January 3, 2007
INSURANCE CLAIM FOR CAR'S DIMINISHED RESALE VALUE
By: Janet L. Kaminski, Associate Legislative Attorney
You asked if a person can make a claim for the diminished resale value of a vehicle that has been in an accident under an auto insurance policy written in Connecticut and if this is addressed in any state's statutes.
When a vehicle is damaged in an accident and repaired, its resale value may be less than that for a comparable vehicle that has not been damaged. Thus, the damage, even though repaired, causes a reduction-or “diminution”-of the vehicle's resale value. In Connecticut, a claim under a person's personal auto insurance policy (“first-party claim”) for diminution of value is typically not covered. The policy language specifies that the insurance covers the cost of repairing the vehicle or, if considered a total loss, the actual cash value. It does not specify payment for lost market value. The policy may even include specific language excluding coverage for diminution in value.
If the accident was the fault of a third person, Connecticut case law holds that the negligent person is responsible for the diminished value of the vehicle. A person whose vehicle is damaged in an accident may submit a third-party claim alleging diminution of value against the negligent driver's auto insurance policy. The policy's property damage liability coverage pays for property damage for which the insured is
legally responsible. The measurement of damages recoverable is the vehicle's reasonable market value before the accident minus its reasonable market value after the accident, plus interest from the date of loss.
There is split authority throughout the country on whether auto insurance policies cover diminution of value. While only two states (Arkansas and North Dakota) have related statutes, a majority of states have ruled on the matter through litigation. Most jurisdictions hold that diminution of value is not covered as a first-party claim, but is covered as a third-party claim. First-party claim denial is based on contract law (policy language interpretation) while third-party liability is based on tort law (negligence). Cases in states holding the minority opinion that first-party claims are covered under a personal auto policy generally state that market value, not vehicle condition, is the baseline measurement of damages.
DIMINUTION OF VALUE
When a vehicle is damaged in an accident and repaired, some believe that it automatically is worth less than before the accident, even if the repairs restored the vehicle to its former physical condition. Such “inherent diminished value” became a focus of attention in the late 1990s with the advent of services, such as those offered by Carfax, that assist body shops and consumers in determining the market value of vehicles and track a vehicle's history.
Proponents (e.g., consumer advocates) of the inherent diminished value theory attach a stigma or negative perception to any vehicle that has been in an accident, regardless of any repairs performed. They believe repairs can never restore the vehicle to exactly the same condition as before the accident and that repaired vehicles are more prone to breaking down in the future. Proponents assert that a consumer will pay less and dealers will offer a reduced trade-in value for a vehicle that has been in an accident versus one that has not. They believe that auto insurance policies should reimburse a vehicle owner for this diminution of value, real or perceived.
Opponents (e.g., insurers) of this theory believe that repairs to an accident-damaged vehicle can restore the vehicle to a condition that meets or exceeds its condition before the accident in terms of appearance, durability, functionality, and safety. Thus, they believe proper restoration of a vehicle does not result in diminished value. They also note that widely used market valuation guides, including the Kelley Blue Book and the National Automobile Dealers Association (NADA) yellow book do not distinguish between vehicles that have been in an accidents and those that have not, saying this is evidence that properly restored vehicles do not suffer a diminished value.
The majority of courts faced with the question of whether or not a personal auto insurance policy's physical damage coverage pays for diminution of value have found that the standard policy language clearly and unambiguously does not cover such a first-party claim. The standard policy language covers the actual cash value of the damage or the actual cost to repair the vehicle to its pre-accident condition.
To clarify that actual cash value does not include market value reduction, at least 38 states, including Connecticut, have approved policy language that expressly excludes coverage for diminution of value. The standard exclusion defines “diminution of value” as the actual or perceived loss in market or resale value which results from a direct and accidental loss (ISO form no. PP 13 01 12 99).
The most prominent case concerning diminution of value claims is a 2001 Georgia Supreme Court ruling that collision-damaged vehicles are worth less simply because they have been damaged, regardless of how expertly they are repaired (State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (2001)). As a result of the decision, State Farm paid as many as 700,000 Georgia policyholders more than $100 million for the diminished value of vehicles repaired after since December 1993 and agreed to consider diminished value when calculating all future claim payments to Georgia policyholders. Soon after the decision, the Georgia insurance commissioner issued a directive requiring all auto insurers licensed in Georgia to abide by the court's ruling and cover diminution of value (Ga. Directive No. 01-P&C-1).
However, in 2003, state supreme courts in South Carolina, Massachusetts, and Texas ruled that personal auto policies do not obligate insurers to compensate insureds for diminution of value when their vehicles are fully and adequately repaired (Schulmeyer v. State Farm Fire & Cas., 579 S.E.2d 132 (SC 2003); Given v. Commerce Ins., 796 N.E.2d 1275 (Mass 2003); and American Manufacturers Mutual Ins. V. Schaefer, 124 S.W.3d 154 (Tex 2003).
Although there is a disparity in court cases nationally, most courts have held that auto insurance policies cover third-party claims for diminution of value since the measure of damages in tort claims, which the insurance covers, is the difference in the property's value before the loss (the damage) and after the loss. The plaintiff must provide evidence of the diminished value.
Connecticut case law establishes the responsibility of the negligent party to pay for a vehicle's diminished value and therefore permits third-party claims (Littlejohn v. Elionsky, 130 Conn. 541, 36 A.2d 52 (1944)). As stated in Littlejohn, the measure of recovery for vehicle damage, if the vehicle is not a total loss, is the vehicle's reasonable market value before the accident minus its reasonable market value after the accident, plus interest from the date of loss. Further, if repairs will substantially restore the vehicle to its former condition, the cost of such repairs will typically furnish proper proof of the loss. However, a vehicle may be badly damaged and be repaired so as to put it in a sound or good state, yet be worth much less than before the accident (Littlejohn at 53).
In all cases involving damage to motor vehicles, the measure of damages is the difference between the value of the vehicle immediately before the damage occurred and the value after the damage occurred, plus a reasonable amount of damages for loss of use of the vehicle (Ark. Code Ann. § 27-53-401).
The measure of damages for injury to property caused by the breach of an obligation not arising from contract, except when otherwise expressly provided by law, is presumed to be the reasonable cost of repairs necessary to restore the property to the condition it was in immediately before the injury was inflicted and the reasonable value of the loss of use pending restoration of the property, unless restoration of the property within a reasonable period of time is impossible or impracticable, in which case the measure of damages is presumed to be the difference between the market value of the property immediately before and immediately after the injury and the reasonable value of the loss of use pending replacement of the property. Restoration of the property is deemed impracticable when the reasonable cost of necessary repairs and the reasonable value of the loss of use pending restoration is greater than the amount by which the market value of the property has been diminished because of the injury and the reasonable value of the loss of use pending replacement (N.D. Cent. Code § 32-03-09.1).