Legally referred to as "diminution of value," a single definition of diminished value (DV) is difficult to pinpoint, especially since there are various types of DV. However, for the sake of analyzing the topic, a standard definition of DV could be "the decreased market value of a wrecked vehicle even after having been repaired." Prior to being repaired, a vehicle that has been wrecked is obviously worth less than before the accident due to the damage incurred; but is it possible to repair that vehicle with such quality that it re-attains its pre-accident market value?

There are two major reasons why a vehicle might sustain DV after a collision and subsequent repair process: the mere perception that the car has diminished value and the quality of the work performed (parts used, processes utilized). For the second point, many body shops allege that DV is generally caused by either the insurance company requiring the use of substandard parts or refusing to compensate the shop for certain needed procedures; the shop's decision to use substandard parts and/or procedures; or a mixture of insurance company/shop responsibility. If the vehicle owner knowingly and willingly allows a substandard repair to be performed, then they are responsible for the diminished value on the vehicle.

Substandard repairs
To allege that their repaired vehicle has DV because of a substandard repair (i.e. the quality of the work performed was inferior), the vehicle owner might cite procedures that were not used or were performed incorrectly; or they might refer to the use of non-OEM parts as the cause of the DV.

This brings up a subjective dilemma: what constitutes a "properly-restored vehicle"? There are currently no uniform standards to determine if a repair job has been done "properly." The only real standard for collision repair is the measurements provided by OEMs. The Inter-Industry Conference on Auto Collision Repair (I-CAR) now has its Uniform Procedures for Collision Repair (UPCR) to provide procedures, but this product is still new - and not yet complete - and time will only tell how readily these procedures will be accepted. Unless there are standard procedures to defer to, how can it be determined if a vehicle that has been in an accident has been properly repaired utilizing proper procedures?

If one can determine whether or not proper procedures have been utilized in a repair job, then there is the dilemma of who is responsible for the DV if proper procedures are not utilized. Common sense would suggest that since shops are the experts and are doing the repair, they should know what procedures to use and should therefore use them. If the insurance company refuses to pay for certain procedures the shop thinks should be used and goes ahead and does the repair, omitting certain procedures because it won't be paid for them by either the insurance company or the vehicle owner, who then is responsible for DV? A shop owner might say the insurance company is to blame for the substandard repair because it wouldn't pay for the procedure. Others contend the shop didn't have to do the repair - it could have turned down the business.

Figuring out how much DV has been caused by a substandard repair is difficult. There are methods by which to determine how much value a vehicle has lost due to a substandard repair (whether due to procedures or aftermarket parts) such as performing a post-repair appraisal, but these methods are subjective. However, DV based on a substandard repair arguably can be rectified by re-repairing the vehicle until the final repair is deemed to be satisfactory, which is almost never the case for DV in the mind of the car owner or prospective buyer.

Diminished value in the mind
The other type of diminished value, the perception that the car has diminished value, generally cannot be rectified, regardless of the quality of the repair job. If a repair has been performed near perfection, the average consumer would not visually see a car worth less than it was before its accident. In that consumer's mind, however, the car is worth less because it was involved in an accident. "It's damaged goods" or "It will never run the same again," are common thoughts of vehicle owners. This brings up the question: Should a vehicle owner be paid for this mental aspect of DV - the mere thought that it is worth less? It's only mental unless the loss in value is real. When the vehicle owner sells their car as a trade-in at a dealership or to another consumer, the DV is real if the prospective buyer perceives the value as decreased.

In states that have disclosure laws on the resale of vehicles, the vehicle owner must inform any prospective buyer if the vehicle has been involved in an accident. Do dealerships decrease the value of the trade-in if it has been in an accident? Absolutely. Would another consumer most likely pay less for a vehicle if it had been in an accident, regardless of its appearance or performance? Of course. Buyers would expect to pay less for that perceived loss of value, at least on newer model cars.

There is one main reason why this type of "perceived" DV is an issue for the collision repair industry: the auto insurance policy. Whether perceptual DV is owed to vehicle owners depends on what exactly is promised by insurance companies through their policies. Insurance companies agree to restore their policyholders' vehicles to pre-accident condition - but what does that mean? Are insurance companies obligated only to restore the vehicle to the best possible condition given the technology available? If DV is real and can be proven, are insurance companies really obligated to restore their policyholders' vehicles to the same monetary value as before the accident? And if it is truly not possible to restore a vehicle to its pre-accident market value, does that mean insurance companies should financially reimburse every policyholder for the DV caused by the accident even if the car is repaired to the best standards possible? Some entities think so.

A consumer is only entitled to the terms outlined in their insurance policy. If the other driver is at fault, however, then the claimant can ask for restitution for the DV on the car against the liability portion of the other driver's insurance policy. There is nothing insurance companies can do about this since it is an accepted aspect of our legal environment. Whether or not vehicle owners are entitled to DV restitution on a first-party basis is a subject that is generally addressed case-by-case.

Insurance companies
Eleven major insurance companies were contacted about DV. All of those contacted think it is possible to restore a vehicle to a pre-accident condition whereby there is no DV on the market value of the vehicle.

Some of the insurance companies contacted acknowledged that this topic is complex and they have not yet established a formal position on DV.

"A car can be repaired where it hasn't suffered any loss of value," said Bill Mayer, assistant vice president of claims, GEICO Insurance. He used the analogy that if you go to the doctor to have your arm worked on, is your value worth less afterward?

With DV claims, handling procedures are based on the statutes within each state, said Roger Wright, vice president of claims for material damages, Integon. Some states don't recognize DV for either first party or third party claims. In states where it is recognized, insurance companies discuss the damages with the car owner. They look at the car on a case-by-case basis, including the make, model, extent of damage, location of the damage, etc.

First party claims are only covered if mandated by the regulatory environment, according to Mayer. They are not covered under GEICO's policy. And with third party claims - as in all third party cases, Mayer said, "they have to prove their charges and we will try to disprove them."

Farmers issued the following statement to AutoInc.: "Farmers is obviously familiar with the concept of diminished value as it relates to collision repairs. We have and will continue to research this matter, however, due to the complexity of the issues and the fact that laws vary in the states we operate in, we are not in a position to respond to your questions at this time."

One insurance representative said he thinks good quality repair shops can restore a vehicle to its pre-accident condition. He raised the point as to why shops would want to say that cars cannot be repaired to pre-accident condition as certain organizations are prompting them to say. This would mean that the cars cannot be repaired successfully, and will result in more cars being totaled.

Determining a vehicle's value
A major aspect of the concept of DV is determining the market value of a vehicle before and after an accident. This is especially true when determining psychological or inherent value. After all, in order to prove that psychological DV is more than just psychological, it is important to show how the mere perception that a wrecked vehicle is worth less can actually affect the market value of the vehicle even after having been properly repaired.

Six auto dealerships in five states were contacted for their policies on handling trade-ins and how the fact that the vehicle has been in an accident affects the value of that vehicle. The responses received unanimously suggest what is commonly known: The value of a vehicle is decreased at the point of trade-in if it has been in an accident.

How much of a decrease in value depends on the extent of the damage to the vehicle and the type of accident, according to Boardwalk Auto Center in California. Some repairs are done very well and it's difficult to tell if the vehicle had been in an accident, but others are easy to spot.

Psychological DV vs. real DV
How do car owners really know the market value of a vehicle in order to determine if there is DV, since there are many different "bluebooks" and many subjective ways of determining a car's worth? And what if the car owner sells directly to a consumer? Is the car's true value the trade-in value or the market value? There are no real regulations for the market value of used cars. That is one of the dilemmas of DV claims - putting a dollar amount on something that is subjective.

If a car owner was previously paid for DV on a vehicle, sells that car for a dollar amount equal to or higher than the market value of the vehicle at the time, should the owner reimburse the insurance company for that money? For example, assume a BMW owner is involved in an accident. After the repair process, an appraiser values the vehicle at $30,000, when it should be $34,000, but is $4,000 less only because of the psychological aspect of DV. The owner files a DV claim for $4,000, and is paid by the insurance company. Ten years later, the market value of his make and model vehicle is $13,000 for a vehicle that has not been in a wreck, and he sells his vehicle for $13,000 despite the fact it has been in a wreck.

There are several aspects of this scenario that deserve notice. Since the car owner sold his vehicle at market value, there really wasn't any DV at the point of sale caused by the former accident. He was paid $4,000 ten years earlier for a suggested DV that never materialized. Should he reimburse the insurance company (plus interest) for filing a false claim?

And even if he sold his car for $11,000, with the market value being $13,000, he lost $2,000 at the point of sale presumably for DV, but he was paid $4,000 for the DV 10 years prior. Should he pay the insurance company the difference at the point of sale? Plus, you would need to calculate the interest lost to the insurance company for that extra $2,000 they had unjustly paid 10 years prior.

One problem with DV is that it is being treated as an exact science. If that is what consumers and body shop owners do, should insurance companies do the same thing and track the sale of vehicles years later that they have been prompted to pay DV claims on, and demand retribution when the policyholder gets the better end of the deal?

It's possible that if a vehicle owner has an accident, and keeps the vehicle for a long period of time, when the owner finally trades in or sells that vehicle, the fact that it was in an accident will have no affect on the value of that vehicle. And what if the vehicle owner keeps the car and never sells it? Should he be paid the DV even though he is keeping the car? At what point does DV become a reality?

Protection against DV claims
Much is still to be determined as to what impact DV claims will have on the industry. Industry-accepted procedures or standards should help, but widespread acceptance could be difficult since many shop owners view their profession as an art, not a science, and could be reluctant to change the way they do repairs.

In the meantime, shops that do good repair work should not have to be concerned with DV due to substandard repairs. Shops should thoroughly document if procedures are denied by insurance companies, as well as any mandates by the insurance company for the use of aftermarket parts. It's also important for shops to keep up-to-date with procedures, and continue to have employees certified and trained through programs offered by the National Institute for Automotive Service Excellence (ASE) and I-CAR.

Disclosure laws should help consumers become more educated about the parts being used in the repair of their vehicles, which will likely benefit everyone involved in the repair process. But if shops are using aftermarket parts that are of inferior quality, they could make themselves targets of DV claims.

Inter-industry communication and education will likely be crucial for the industry to successfully handle this relatively new issue whose consequences, although yet to be fully understood and realized, could have an enormous impact on the state of the industry.

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