other two categories?
It seemed the possible ambiguity in the wording of insurance policies allowed many consumers to be compensated for inherent and claim-related DV. The policies didn’t say DV was covered, but they didn’t say it wasn’t covered either. Legally speaking, in a situation like that, where a unilateral contract –– like an insurance contract –– has any ambiguity, it’s enforced against the author of that contract, so when informed customers pushed their insurers hard enough to compensate for DV, they usually got it.
"All insurance companies have paid diminished value in the past," says Thomas Thrash, an attorney from Little Rock, Ark., who was a member of the plaintiff’s counsel in the Snider vs. State Farm case. "There’s no question about that."
The contract ambiguity was, in a sense, the consumer’s friend and was therefore the average shop’s friend, too, since those consumers were happy –– they had been made whole again. Insurance companies, though, didn’t exactly hire the town crier to announce these DV payments. But increased public awareness of DV, thanks to consumer advocate groups, repair shops, car dealers and other companies, have apparently increased the number of DV claims to a point beyond the threshold of what insurance companies want to bear. If you have a few bugs flying around while you sit on the deck drinking beer, you just swat them away with a casual wave of your hand. But when scores of them come from all directions, then it’s time to get the bug light.
The ISO may be the bug light in this case. In light of the increased number of claims from policyholders requesting DV compensation, the ISO went to work to make the policy language less confusing. "Basically, the idea behind the exclusion clarifies that diminution in value is not covered under the Personal Auto Policy," says Dave Dasgupta, a spokesperson for the ISO. "That’s the clear intention."
But making the semantics less confusing may have made the whole issue more complicated. The wording in the Insuring Agreement in the Personal Auto Policy went like this: "We will pay for direct and accidental loss to ‘your covered auto’ or any ‘non-owned auto,’ including their equipment, minus any applicable deductible shown in the Declarations."
While it indicates mandatory compensation for direct or accidental losses, it doesn’t mention DV. But does that mean DV was included?
"Absolutely," says James Lynas, president of Wreck Checks Inc., an industry group based in Marietta, Ga. "A policy of insurance is an inclusionary contract, meaning [something] must be specifically excluded or it’s otherwise included. For example, you don’t see a single policy of insurance that mentions anything about a fender or a bumper. But yet, fenders and bumpers are included. You don’t need to have a policy inclusion for [that]."
Dasgupta contends, however, that this wasn’t the case for DV. "The reason we came out with this exclusionary endorsement was to clarify the intent of the policy, which said this is not going to pay for any real or perceived loss in market value," he says. "It was never the intent of the policy to pay for loss in market value of autos. … It was never covered."
Despite the debate and concern, the ISO tweaked the policy in such a way as to specifically exclude DV from coverage, while at the same time asserting that DV never should have been covered in the first place. According to the endorsement, " … Nothing in [the language of the insuring agreement] contemplates payment for diminution in value, [but] insurers are seeing an increase in these types of claims by policyholders."
In addition to saying the policy never covered DV, this statement implies that the exclusion may have been a response to an increase in DV claims. Was this what spurred the ISO to clarify the language? It depends on whom you ask.
"It was an indication of what was happening in the market," says Dasgupta. "But I don’t think it can be directly attributable to higher [numbers of] claims. What we do is provide information, so [a higher number of claims] is not something we would be influenced by."
Lynas disagrees. "Because the insurance companies started getting hit with more diminished value claims … [they] screamed and hollered to ISO to give some kind of protection from this because [they were] being inundated," he says. "And ISO put a stop-gap measure together –– and that is the PP 13 01."
The change in policy included the addition of the definition of "diminution in value," defined as "the actual or perceived loss in market or resale value which results from a direct or accidental loss." The change also included the following exclusion: "We will not pay for: Loss of ‘your covered auto’ or any ‘non-owned auto’ due to ‘diminution in value.’"
So, if the policy only covered "accidental" and "direct" losses, then is a drop in market value not a loss? Or is it not a direct loss? Bob Stanton, director of the insurance fraud unit at the New Hampshire Department of Insurance has said DV is an indirect loss and is therefore not covered. The typical policy "will pay for anything but diminished value," he says.
Dasgupta agrees. "[Diminished value] is considered an indirect loss," he says. "When damage is done to a car in an accident and [the customer] has been paid to get it repaired, that is considered a direct loss. Now because the additional [loss in market value] does not relate to the cost of repairing the car, it’s an indirect loss, which results because the car was in an accident."
Lynas, on the other hand, points out that, "The law in every single state defines the damage to an automobile as the difference in value before … and after the accident. … Now, if the law says the legal measure of damage to an automobile is its diminished value and you have a policy in insurance that excludes damage to an automobile, then you actually have a policy that sells nothing, covers nothing and includes nothing."
Ann Spink, a shop owner based in Denham Springs, La., and vice-president of the Coalition for Collision Repair Equality (CCRE), agrees, saying that if a consumer has a cash value policy and the exclusion removes the market value, then there’s nothing left.
And this is where the can of worms, Pandora’s Box and the Ark of the Covenant all start to burst wide open.
Us and Them
If PP 13 01 is widely adopted, it appears the DV issue may be determined in the courts. Experts on both sides agree the ISO’s exclusion is a "stop-gap" measure preceding a possible flood of litigation. "It might buy the insurance industry another six, eight or 12 months, but that’s about it," Lynas says.
The thing is, the courts, that last bastion of order where final judgments are made and irretractable precedents are set, have given mixed rulings on the DV issue.
Proponents of both sides cite court cases supporting their arguments, and when the law gives no definitive answer, you can bet the impending flood of litigation will make Niagara Falls seem like a leaky faucet. For example, Delladone vs. State Farm in 1992 said "an insurer’s provision to ‘repair or replace’ a vehicle or its parts with ‘like kind and quality’ requires that the insurer pay for diminution in value." In 1997, Smith vs. Midland Risk Insurance Co. said policyholders were entitled to "damages … for the diminution of value due to the vehicle’s involvement in an accident." And there are many more cases with similar results, meaning that any judges in future litigation need only look this far to make his or her judgment, right? Precedent has been set. What a relief. Now the judicial system can get back to that whole prayer-in-public-schools thing.
Not so fast. In the summer of 1999, Allstate was slapped with a "diminished value" lawsuit, Munoz vs. Allstate Insurance Co., where a woman sued to reclaim the money for the loss of market value in her car following an accident. But the class-action suit was dismissed before it went to trial. Why? The court ruled that Allstate never breached its contract. Similar DV suits were also rejected last year in Massachusetts, Florida and Texas, leading Robert Hurns, associate counsel for the National Association for Independent Insurers, to proclaim DV cases to be "baseless" and that "the expectation to be paid for diminished value was unreasonable."
So what’s with the differing rulings? Were the judges and juries sniffing paint fumes?
Not likely. "It depends on the jurisdictions and how they interpret the language of a particular policy," says Thrash. "Most of the time when the policy says they’ll put you back to pre-loss condition, those cases say that included the diminished value. That seems to be the most prevalent and correct decision. There are some minority positions where the courts have interpreted the specific languages of policies to not require the insurance company to make you whole."
Since there’s no clear-cut decision across the country, it seems that each case, no matter who wins, only adds another rock to this mountain of evidence for both sides, providing respective bases of support. This is another reason why a flood of litigation is expected.
Suppose PP 13 01 is accepted by most major insurance companies. What happens to the average shop?
For one thing, written documentation becomes extremely important if shop owners want to avoid liability. "Therefore, the shop has documented records that show the insurer and the vehicle owner were notified of the necessary parts, procedures, repairs and materials that were needed to repair the vehicle," says Spink. "If an insurer does not include these items on their estimate and the car is not properly repaired following the insurer’s estimate, then the shop has protected itself."
Speculation also abounds that PP 13 01 may give insurers more control in determining how repairs are done, and at what cost. "If the policy provision were permitted to stand as written … then that would give the insurance company carte blanche to under-repair the car and defraud the customer [because insurers don’t have to pay the corresponding loss]," says Lynas. "Technically, diminished value is the only mechanism that protects the consumer from the insurance company putting a blue fender on a white car and saying, ‘Hey, you got a fender, and it has paint on it. That’s all we owe you.’"
If a shop, then, performs a repair they know is substandard, even though they followed the insurer’s estimate, that shop could be considered negligent if a problem (like a hood) pops up later. That’s why documentation is possibly the best protection.
In fact, the flood of litigation that results from a wide adoption of PP 13 01 may shine light on DV, what was otherwise a little-known concept. The public’s knowledge of aftermarket (A/M) parts shot up dramatically following the Snider vs. State Farm decision. Likewise, shops may have more customers inquiring about DV, like they’ve been doing about A/M parts. And shop owners will have to be ready. But what can you tell customers about a topic that appears about as malleable as a Gumby doll left out in the sun?
The shops that document their activities with insurers will have an easier time answering questions and putting customers at ease. However, all this is speculative because the final chapter in this saga has yet to be written, much less brainstormed.
God Only Knows
"Any insurance company that implements PP 13 01 will be doing, in my opinion, one of the dumbest things they could possibly do because they are eliminating one of the most cost-effective ways to add finality and resolve claims," says Lynas, referring to how the insurer foots the bill for re-repairs until the repair is done right. Such re-repairs can often go above and beyond the amount it would have taken to pay off the DV.
So why exclude it? "The problem is they don’t pay for either [DV or re-repairs]," says Thrash. "Insurance companies have historically done everything they can to not pay claims."
But without the ISO’s exclusion, could consumers have taken advantage of a system where DV compensation is paid out in every instance DV is determined to exist? It’s possible. If inherent DV can be theoretically found in every repair, then everyone would want some extra cash, whether they planned to sell their cars anytime soon or not. It’s the definition of "inherent" that has insurers and consumer advocates scrambling to determine and proclaim the extent of DV, if any, in the collision repair industry.
Insurers say a car can be repaired to its pre-accident condition, to the point where the car is just as good as before the accident. According to insurers, if we can get past this psychological block that says any car that was in an accident is "damaged goods," then that vehicle can be restored to its previous condition and market value. Insurers say it’s only the public’s mindset that prevents the car from being 100 percent, and this is where the urban legend of inherent DV comes from.
But this mindset is insurmountable, according to Thrash. "You can’t get past it," he says. "It’s a mindset like [knowing] the sun is going to come up in the morning. It’s a fact of life. The propaganda [insurers] put out says that in a good repair, there won’t be any diminished value. Well, that’s just hogwash. There’s no truth to that at all."
Lynas points out that while inherent DV exists, its definition has been misconstrued by the insurers. "It’s not just a perception, which is what the insurers are trying to paint it as," he says, contending that consumers’ belief a wrecked and repaired auto is "damaged goods" is based on more than just a gut feeling. It’s legitimate.
Returning a car with moderate to high damage to pre-accident condition with regard to its function, appearance and safety is impossible for all three categories, says Lynas, especially when A/M parts are used. Because of this, value is diminished. A/M part usage will not put a car back the way the factory intended, and as a result, safety may be compromised. Air bags may deploy too soon or too late and crush zones will not evenly collapse in a collision, he says.
The function of the car may be compromised, as well. Kinetic damage, or the damage that doesn’t become evident until months after the repair, adds to the DV. For example, a car is hit from behind, jumping in the air as the suspension crashes forward. The crash is so violent that it causes damage throughout the remainder of the vehicle, like in the back axle housing. When the axle slams into the bearing carrier, the carrier will elongate and cause flat spots. But this won’t be detected when the car is delivered back because it’s not in the area of the car where the collision took place. Chances are there will be rear bearing failure thousands of miles too soon, at 60,000 miles rather than 130,000, for example.
"It’s these kinds of things that cause consumers to not want to have a car that’s been involved in a previous accident," Lynas says. "They are all valid concerns based on the fact that the vehicle has not been restored to pre-loss condition, even though it may have been restored to the best of human ability."
Consumers recently backed up Lynas’ comments in a recent Insurance Consumer Advocate Network (I-CAN) survey, in which consumers indicated that a repaired car isn’t worth the same as the identical car that’s accident free. Nearly 96 percent of respondents indicated they wouldn’t pay the same price for a repaired car as compared to an accident-free auto, no matter how similar they appeared.
"You really have to wonder about the other 4 percent," says Thrash. "Why would they say that? Maybe 4 percent of the people out there are in the insurance industry."
All of this, however, is just build-up to something that may never even materialize. PP 13 01 is still in its early stages. According to Dasgupta, it was filed in 47 states and has been adopted by 29 as of press time, meaning that ISO member insurance companies in those states can choose to adopt the policy exclusion. Adoption, however, could lead to policies being interpreted as having duality. In other words, the same policy that allows a car to be totaled –– the insured gets $10,000 or 100 percent of the cash value, for a totaled car –– will also pay for a repair but not DV –– a $10,000 car gets $3,000 in repairs and the insured receives $3,000, but his car is now valued $1,500 less so he’s short $1,500 of being made whole, or 100 percent. "If you hit somebody really hard, you’ll receive 100 percent, but if you don’t hit them quite hard enough, you’ll only receive a portion," says Lynas. "Hit ’em harder if you want to get paid in full."
If PP 13 01 is adopted widely, many speculate that insurance companies will be hit just as hard with class actions. If it’s not adopted, it could lead to scores of new DV claims. Either way, consumers will be more educated, yet more inquisitive on the issue, and shops will have to be prepared to answer inquiries and possibly be middlemen between consumers and insurers as the DV debate rages.
Pandora’s Box has been opened. Now we’ll see what’s inside.
Writer Mike Lawrence is associate editor of BodyShop Business.