An Automobile Diminished Value Primer

FORT PIERCE, Florida – Automobile Diminished Value has officially become an entry in the lexicon of insurance terminology. This article explains what is known as “inherent diminished value.” It reflects a car’s quantifiable loss in fair market value subsequent to being repaired after a collision. Differing from “repair related diminished value” which deals with faulty repairs and “insurance-related diminished value,” which deals with an insurer’s use of aftermarket parts in car repairs, “inherent diminished value” claims are far more common. In every state with the exception of Michigan, you are entitled to recover the value that your vehicle has lost as a result of collision repairs from the insurance company of the at-fault driver.

It has always been known that used-car buyers favor purchasing a previously undamaged car to a repaired one. But until CARFAX came along it was virtually impossible to know one from the other. Now that repaired vehicles can be easily identified by having the dealer order a CARFAX report, these cars and the stigma of their being previously repaired eroded their trade-in values, sometimes considerably. This type of loss is known as “inherent diminished value.”

How much of a vehicle’s value is ultimately lost after repairs are completed? The amount of diminished value varies according to many factors. The year, make, model, mileage, type and severity of repaired damage and even a car’s color can factor in to the equation. Consumers of high-end cars such as Bentley, Mercedes-Benz and Porsche tend to be more discriminating and usually won’t buy a vehicle that was repaired, regardless of how minor the damage was. Diminished Value can result in 50% of the vehicle’s value lost.

How is diminished value calculated? In order to determine the most equitable settlement amount, the ultimate authority is the used car market itself. Insurance companies began using a formula known as Rule 17C which was modeled after a formula once used by Infinity Insurance Company. This formula contained “modifiers” such as severity of damage and mileage, and then assigned points accordingly. The total number of points accumulated equaled the amount of diminished value.

In 2001, the Georgia Supreme Court made an historic ruling that impacted all 50 states in the case of State Farm Insurance Company v. Mabry.Their decision impacted how automobile diminished value claims should be treated, not only in Georgia, but also in all other states with the exception of Michigan. The diminution of value after a collision has always existed but, until Mabry, insurance companies refused to pay or even acknowledge diminished value.

The Georgia Insurance Commissioner issued a directive regarding the Georgia Supreme Court ruling that set precedent for diminished value claims throughout the United States. What this clarification meant for consumers was that their insurer would have to settle each claim on an individual basis, because no single formula could be applied to all diminished value claims. The Commissioner concluded that the Georgia 17-C formula is to be used only in the event there is no other methodology to arrive at the diminished value and that it is not sanctioned or endorsed by the Georgia Department of Insurance. The trial court’s order required State Farm to include an evaluation of diminution in value in its standard assessment of damages, just as it evaluates other elements of damage, and to adopt a suitable methodology for doing so.

Many independent appraisal companies that provide automobile diminished value reports still use this methodology. Other companies rely on automobile auction results which show the difference in prices realized between previously repaired vs. previously unrepaired vehicles. These reports are not specific to the actual vehicle in question nor do they address the specific repairs that were done.

Only one indicator can be considered relevant regarding automobile diminished value – how much less the dealer will offer for your trade-in as a result of a bad CARFAX report. If a consumer or attorney needs to hire a diminished value appraiser, the appraisal should preferably be done on the basis of actual dealer opinions rather than the use of formulas or auction results. It is advisable to make certain that the appraiser is properly licensed in any state as an independent adjuster who is a credible expert witness for any legal proceedings that might follow.

Diminished value appraisal figures should represent what the vehicle will encounter in the real world of used cars. It is the used car managers at dealerships who provide the most realistic assessment of values because automobile dealers are the ones purchasing and re-selling the vehicles. An automobile diminished value appraisal that is compiled in this manner, listing each dealer, their estimation of how much less they would pay because of the bad CARFAX and any pertinent comments such as how different variables may have affected their decisions, carries the most weight. Although it is more time consuming than using a formulaic approach or an auction printout, it isthe most valid method by which accuracy can be obtained.

Although most states have not accepted the existence of diminished value in first-party claims, drivers who crash their own vehicles still have recourse by taking a tax-deduction for the diminished value of their automobiles.IRS Form 4684 is used for casualty losses such as automobile diminished value. It is advisable to check with an accountant or CPA to determine exactly what percentage of the appraised amount is tax-deductible. The cost of the automobile diminished value appraisal is also tax-deductible on Line 22 of IRS Schedule A.

Franklin Colletta The St Lucie Appraisal Company PO Box 2700 Fort Pierce, FL 34954 phone: 772-359-4300 email: [email protected]