“Inherent Diminution of Value”.
A claim that states that if you were to put a repaired vehicle next to one that has never been in an accident, the repaired vehicle would be worth less
The Argument
I was recently asked to perform a desk review on a demand for Diminution of Value. What was different about this assignment is that the assignor actually wanted to pay something towards the perceived argument, but not the arbitrary figure that was being asked for. The adjuster had bought into the claim (of which is the core issue), that if you were to put a repaired vehicle next to one that has never been in an accident, the repaired vehicle would be worth less. This is what is called “Inherent Diminution of Value”. The claim is not without merit, it has teeth, but usually when you’re dealing with a rare, special type (classic) and/or irreplaceable vehicles’. The issue is viable, but the answers are not, at least in the conventional way that the issue is being handled in today’s claims departments’.
In the normal course of handling this type of claim, I look for the basis of the amount in question. In this case, as in so many others, there was no basis. The claimant had no problems with the repairs and continues to drive the car to this day. The real problem stems from the issue that is noted above as an emotional one and it should be noted that it is impossible to put a price tag on emotions (they’re priceless).
Diminution of Value is a real problem when you consider what “State Law” say’s when one wants to sell his or her vehicle after the repairs. As an example and in the State of California, the seller must report to any suspecting buyer that, a); the vehicle has been in an accident and the repairs exceed 10% of the vehicle’s actual cash value, or b); if the vehicle’s frame or unibody structure has been compromised. I’m certain that this language is supported by all of the other states of the Union as well. But what is ironic here is that most states do not recognize 1st party Diminution of Value claims and for obvious reasons, “How do you create a formula that is based on an assumption”? Third party claims are no different in theory, but because the situation may become a legal matter, concessions are always in order and helps to avoid litigation, but to what extent?
Getting back to my desk review, it was quite apparent that there was simply nothing coherent to consider. I wasn’t surprised by this, but there was something in the demand that caught my attention. At the end of the Appraiser’s Report, it indicated that “This report was influenced by Rule 17C” (paraphrased). I proceeded to investigate this rule, of which turned into a quest.
I found that “Rule 17C” had emanated from a court decision by the State of Georgia. This rule outlines a verdict that was handed down in a class action lawsuit that involved some 25,000 vehicles’, the case is known as “Maybry vs. State Farm”. In this case, the court ordered State Farm to come up with a formula to satisfy the court’s ruling in favor for the plaintiffs. State Farm then turned to a formula that was circulating from another insurance company. The formula that was used to establish and remedy the case is based on “Modified indicators” that represent sections of the vehicles’ overall condition and the percentages of those indicators as applicable. The problem is that each one of those indicators has no foundation of life expectancy to attribute to the percentages applied. Nor is any of it “Discernible, Measurable and/or Itemized”.
As I continued scanning through the submitted “Appraiser’s Report”, I noticed that the amount of the Diminished Value being asked for represented 31.92% ($20, 748) of the vehicle’s Actual Cash Value ($65,000)! We are dealing with a 2014 Tesla S85 (Electric Car), with low miles. Wow, I said to myself, how does a perfectly repaired vehicle lose so much value? One would think that the ACV would be stable or go up (electric car), not down (and certainly not that far down).
In this desk review the claimant’s appraiser had also indicated that he contacted (6) used car sale managers’ from the manufacturers dealerships’ for their opinion on how much the repaired vehicle was worth after the repairs. The appraiser goes on to say that he has informed the used car manager of all of the facts surrounding the loss vehicle. He then elaborates that the vehicle has a tainted history that was revealed through “Carfax” (by the way, I ran a “Carfax” and it came back clean). While I’m on the subject of vehicle history, no where that I am aware of does it state that an insurance company is obligated to report any accident other than a TOTAL LOSS to the N.I.C.B., (the reporting agency). In fact, “Carfax” gets their information by hunting down police reports (public information). They are fishing, nothing professional about it. There is no specific information about the extent of damage, they report the fact that an accident has taken place only!
So when an appraiser contacts those dealerships for their opinions on “Actual Cash Value”, those same appraisers should know that any quotes obtained from them are not rooted in fact, but in the “profit” mindfulness of the situation. This brings us to the question, who are these sales managers? What are their qualifications? Where are these individuals located that are giving these quotes, are they near the vehicle owner’s residence in proximity? Does their opinions fall in line with either N.A.D.A. or Kelley Blue Book’s guidelines (of which does not know that the vehicle has been in an accident)? There are many questions regarding this part of the process and correct answers matter, especially when it comes to “Actual Cash Value”.
My question is and has always been, why is the “ACV” of the loss vehicle used as the mitigating issue, when the focal point of the problem lies within the damages and the repairs rendered. Therefore, if there is any problem to consider, the solution should be sought out in the Damages vs. Repairs equation. The ACV is the outcome, not basis!
Yes, there is a solution and the answer is rooted in the formula that is “Discernible, Measurable and Itemized”. But any attempt to settle this part of the claim should be considered as a consolation. At the end of the day, this is still a mute point, up and until the claimant has proved their loss.
This issue is huge and continues to grow. Most claim agents (and a claim agent is anyone supporting the outcome in the settlement of a claim) is not necessarily trained in political scenarios. When this type of a claim is received it is naturally turned over to house consul or an attorney. They in turn hire a person like me to do the argument. Again, the argument is based on the fact that you cannot put a price on an assumption. And by the way, the burden of proof for the plaintiff in this matter is extremely high.
Consider the case of the Plaintiff and Appellant, “William Baldwin” vs. AAA Northern California, Nevada & Utah Insurance Exchange et al., Defendant and Respondent, (Case# A142217, Court of Appeals of California). Here is what that decision basically says; a fairly new vehicle, with average miles has been involved in an accident and the incident was no fault of the vehicle owner. He takes the vehicle to the dealer or its recommended surrogate to have the repairs performed. That entity is the factory’s recommended certified repair facility, being repaired by a certified technician, using the factory’s recommended repair procedures and utilizing original equipment manufacturer (OEM) parts. Not to mention that the vehicle owner had been given a replacement vehicle, while his or hers was being repaired. The judicial system found that the plaintiff failed to meet the required level of “Burden of Proof”. Case dismissed!!!
Every claim has its own set of circumstances and a “broad brush” won’t work. A specific response is needed for a specific demand and should be professionally represented in doing so.
You just can’t dismiss the claim without going through the motions. This means that every appraisal demand and/or any other type of appraisal that attempts to address “Diminution of Value” will need a response that addresses dollar amount specifics. The problem now is in the fact that everyone seems to be using the Actual Cash Value of the loss vehicle as the mitigating source, rather than the repair costs. It is in the repair costs, that weighs the possible consideration for a resolution.
The “No Fault” accident started this problem and rolled into the repair process and into the delivery of the restored vehicle. If the truth be known, the claimant never asked to be in this accident and wants someone to pay for the inconvenience. Webster’s dictionary describes an accident as an “unexpected event, usually undesirable”. Jurisprudence is already applied in normal claims handling.
Let’s face it, the problem is not that there is actually a problem. The problem for any claimant in this situation is in the feeling that the whole car is going to fall apart at any time and deep down the claimant just doesn’t want the vehicle anymore. The problem is exacerbated by the fact that vehicles today are not cheap and it takes a great deal of damage to render the average car a Total Loss. Very few people are familiar with the formula that meets the threshold of a Total Loss. That equation is; repairs costs, open items (what could be damaged that is not visible now) and salvage value (the present value, wrecked). For the claimant, the accident is not fair. Someone needs to walk the plaintiff through the entire process of “Reasonable Thinking and Common Sense”, so that the claimant may be enlightened as to the “Market” as it applies to vehicles and their destiny.
For the adjuster, who thinks that this claim is over after the repairs are done, then gets a rude awaking when the claimant hires someone (usually through the internet) who can help them with this spurious claim for “Inherent Diminution of Value”. This so called auto appraiser will probably cost the claimant anywhere from $150 to $500 for his or her product. This product is based on the aforementioned and then those quotes are averaged out and then the principles of “Rule 17C” are applied or some other version of “smoke and mirrors”.
Nevertheless, this “Rule 17C” has taken on steam now and has somehow entered into our industry and is taking it by storm. This rule is knocking on the doors of several states now and several insurance companies are trying to get ahead of it by implementing this process without being mandated to do so. I believe that several estimating systems have gone ahead and have created programs that use Rule 17C as the template.
It should be noted that the Department of Insurance in the State of Georgia, has stated, they do not endorse, support, nor condone the application of “Rule 17C”. They go on to say that Rule 17C should not be considered as any sort of established precedent. Provisions are already in place and are noted in the “Fair Claim Settlement Practices” that already exists in its present language that outlines settlement procedures. That language is consumer based and was established to protect the consumer by “unfair” claims settlement practices.
There is something else to consider here. Though most of the Diminution of Value claims submitted indicate that no post re-inspection was ever performed, a re-inspection is vital. The physical inspection is the only environment in which an appraiser can verify that the repairs were done properly and in accordance with the manufactures’ repair process. If there was any Diminished Value, it would be in the improper repairs performed.
And finally, and as a means to get this claim off the adjuster’s desk, I suggested to the adjuster to pay 10% of the repair costs ($36,971) = $3,697 and that the payment should be categorized as a consolation to satisfy this particular claim, so as not to set a precedent. It was further suggested that if that offer was not accepted, that the argument proceed to a court decision.
Fred Zapien, is a Physical Damage Auto Appraiser and is considered the “Unofficial Policeman” of the Auto Body/ Insurance Claims Industry. He is also the owner of Zapien’s Appraisal Inc. He can be reached at fzapien@zapiensinc.com. Or visit his website @ www.zapiensinc.com