Diminished Value Heating Up or Going Away?

Proponents of diminished value - in essence, the decrease in the value of a vehicle after it has been in an accident - say they are gaining the upper hand. They point, as an example, to State Farm's recently-announced $250 million settlement after the Georgia Supreme Court's ruling in late November that State Farm must pay its auto policyholders for diminished value.
Insurers, on the other hand, like to point to a list of a dozen or more diminished value state court decisions in their favor; less than a month before the decision by the Georgia court, for example, Delaware's Sup-reme Court reviewed three insurance policies (including State Farm's) and ruled that diminished value did not apply.
Some shops see diminished value as the hammer the industry has needed to force insurers to pay for quality repairs; others see it as another factor likely to result in more total losses.
Some consumers proudly wave the check they received from their insurer based on a diminished value claim - not infrequently years after filing such a claim - while others see diminished value as yet another basis for premium rate hikes by insurers.
And some see diminished value as a "loser issue" all the way around, with no one - not shops, not insurers and not even consumers - benefitting much at all, with only one possible winner: class action attorneys.
Here's the latest on the diminished value battle, and a look at where it's likely to go from here.

Its rise from obscurity

First, a little background. Though nothing new, diminished value made it on to most collision repairers' radar screens only in the mid-1990s when a former shop owner began marketing a system that purported to establish how much a vehicle's value had declined following an accident and repairs.
Two types of diminished value are discussed. Inherent diminished value is that which occurs simply because the vehicle was involved in a wreck, regardless of how well it was repaired.
In other words, put two virtually identical cars next to each other on the lot and tell a consumer one was previously damaged in an accident; inherent diminished value, the type at stake in much of the current litigation, is based on the notion that the consumer won't be willing to pay as much for the one that had been wrecked, even if they can't tell which one it was.
Diminished value proponents also speak of repair-related or insurer-related diminished value. Insurer-related diminished value, they say, can result from the insurer's refusal to pay for necessary repair procedures, or the required use of poor quality parts. Repair-related diminished value can result from such things as failure to put on parts for which the shop was paid, mismatched paint, overspray, crooked stripes, poor welds, or poor sheet metal repair.
A few shops in many markets have latched on to the issue of diminished value as part of their fight against what they see as insurer wrong-doing. An insurer won't pay for a procedure you see as necessary? Don't do it and let the insurer end up paying more to the consumer because of added diminished value. Lose a job to a direct repair shop? Offer the consumer a post-repair diminished value evaluation that may cost the insurer and DRP shop some bucks and credibility.
Diminished value advocates more recently have even suggested definitions of seven levels of repair quality, that range from "true pre-loss condition" and "best of reasonable human ability," to "industry standard," "poorly repaired" or "unsafe to operate."
A number of shop owners promoting diminished value assessments say they believe they are being targeted for retribution by insurers. An Arkansas shop owner, for example, has received a cease and desist order from that state's insurance commissioner for "unauthorized insurance consulting activities," requiring him to change how the shop's website promotes diminished value assistance.

The courts continue to rule

Anything that pits consumers and insurers at odds generally results in litigation, and diminished value is no exception. State court rulings on diminished value have been all over the map. The most recent decisions provide good evidence of this.
Last October, the Louisiana Court of Appeals rejected the diminished value argument. In the case of Campbell v. Markel American Insurance Cos., the plaintiff asked the insurer to pay for repairs to his motorcycle as well as the difference between the pre-damage value and the value after it had been fully and properly repaired.
"The Court of Appeals correctly reversed the lower court's ruling and found that Markel met its obligation under the contract in making full and adequate repair of the vehicle," said Laura Kotelman, counsel for the National Association of Independent Insurers (NAII).
The court concluded that the policy language capped Markel's liability at the cost of providing physical restoration of the motorcycle and that the policy did not require coverage for claims of diminished value. A lawyer for the plaintiff has asked the Louisiana Supreme Court to review the case but whether it will has not been determined.
Delaware's Supreme Court last November also gave diminished value claims a thumbs-down. The Court said, "A plain reading of the limits on liability in the policies in question unambiguously gives the insurers the option to choose between the cost of repair or the full value of the vehicle before the covered damage occurred... [T]he insurer is obligated to repair or replace vehicle parts only to the extent necessary to return the automobile to substantially the same physical, operating, and mechanical condition as before the covered incident."
But the Georgia Supreme Court came to a different conclusion in its review of the Mabry v. State Farm case, upholding the diminished value claim. Supreme Court Justice Robert Benham wrote that "value, not condition, is the baseline for the measure of damages in a claim under an automobile insurance policy in which the insurer undertakes to pay for the insured's loss from a covered event."
Georgia Insurance Commis-sioner John Oxendine subsequently stated that all auto insurers in that state must pay its auto policyholders for diminished value.
In early January, State Farm agreed to settle the class action suit in Georgia, providing $100 million to as many as 700,000 Georgia policyholders who've filed claims since December 1993.
The insurer also has agreed to provide $50 million for court costs and attorney fees, and as much as $100 million for diminished value in future claims over the next six years.
Meanwhile, two other class action lawsuits, one against State Farm and one against Allstate, and each covering policyholders in more than 30 states, are moving forward. Potential class members (which, in the State Farm suit, for example, could total more than 2.3 million current and former State Farm policyholders) are those who filed a first-party claim since 1996 if their vehicle was 6 years old or newer with less than 90,000 miles on it, and who had $1,000 or more in repairs.

The outlook

Despite these pending class actions, insurers and insurer groups point to their state court victories and insist that its only a matter of time before they have the legal decisions they need to avoid most diminished value claims
"The entire theory of diminished value is dubious because there is no way to accurately determine the exact value and condition of the vehicle at the time of the accident," argues James Taylor, southeastern regional manager for the NAII. "The role of auto insurance is to repair or replace a damaged vehicle to pre-accident condition; it is not designed or priced to guarantee the value of a car before or after the repair is made."
Diminished value advocates, on the other hand, say the cases they have lost were mostly those brought early on before attorneys had refined their arguments or learned to group plaintiffs advantageously. The Georgia ruling has done a lot to buoy their spirits.
But Bill Hardt, assistant vice president for property damage claims for State Farm, said he believes there's still more questions than answers surrounding the issue of diminished value. "Think about it: If it were you, how are you going to tell how much diminished value there is?" Hardt said. "The car's repaired to pre-loss condition."
At this point, who can say what the diminished value is - based on the quality of repair? More importantly, Hardt said, anyone who views the Georgia case as a victory for collision repairers isn't seeing the bigger picture.
"What's going to happen to [shops] if because of diminished value the cost of claims jumps by 15, 20, or 25 percent?" Hardt asks. "First of all, insurance premiums will go up. Second of all, shops will be fixing a lot fewer cars because we'll be totaling them."
But many see the court decisions as relatively unimportant either way in the longer term. Insurers, they believe, intend to eliminate diminished value claims in much the same way they are moving on the non-OEM parts issue: not through protracted legal battles but by simply making changes to the policies they offer consumers.
Evidence backs this view up: The Insurance Service Office over the last two years has filed diminished value exclusions in nearly every jurisdiction. That exclusion has already been approved in almost 40 jurisdictions; only eight declined to approve it.
As Brian Sullivan, editor of several insurance industry newsletters, said recently, expect diminished value to be a "noisy thing" over the coming months, but less likely a long-term issue.

The Bottom Line

The best defense against lawsuits, both at the shop and insurer level is a quality repair. A quality repair, however, is not a complete defense. It is becoming critical that the shop be able to document the quality of repair. For example, the use of computerized measuring systems provide before and after documentation of frame/unibody pulls.
In our judgment, a formalized quality control process will also be critical, and, in future articles, we will cover what needs to be included in such a program.