Back in 1986, CARFAX began compiling a database of cars with repair histories. It was then that potential car buyers could determine whether their intended purchases had been in prior wrecks. How did CARFAX affect the used car market? The upside for consumers was their capability to choose between repaired cars and those that weren’t. The negative aspect primarily affected insurance companies once car owners learned that they could make third-party claims for inherent diminished value. What is inherent diminished value? Wikipedia describes it as is a loss in value due to a specific, sudden, and unexpected negative occurrence. Inherent Diminished Value assumes proper repair has been completed and is defined as the amount by which the market value of the repaired auto is less than the market value of the same vehicle before the accident. Almost every car or truck that experiences an accident suffers a certain amount of Inherent Diminished Value. What is a third-party claim? If you’re in a car accident that someone else causes, you can file a third-party claim with the other driver’s insurance for your covered accident-related expenses. The car’s loss in value due to its now having a repair history is part of those expenses. Each car owner has auto insurance which includes a property damage section that guarantees that any other party impacted by the policyholder’s negligence be made whole. The diminished value of a vehicle is a type of property damage claim.

How was the amount of diminished value determined in those early days? Certainly, there were considerations to take into account such as the type of vehicle, pre-accident condition and, of course, the severity of the damages that were repaired. A consumer making a third-party claim for inherent diminished value typically obtained a letter from their dealer showing how much less their car would bring in trade because of the repair history to present to the insurer as evidence. This methodology, however, was short-lived. Insurance companies countered by serving the dealers with subpoenas to testify in court. Everyone knows how time-consuming court appearances can be which resulted in dealers declining to provide those letters.

Insurance companies were quick to respond in a manner consistent with their values – to achieve the lowest settlements possible. Enter the 17c formula. This methodology for determining a car’s loss in value was first created by Infinity Insurance Company. The 17c formula is designed to limit the amounts paid out for diminished value claims. 17c contains a cap of 10% even though some cars that suffered airbag deployment and/or structural damage brought about trade-in or outright sale experience losses of up to 50% of pre-accident value. Of note, 17c was approved for use in a class action suit filed against State Farm Insurance Company by The Georgia Supreme Court simply to expedite matters. Since then, 17c has been rejected by the Georgia Insurance Commissioner over any other case than the one in which it was approved. The trial court’s order required the insurer 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. Thus, the trial court’s order did not mandate any certain claims handling procedure, only that the insurer start actually handling its claims in accord with its contract, without refusing to consider some elements of loss.

How is the amount of a car’s diminished value determined at present? Both insurance company auto appraisers and independent auto appraisers create automobile diminished value appraisals. Independent appraisers work for insurance companies, for car owners or both. Derivatives of 17c continue to be used; sometimes called formulas or algorithms, by both insurers and independents. One advantage is that they are time-saving shortcuts. These methodologies use “damage modifiers” and “mileage modifiers” to determine loss in value. It is worth mentioning that these modifiers can be adjusted to boost or restrict diminished value amounts. Conflicts arise when car owners and insurers obtain appraisals using differing modifiers.

What other methodologies exist for determining auto diminished value? A quick method used by many auto appraisers, for example, is using KBB or other online valuation guide, and deducting the “fair” value from the “very good” value. Another is using online ads from different dealers – comparing asking prices for similar cars that were either previously-repaired or not. Both shortcuts, in addition to the previously-mentioned formulas and algorithms, do not support what car owners experience when they attempt to trade-in or sell the car.

We have come full-circle in order to benefit car owners. It is only fair to level the playing field, however, using artificial intelligence or simplistic alternatives alone are not sufficient. Independent appraisers that provide diminished value reports for car-owners must also do exhaustive research to confirm their opinions. That means going back to old school diminished value.

Insurance companies had legitimate complaints when third-party claimants presented diminished value letters from their dealers, pointing out the obvious profit motives involved. Yet, it still remains that automobile dealers are the experts in buying, selling, trading and auctioning cars. They have to be as their livelihoods depend on recognizing the market. Competent independent appraisers must reach out to multiple unbiased dealers, explaining that the car is not available for purchase or trade, to confirm their opinions. If their views coincide with the appraiser’s findings, the resultant inherent diminished value appraisal earns unrivalled credibility.

This is an Open Education resource focused on auto diminished value, collective knowledge and the sharing of scholarly content.
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