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What’s Diminished Value Mean To You

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As contentious an issue as diminished value (DV) has become in the insurance and repair industries, there’s a quiet revolution taking place in the claims business. Once limited to the owners of exotic cars, DV is now a phrase on the lips of ordinary people with damaged grocery-go-getters. And this flood of inquiries to claims offices has led to some rather desperate, yet proven strategies to fend off the claims.

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Besides the common delay tactics used for decades to thin the ranks of claimants, some word tracks are popping up in claims offices to also help sidetrack what insurance industry spokespersons like to call the “fallacy of diminished value.” One Pennsylvania new car dealer was threatened by his own insurance company that he’d be reported to the authorities for insurance fraud for having the audacity to file a DV claim. Says Stan Cramer, of Cramer Oldsmobile in Harrisburg: “They really scared me with that one, but I’ve since learned that it’s not only legal, but it’s my right to recover these losses when my rental fleet or stock units are damaged.”

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Instead of presenting the tired arguments on the pros and cons of DV, whether it in fact exists, is owed and who owes what to whom, I thought a look at the state of the business of DV claims might be more helpful. But before we get started, let’s consider what all this means to body shop operators.

With the increased frequency of DV claims, the odds of re-inspections by insurers, independent post-repair inspectors and dealers are growing. And any defects in workmanship that are found by one of these parties is likely to be hung on repairers. In fact, I’ve been hired by insurers to do these appraisals and have been told to allocate any responsibility on the body shop for loss in value due to bad work.

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The traditional triangle of insurer/shop/car owner is being broken into by these fourth parties. And whether this can be viewed as a good trend or a cancer for the body shop industry may depend on where your shop falls on the quality spectrum.

What’s Driving DV?
A distinct market readjustment has occurred in which there’s a greater degree of spread in car values. Where shoppers for used cars once saw claims of “new paint” in classified ads, they’re now seeing more emphasis given to clean models with their original coatings. And this is in response to changing consumer attitudes toward collision-damaged cars.

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“Collision damage will alter the value of a vehicle at varying levels depending on the make, model and year of the vehicle,” says used-vehicle pricing analyst Jeff Huang of Edmunds.com, an online source for car values. “Damage to high-line vehicles such as Mercedes-Benz and Lexus will have a more drastic impact compared with damaged vehicles that are more common on the road, such as the Ford Taurus. This is in large part due to the higher expectations from high-line used-car buyers compared to buyers who are interested in lower-priced vehicles. In some extreme cases, such as when a vehicle is branded with a salvage title but yet repaired, the value of a car may drop as much as 50 percent.”

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Further driving the market downward for collision-damaged vehicles is the advent of the factory pre-owned vehicle certification. Virtually none of the major auto manufacturers will certify heavily damaged cars and trucks. In fact, even light damage and major re-painting will disqualify cars in the luxury market.

In one of her many articles published on the subject of DV, Erica Eversman – an attorney from Bath, Ohio, and president of the firm Vehicle Information Services, Inc. – says: “As a vehicle broker I know bluntly puts it, ‘Paint work is the kiss of death on a BMW, Mercedes, Jaguar, Audi or any other high-line vehicle, for that matter.’ “

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What’s more significant than the factory certification programs is that a dealer faces a risk when selling one of these cars without disclosing its history to a buyer. Consumer protection laws in the states provide punitive damages for persons who unwittingly purchased wrecks in situations like this, a risk compounded by state lemon laws that provide free legal help to consumers in these situations.

Says David Gorberg, the leading lemon law attorney in Philadelphia regarding dealer fraud cases: “We’ve held a number of New Jersey and Pennsylvania dealers accountable for selling former wrecks to consumers, so I’m afraid a few have had to feel a little pain for engaging in what was once a very common practice.”

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Underlying all of the above is the widely held belief that any kind of collision damage is public knowledge today, with consumers accessing databases maintained by Carfax and other companies like them. While Carfax mines data to a greater extent than any other service, their access to insurance loss data is practically nil. According to sources in the company, they only have information from police departments in little more than a dozen states. The rest is tightly held by the insurance industry – which makes sense given the fact that the publication of such would increase their liability for the losses.

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What the States Say – or Don’t Say
True to form, the state insurance departments are, for the most part, mute on the subject of DV. In Pennsylvania, for example, state regulators defer to the courts in cases involving DV claims – essentially an exemption from regulation for the insurers.

When contacted for a comment on this, Pennsylvania Department of Insurance spokesperson Melissa Fox, says: “As you know, the insurance department is charged with the enforcement of Pennsylvania Insurance Statutes and Regulations. Pursuant to this authority, the department routinely reviews complaints from Pennsylvania consumers regarding specific insurance claims. … “Having said that, generally speaking, auto insurance policies in Pennsylvania require that vehicles be brought to their pre-damaged condition after an accident. For example, when an appraisal is prepared, it must generally contain a description of repairs to return the vehicle to its pre-damaged condition. [See Pennsylvania Regulation – 31 Pa Code ¤62.3]. As a result, the department enforces this regulatory standard.

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“Generally, the department is not involved in claims for diminished capacity. However, the department must examine each complaint on a case-by-case basis and, in doing so, enforces compliance with Pennsylvania Law.”

While the issue of diminished capacity clearly wasn’t what I was inquiring about, the department’s official position in which they say they’re “not involved” confirmed my understanding of the matter. That is, some insurance claims simply are not subject to regulation.

This isn’t the case, however, in other states. In February of this year, the state of Iowa issued the following draft bulletin instructing auto insurance carriers to tow the line on DV:

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“The Iowa Insurance Division (IID) has observed that some carriers are not routinely complying with Iowa law in valuation and settlement of third-party automobile claims. The purpose of this Bulletin is to advise carriers of their obligations on this issue.

“In the Iowa Supreme Court decision of Pappenheim v Lovell, 530 N.W.2d 668 (Iowa 1995), the Court found that when repairs could not fully restore a vehicle to its pre-accident market value, the claimant was entitled to recover the difference between the reasonable market value of the vehicle before the accident and the reasonable market value of the vehicle after the accident.

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“The IID has observed that some carriers do not consider diminished value as a part of the measure of damages, and others include it only when the claimant makes the request. When brought to our attention, the IID directs carriers to reassess valuations and add an element for the diminished value of the repaired vehicle.

“Carriers are reminded that in all cases of third-party automobile claims, carriers are expected to consider diminished value as an additional measure of damages. Carriers who fail to implement procedures to assure that diminished value is considered are at risk of being cited for an unfair trade practice under Iowa Code chapter 507B.”

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Bill Schroeder, vice president of the Alliance of American Insurers Midwest Region, responded in testimony submitted to a departmental hearing on this subject: “[The proposed regulation] would force insurers to pay third-party claimants for diminished value. … There is no contractual requirement to pay anything to a third party. As such, payment of diminished value is a tort claim and a matter of negotiation.”

The states of Pennsylvania and Iowa are contrasted by Georgia, which is known for the famous Mabry decision that forces all insurance companies to pay policyholders and claimants for DV.

“The Mabry court required State Farm to develop ‘an appropriate methodology and procedure’ to determine diminished value,” says Eversmanm. “The method the parties agreed to use in the settlement of that lawsuit has come to be known as the Ô17c formula,’ and other insurers settling Georgia claims have adopted this formula.

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“The 17c formula, however, is as mind-boggling as it is inaccurate. The formula begins with false presumptions that the National Automobile Dealers’ Association (NADA) sale value for the vehicle will be an appropriate initial vehicle value and that 10 percent of that NADA value will represent the maximum decrease in value suffered.

“Often, there are no NADA values for particular vehicles, especially in the beginning of a vehicle’s model year. Additionally, the 17c formula provides no explanation substantiating why 10 percent of the NADA value is an appropriate base figure for the decrease in value. Then, there are multipliers and discounts and subjective determinations as to how severely a vehicle has been damaged, none of which have any real relationship to the actual change in fair market value of the particular vehicle.

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“One of the disagreements I’ve had with some folks in the DV area is that based on my experience, at some point in time it really doesn’t matter if a vehicle is damaged.In other words, a 1985 Pontiac (non-collector car) with 100,000 miles worth $250 isn’t going to have its value impacted by a $110 repair. Without meaning to seem judgmental, it was a piece of junk before it was damaged and it’s still a piece of junk. A car like that, in my opinion, has no measurable DV if damaged. I find it interesting that insurers are paying DV on those types of cars under the 17c formula.”


Case History: The Story of One BMW
The BMW (shown at left) is an interesting case. The car’s owner was insured by Allstate and was rear-ended by an Allstate insured as well. The owner, Kirk Simmon, lives in suburban Philadelphia and had the car repaired by one of the better shops in the area, so the workmanship was as good as it gets. Nevertheless, the car sustained more than $13,000 in damages (using repair costs as the measure of severity) and consequently lost a substantial percentage of its value.

Shortly after the car was repaired, Simmon filed a DV claim with Allstate for roughly $2,900 or 20 percent of its pre-loss value. What transpired afterward is interesting in that his claim didn’t specify whether it was being filed as a third-party tort loss or first-party claim under his contractual rights. Interestingly, Pennsylvania is a state whose insurance department has approved the ISO language that excludes DV from first-party benefits. But Simmon says that after a thorough search, he found no exclusion from coverage in his policy.

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Ordinarily, Allstate will stiff-arm third-party claimants filing claims for DV, citing a company policy that allows them “365 days to consider a claim.” They’re as adversarial to claimants as one gets in these cases. However, they responded to the claim promptly and requested that the owner submit to an inspection by an appraiser of their choosing, to which he agreed. Allstate then dropped the claim in the hands of Curtin and Heefner, a Delaware Valley law firm that handles DV.

After four months of back and forth between Allstate’s lawyer and Simmon, no settlement has been reached. Furthermore, Simmon’s requests for a copy of the Allstate appraisal have been ignored. Allstate, however, did offer him $1,000 to settle the claim. At this point, Simmon asks: “What’s the difference if diminished value is covered when they don’t pay anyway?”

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Indeed. One might wonder if Allstate is handling Simmon’s claim in good faith.

What Simmon’s experience in this claim crystallizes is the arbitrary manner in which DV claims are handled. That is, when it appears that a claimant has the wherewithal to hold an insurance company’s feet to the fire, they settle. In Simmon’s case, however, he complied with his insurance company’s every request, including that he sell his car to accurately define the claim, which coincidentally matched the appraisal he submitted at the start. Yet he waits.

The Future of DV
The exciting part about DV claims today is that those of us involved in the development of methods that analyze the value of autos are essentially writing the rules – and, in some cases, making law. This isn’t always a good thing, such as the case of the State of Delaware, where a 2001 case overturned the Delladonna precedent that allowed for an insured to claim DV.

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Obviously, the stakes are enormous for insurers, car dealers and consumers alike. However, as it is with any development in the world of insurance, what’s good for consumers is often a mixed blessing – if insurers pay more, we undoubtedly will pay more for insurance.

Perhaps the most significant thing for body shops is that given the growth in the DV claims, the odds of another set of eyes on your customers’ cars is growing. It’s not just the insurer/customer/shop triangle anymore.

For the most part, however, I think DV will live or die with no major impact on repairers. DV is more of an issue among insurers, state regulators and consumers.

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DV is what it is. I say this often and what I mean by it is this: No one knows with any great degree of certainty how much a damaged and repaired car is worth – until it’s put back into the marketplace.

Writer Charlie Barone has been working in and around the body shop business for the last 27 years, having owned and managed several collision repair shops. He’s an ASE Master Certified technician, a licensed damage appraiser and has been writing technical, management and opinion pieces since 1993. Barone can be reached via e-mail at [email protected]

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It Is What It Is: A Lesson in DV


In March of last year, Jon Skolnick, the owner of a 2000 Porsche Carrera contacted me with a request that I go to Rahway, N.J., to inspect his car. It’d been heavily damaged in a collision while being test driven by a technician from the local Porsche dealer. Actually, the Porsche tech was hit by another driver who nailed the coupe in the left wheel. In his e-mail to me, Skolnick said he was “pissed.” And rightfully so.

Fortunately, Skolnick is a lawyer and knew enough about civil law to know he didn’t have to take this lying down. Once I explained the process of the typical DV claim to him, he was interested in an analysis of the car in its damaged state, which is a departure from the routine but nonetheless useful for his purposes. My analysis was in the form of a projection of the DV loss he could expect, with the assumption that the car was repaired as well as possible.

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The car was rebuilt by Quality Auto Body, a preferred facility for Ray Catena Porsche in Edison, N.J. From what I could see of the operation while inspecting the car, I was fairly confident they’d satisfy the owner. And after he paid them approximately $25,000 in repair costs, they did satisfy him. The problem was that the third-party carrier for the at-fault driver was only insured for $25,000 in property damage liability, and that coverage was exhausted paying for the repair work, leaving Skolnick to file a DV claim using his own under-insured motorists (UIM) coverage for the DV.

Based on the nature of structural and suspension damage the 996 coupe sustained, the cost of repairs (better known as severity) and its ACV as of the date of the accident, I knew the car was going to take an equally hard hit on its market value. The way I figured, Skolnick had a high-performance car, one built and sold for the purpose of spirited driving. Once the damage was disclosed, how would a buyer of such a sports car react with respect to the bid? Would he want a car that can reach speeds of 140 mph that once had its suspension ripped out by an errant New Jersey driver? I would guess not.

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Arguably, those who would buy a properly repaired car such as this one wouldn’t want to pay fair market value. Far less, in fact. Based on a well-worn seat-of-the-pants guess, I projected a loss of 48 percent of its ACV. Skolnick’s insurer, Atlantic Mutual, balked at the figure.

This is the point where things get interesting. In their belief that my projection was overstating the market reaction to a Porsche damaged like this one, Skolnick’s insurer was tempted to use the actual method of determining the loss. Ironically, Atlantic Mutual and I are in agreement that only the market can determine DV precisely. So his insurance company went through a door they shouldn’t have opened – they pushed a sale and the repaired Porsche went to absolute auction.

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With DV, I always say it is what it is. In other words, no one (not even me) knows with any great degree of certainty how much a damaged and repaired car is worth. Who’s to say? The notorious Georgia 17c formula? A new car dealer?

The pre-loss ACV on Skolnick’s Porsche was roughly $72K. The bids stopped at $40K. The owner bid $40K plus $1 and bought his car from himself. The car never left his possession, the title never changed and Atlantic Mutual wrote Jon Skolnick a check for $32,640. So I was wrong about the DV. The car lost 49 percent of its value.

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As a kind of retaliatory footnote to the tale, Atlantic Mutual reported the Porsche and its VIN to the NICB as having been a total loss. While this is nowhere near the truth of the matter, Jon Skolnick is satisfied with his car and the outcome. Fair is fair.

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