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The Court of Diminished Value

As consumers across the country file diminished value (DV) claims against insurers and hire lawyers to file DV class-action suits, repairers need to learn what the law says about DV — and if and when the scales of justice will be tipped against them.

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I had nothing to do with this wreck. I had a new car, and I want it new again — or at least as new as it can be," says Eladio Sotolongo III, lamenting about the damage to his new Ford Thunderbird, which he bought only six months before.

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It seems Sotolongo was stopped behind another vehicle on the roadway when, "I heard a screech and turned to brace myself," says the Florida restaurant consultant, explaining how a Mustang hit his Thunderbird square in the back, hard enough to open the sunroof and to push Sotolongo’s vehicle into the car in front of him.

When all was said and done, his new Thunderbird sustained severe front-end and rear body damage. "I went to several body shops," says Sotolongo. "Their estimates ranged from $5,700 to $6,100 for repairs. My insurance company gave me an estimate of about $4,400."

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Sotolongo says he was advised by friends to "make money out of the deal" by going to cheaper repairers. "But I wanted my new car fixed right," he says.

Still, he had to settle for the repairs the insurance company would pay for. As a result, the body shop he selected could only repair the front bumper cover instead of replacing it, leaving it slightly distorted and open to potential tears from the small cracks that couldn’t be fixed. The shop also straightened the left and right rear quarter panels, replicating the line of the body with plastic filler instead of using new quarter panels. Plastic filler was also used to repair the deck lid.

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The shop also repaired, instead of replaced, the buckled frame rails, which the techs felt impaired the structural integrity of the vehicle.

"I think the insurance company should have put all new parts on [the Thunderbird] and replaced things instead of repairing them," says Sotolongo. "[The insurance company] even argued about a $50 molding. The adjuster told me the molding on his car didn’t look any better than my damaged molding.

"But I had a new car," continues Sotolongo, who paid about $17,000 for his vehicle. "If I’d wanted a wrecked car, I would’ve kept the old car I had before this one."

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Enter diminished value (DV) — a term Sotolongo didn’t know before the accident. Now quite familiar with the term, Sotolongo contacted his insurance company, Liberty Mutual, about getting compensated for the decrease in the value of his car. At present, the insurance company is "looking into it," he says.

"I wanted it fixed in a way [to get it back] as close as possible to … the way it was," says Sotolongo. When the insurance company failed to do that, Sotolongo felt he should be compensated. As the vehicle owner, he wasn’t happy with the extent or quality of repairs; he also feels the car isn’t as valuable simply because it was damaged in the accident.

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Does he have a claim? Is DV an issue here? To get a better understanding, let’s examine it from all sides — the vehicle owner’s, the insurance company’s and the law’s.

Defining DV
There are really three different scenarios in which the term "DV" is claimed:
1. The value of the car decreases because repair work has been done improperly or because certain parts of arguably lesser value have been used in a repair.
2. The value of the vehicle decreases because the insurance company refused to repair a vehicle to the highest level possible or at least to the level the policyholder feels is reasonable.
3. The value of the vehicle is lowered simply because of the damage.

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The first situation has been brought to the forefront by franchised software companies, such as Wreck Check, which attempt to evaluate work done by a prior repairer or to assist a consumer in evaluating what his car is worth at present compared to what it should be worth if undamaged.

DV, in this sense, has been defined as the difference between the actual cost of the repairs authorized and the cost of what it would take to get the vehicle in the best condition possible. Claims under this theory might be made by a consumer against a repairer who lowered the value because of sub-standard work or against an insurance company that insisted a vehicle be repaired at a body shop that didn’t do proper work.

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The second situation occurs when an insurance adjuster writes an estimate that doesn’t agree with the way the body shop and the car owner feel the repairs should be made. "We try to work these situations out between the body shop and the adjuster," says Gregg Mecherle, counsel who specializes in automobile claims in State Farm Insurance’s corporate law department. "If a reputable body shop advises us that something else needs to be done to repair the vehicle to pre-accident condition, we try to listen. That’s what supplements are for."

In Sotolongo’s case, after the body shop discussed the matter with the adjuster, a supplement was given for the moldings and for some OEM parts to be used on the vehicle.

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Many of the disputes described in the second situation revolve around the aftermarket vs. OEM parts controversy or the repair method, such as whether certain parts should be repaired or replaced.

State Farm policies specifically authorize the use of aftermarket parts in repairs. If a customer is adamant about the quality of the repair, then State Farm will take a second look at the job, says Mecherle. But State Farm likes repair shops to at least try to repair with aftermarket parts. (The intention of the policy on the insured vehicle is to restore that vehicle to substantially the same condition it was immediately before the accident.)

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Regarding DV, State Farm has issued this policy statement: "We are familiar with ‘diminution of value’ claims. If a claim for diminution in value is covered under our policy contract, State Farm pays such claims in those jurisdictions that recognize them as a compensable item of damage but only to the extent the claimant shows there has been diminution of value.

"In most cases, State Farm believes a vehicle that is involved in an accident can be restored by quality repairers to its pre-loss condition without any diminution of value. Whether damages for diminution in value are appropriate can only be determined on the merits of a particular case considering the applicable jurisdiction and policy contract involved."

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Regarding services that offer to provide software for evaluating DV, State Farm adds: "We are not aware of any system for determining DV subsequent to a collision repair and would be suspect of any such system used in all cases of repair since we believe quality repairers can restore damaged vehicles to their pre-loss condition."

But can an automobile damaged in an accident ever be the same? This is perhaps the most intriguing meaning of the term DV. In other words, it’s arguably just the nature of damage that the vehicle can never totally be restored to the way it was before the accident. Even if every part on the vehicle were replaced with a new, OEM, top-of-the-line part, to the owner and a subsequent buyer, it might never be the same simply because it’s been wrecked.

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"I know it’s not a new car," says Sotolongo. "I saw the body shop rip the sides off and put parts that weren’t the same on it."

He also reports that the car "is making a noise" that wasn’t present before the accident. "It’s just not the same car," he says.

But the "value of the vehicle" is an amount determined not by the value of the vehicle to its owner — who often has a love affair with a particular car causing him to believe the amount of his loss should go up — but by an amount calculated in terms of fair market value. And vehicle owners are contending that their insurance companies are responsible for returning the car, if not to the actual physical condition before the incident they’re insured against, then to the value of the car before that time.


Case Study
As the policy statement issued by State Farm suggests, a recovery by an insured, like Sotolongo, against his insurance company for DV may well depend on two factors: first, the language of his particular policy, and second, how the jurisdiction where he lives interprets that contract.

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Interestingly enough, courts in separate areas of the country have interpreted exactly the same language in a State Farm insurance policy and have come to opposite results on the insured’s DV claim.

In both cases, the appellate courts were reviewing a claim made under a State Farm policy that included the following language:

"The limit of our liability for loss to property or any part of it is the lower of:
1. The actual cash value; or
2. The cost of repair or replacement …

We have the right to settle a loss with you or the owner of the property in one of the following ways:
1. Pay up to the actual cash value; or
2. Pay to repair or replace the property or part with like kind and quality … "

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The question before the courts in each case was whether or not the phrase "repair or replace with like kind and quality" was ambiguous.

In Johnson vs. State Farm Mutual Automobile Insurance Company, decided by the Court of Appeals of Arizona in 1988, the plaintiff, Johnson, was in an automobile accident. State Farm decided to repair the vehicle because repair costs were lower than the car’s actual cash value. State Farm didn’t delay the repair, which cost $5,064.48, and Johnson made no complaint of any defective repair.

However, after the accident, the value of the vehicle was found to be $3,000 less, so Johnson argued that since State Farm decided to repair the vehicle, the company had an obligation to restore the vehicle to its value before the accident.

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The Arizona court disagreed, saying that nowhere in the policy did there appear any language requiring State Farm either to restore the vehicle to its pre-accident condition or to pay the insured the difference in value. The court further said, "We also do not find any ambiguous language in the provision at issue."

The Superior Court of Delaware, however, reached a completely contrary decision on similar facts in 1992 in Delledonne vs. State Farm Mutual Automobile Insurance Company. In that case, Delledonne’s automobile sustained flood damage while parked at a bank. The insurance company paid for repairs in the amount of $1,387.93, but Delledonne alleged a loss of $8,000 to the value of the car.

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As in the Johnson case, State Farm argued that the policy didn’t provide for the payment of any perceived or residual loss in value and that it fulfilled its obligation under the insurance contract when it paid for the costs of repairs.

Delledonne countered that the phrase "repair or replace with like kind and quality" was ambiguous, and that it must be construed to include loss in the form of loss of value.

In its opinion, the Delaware court stated that ambiguous language in an insurance contract, which it defined as language susceptible to two or more reasonable interpretations, is construed against the insurer. The court stated it would look to the reasonable expectations of the insured at the time of entrance into the contract if the policy terms were ambiguous.

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The Delaware judges decided that since various courts took two distinctly different positions on the issue, it proved the contract provision was ambiguous. The court determined that the words "repair or replace with like kind and quality" required the restoration of the vehicle to substantially the same condition prior to the damage and concluded that "restoration to such condition cannot be said to have been effected if the repairs fail to render the vehicle as valuable as before."

The Delaware court followed a prior South Carolina case that held that, depending on the facts of each particular case, the appropriate measure of damages could either be the difference between the fair cash value of the car before and after the accident, the cost of repairs plus the diminution after the accident, or the cost of repairs plus the diminution in value.

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In the Delledonne case, the Delaware court gave a further explanation of its reasoning with a suggestion for insurance companies: "It cannot reasonably be believed that the ‘repair’ of a vehicle that has been flood damaged with ‘like kind and quality’ is complete upon making basic physical repairs. It is well-known in the insurance industry that automobiles suffer great loss in value as a direct result of their status as flood-damaged vehicles. An insurer wishing to avoid such liability should employ language in its policy that clearly reveals its intent to do so. … This Court finds that, the language being ambiguous, the loss in value to plaintiff’s vehicle must be added to the cost of repairs made in order to give effect to the reasonable expectations of the insured plaintiff."

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It’s interesting to note that the case didn’t end successfully for Delledonne at the moment of this decision. The court also found that, at that point, she hadn’t successfully established the monetary loss in value to her vehicle.

What Does It All Mean?
What does all this mean in terms of Sotolongo’s claim that his Thunderbird isn’t the same and that he’s entitled to some form of compensation from his insurance company?

First, it means he probably needs an attorney, since there’s room for argument and courts aren’t unanimous about recovery. Sotolongo’s attorney will undoubtedly want to review his insurance policy, since the policy language may be different or limiting. The attorney may also wish to determine if Sotolongo has a viable claim against the Mustang driver who hit him, since he may be able to make a more successful third-party claim against that person, instead of making a claim against his own insurance company. The attorney also needs to find some well-respected expert testimony as to the amount of DV, if there is any.

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Most importantly, the attorney needs to review the decisions within Sotolongo’s home state to determine which way the courts are leaning on the issue of ambiguity under the applicable state law in order to advise his client on the chances of success on this claim.

At the beginning of this decade, the majority of jurisdictions interpreted the "repair or replace with like kind and quality" provisions to be ambiguous enough to require insurers to pay for DV, and such provisions aren’t limited to situations where an insurer’s repairs are faulty.

But there’s nothing to prohibit an insurer from adding clauses to an insurance contract that better define the limitations of its liability. So the first step in Sotolongo’s claim — or any other claim based on DV — should be to carefully read the insurance policy. Unfortunately for consumers — and for repairers hoping to clean up the industry and straighten out insurers — some new, limiting policy language could diminish the chances of DV claims being successful.

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Writer Susan Martin has her own law practice in Miami and is licensed to practice in the state and federal courts of Texas, Florida, Hawaii and Nevada. She’s married to a body shop owner.

Note: The foregoing is intended as an informational article only and should not be construed as legal advice.

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