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DIMINISHED RETURNS

How to protect your car’s value following accident insurance claim.

BY KEITH BURTON

Most of us believe auto insurance is usually a good deal. We don’t mean to imply that it’s inexpensive, because it isn’t. It’s a good deal in this sense: your insurance company expects you to pay its premiums, and in return you expect your insurer to protect your investment in your car or truck.

But do insurance companies live up to their end of the bargain? In a word, no.

If you’re involved in an accident, your insurance carrier might fully reimburse you for the cost of repairs, and afterward your car might look and run like new. But if you think your investment has been protected, you may be surprised to find out that it hasn't. Once your car has been involved in an accident—no matter how good the subsequent repairs—its market value drops significantly.

You may not realize it right away, but you’ve lost money.

Many insurance companies don’t want you to know that. They also don’t want you to know that traditional auto-insurance policies are supposed to protect the cash value of your vehicle, not just reimburse you for repairs. What they don’t want to pay you for is the “diminished value” that a vehicle suffers after any significant accident.

“Diminished value is a fact,” says Dennis Howard, executive director of the Coalition for Collision Repair Excellence. “The question at hand is whether the consumer can be reimbursed for that value.”

The CCRE, an organization of repair-shop owners, lobbies to resist the efforts of insurance companies to require the use of inferior parts, materials, and techniques in auto repair. The group’s principal concern is replacement body parts; for example, aftermarket fenders and trunk lids often have slightly different dimensions from the originals and therefore can never be perfectly aligned, no matter how expert the repairer or how heavy the hammer.

Diminished value is also a CCRE concern, because it is a reality of the repair business. A reality largely hidden from consumers.

Another reality is that insurance-company reimbursement for diminished value is the exception rather than the rule. Over the past several years, insurance commissioners in a growing number of states have allowed insurance companies not to pay for the diminished values of their policyholders’ cars, even when alert policyholders realize they have been shortchanged.

‘DIMINISHED VALUE’ WHAT IT IS

Diminished value is the reduction in the true value of a vehicle after it has been damaged. Suppose your car has a book value of $20,000, and you’re involved in an accident just severe enough to cause the air bags to deploy. Suppose further that after you get it repaired, it looks “as good as new.” But the fact is that it isn’t as good as new, even if the repairs are invisible and expertly done. If you try to trade it in, the dealer won’t give you anywhere near its $20,000 pre-accident value.

Auto dealers today often begin negotiations on a trade-in or a used car by asking if it’s ever been in an accident, or if its air bags have ever deployed. A yes to those questions will result in a lower valuation for your car. You could lie about your car’s history, but you might not get away with it. Dealers are trained to spot the telltale signs of an accident, such as paint overspray.

When you think about it, diminished value makes perfect sense. Most people would resist paying as much for a repaired car as they would for an identical car that had never been damaged. It’s only natural, then, that you would expect your insurer to compensate you for the reduction in your car’s value after an accident. Historically, in fact, most auto-insurance policies have promised to do just that.

Furthermore, several court decisions have interpreted “actual cash value” to mean a vehicle’s value before an accident. But consumers have rarely been aware that the wording of their policies entitles them to recover the reduction in the value of their vehicles. By and large, most people have been satisfied just to see their insurance companies pay for repairs.

“The insurance companies are not stupid,” Dennis Howard says. “Insurance adjusters are trained to resist paying [for diminished value]. They are not going to go to consumers and tell them they are owed extra money.”

RULES QUIETLY CHANGED

A growing consumer awareness of the diminished-value issue has triggered a number of successful lawsuits against insurance companies. The bad news is that those victories have, in turn, prompted the insurance industry to lobby legislators and insurance regulators to change the rules of the game. So far, the insurance departments in more than half the states and the District of Columbia have adopted regulations that allow insurers to write policies that exclude diminished-value payments.

In justifying such rulings, government regulators say their decision to allow insurance companies to exclude diminished-value coverage is an easy one. The result, they say, will be lower rates for consumers.

Maybe so. Maybe not. But for the present, the key issue is disclosure.

“I don’t want the consumer buying one thing and getting another,” says Mississippi’s insurance commissioner, George Dale. Mississippi is among the 33 states that now allow insurers to ignore diminished value.

Dale says that insurance costs have to be considered when such decisions are made. Many consumers demand the lowest possible costs for insurance coverage but don’t consider the ramifications of their cut-rate premiums. “Most consumers want a Ford price for Cadillac coverage,” Dale said. In his opinion, insurance companies should offer diminished-value coverage only as a premium service.

LOSSES ALSO OCCUR FOLLOWING DISASTERS

The diminished-value issue also applies to cars repaired after natural disasters, such as the floods that devastated North Carolina in 1999. The vehicle identification number of every car that suffered flood damage for which an insurance company later reimbursed the owner—be it a dealership, a bank, or a private individual—was recorded in a national computer database.

When the owner of such a car goes to trade it in, a dealer who checks that database will uncover the car’s history. (Individuals can receive similar reports for a fee from www.carfax.com.) When the database identifies the vehicle as having been damaged and repaired, the owner can forget about getting a good trade-in valuation, no matter how well the repairs were made.

CAN YOU COLLECT FOR DIMINISHED VALUE?

If all of this sounds bad, there is still some hope of recovering the diminished value of your car, even in states that now permit the diminished-value exclusion.

“You still have the option of going back to your insurance company and attempting to collect on it,” Dennis Howard says. It’s a matter of timing, and also of making your claim in the proper manner. Here’s what you need to know and do:

What you need to to do first is read your policy carefully. If it explicitly excludes diminished value, you’re probably out of luck. But if you bought your policy before the diminished-value exclusion was instituted, you may be able to collect. That’s because, in providing the diminished-value exclusion, state regulators and the insurance companies in effect acknowledged that diminished-value coverage had previously been an element of the policies.

The bottom line: If you’ve had your policy for several years, or if you added a vehicle to a previously existing policy, you might still be able to collect.

“It’s purely a matter of consumer awareness,” Howard says. “Insurance policies are often silent regarding diminished value, but any ambiguity in the policy goes in favor of the insurance customer.”

KNOWING WHAT TO CLAIM

To recover the diminished value of your vehicle after an accident you have to start with information. You first have to determine its true value.

A good place to begin is the Kelley Blue Book or the NADA (National Automobile Dealers Association) yellow book. You can also search online for used-car values.

Changes in state regulations may occur in the future. Policyholders and insurance-industry watchdogs continue to wrestle with the issue of diminished value in the courts. But for now, examine your insurance policy to determine whether your carrier will pay for diminished value, or ask your insurance agent to clarify the issue. Should you ever have to make a claim on your vehicle, that knowledge may help you recover hundreds, perhaps thousands, of dollars.

FOR MORE INFORMATION

These online sources have additional information about diminished value and used-car prices:

• Coalition for Collision Repair Excellence: http://www.theccre.com/

• Insurance Consumer Advocate Network: http://www.ican2000.com/

Kelley Blue Book: http://www.kbb.com/

• NADA Official Used Car Guide: http://www.nadaguides.com/

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