No coverage for a damaged car’s loss of market value

No coverage for a damaged car’s loss of market value

Hicks, Bruce

But will ISO’s new mandatory endorsement open up a Pandora’s Box of indirect loss issues?

ISO has decided that its basic auto policy, PP 00 01, needs to be clarified by the addition of a mandatory endorsement, It has begun filing of the PP 13 01.

This form is proposed to take effect in most states effective 12/1/99 and adds both a new definition and a new exclusion to the 06 98 edition of the PP 00 01, Personal Auto Policy (PAP). The purpose is to clarify that the policy is not obligated to pay for a loss to a covered car’s market value when that value has been reduced because of a loss and subsequent repair.

Background

The introduction of the PP 13 01, Coverage For Damage To Your Auto Exclusion Endorsement, is in response to the increased visibility of diminished value or diminution in value. The “diminution in value theory” which is gaining strength as a major insurance consumer concern, claims that damage to an auto often results in a monetary loss in its market value. In other words, there is a monetary difference between the following two conditions:

1. A car’s pre-accident value

2. A car’s value after an accident and repair

Example: Martha Bye-Lemun has a personal auto policy that originally covered her ’96 Buick Regal. Martha bought a ’99 Lexus and, instead of trading in her Buick, she decided to sell it. Martha notified her agent and both cars were listed on her policy.

Martha’s research showed that the car should be worth around $7,500. The evening of the same day that Martha put her Buick on her front lawn with a “For Sale” sign on its windshield, a very heavy branch from her oak tree fell and smashed the Buick’s roof. The Buick was repaired for $1,700. However, when Martha later sold the car; the most she could get was $6,300. Martha then asked her insurer to make up the difference.

Forms of diminished value

Diminished or diminution in value (DV) may exist in several forms which are variously defined, including actual, real, perceived, psychological and others. However, the following are terms that are commonly used and which provide a good illustration of the DV concept:

Inherent DV.- This is merely a general conviction that a vehicle which has been wrecked and is then repaired is less valuable. This belief is generally unaffected by:

* having information on the scope of the repairs

* whether there are any visible signs of repair

Example: Will Prudunt is ready to get a new car. Although his ’94 model has served him well, he’s ready for a change. Will finds his dream car and is now ready to make the best deal he can on his ’94. Will and the sales rep look over his ’94 and agree on a $3,950 trade-in. As they discuss the loan papers, the rep asks Will if the ’94 has ever been in an accident. Will slaps his forehead and says “Oops, I was rear-ended three years ago. My insurer paid about $2,000 in repairs.”

The sales rep then picks up the finance paperwork and says that he will have to re-figure the agreement. When he comes back, the rep says that they can only offer him $2,400 on the trade-in. Will points out that he’s never had any problems with the car and that it ran even better after the repairs… the rep won’t budge on the lower trade-in offer. Claim-Related DV.- This is actual diminished value that places responsibility for the reduced value on an insurer. It refers to any instance where an insurer’s action or practice results in an inferior vehicle repair. Note that this term is subjective because there are various opinions about what constitutes an inadequate repair. What is considered a below– standard result that is created by an insurer may involve an insurer’s:

* insistence upon the use of selected auto repair facilities

* preference or requirement that a repair facility use after-market, rather than original equipment manufacturer parts

* refusal to pay for additional repair procedures identified by a repair facility

Repair-Related DV:

This is actual diminished value that places responsibility for the reduced value on a repair facility. It refers to any instance where a repair facility’s action or practice results in an inferior vehicle repair. Note that this term is also subjective because there are various opinions about what constitutes an inadequate repair What is considered a below-standard result that is created by a repair facility may involve a facility’s:

* completed work which includes below-standard labor or improper procedures

* completed repair where below– standard parts were used when an insurer authorized standard parts

* incomplete repairs when an insurer authorized that all needed repair be performed

Naturally, DV may also result from a combination of insurer and repair facility actions. Also, the line may be blurred due to many factors. For instance, is a repair facility culpable for DV if it even agrees to install aftermarket parts or to skip procedures which it has identified? Is an insurer responsible when it authorized standard parts and repair procedures but the repair facility does poor work or fails to identify all needed work?

There is also no consensus on the overall concept since some believe that a good repair job can eliminate DV while others say that there is always some level of DV.

First-party issue only

Note that the endorsement only addresses settlement that occurs under Part D-Coverage For Damage To Your Auto. Diminished Value is not truly subject to the debate under third-party (liability) claims since insurers are obligated to pay for all damages caused by their insureds and aren’t in the position to change that obligation. However, an insurer faces a different set of loss settlement circumstances with their own customers because it is a first-party obligation.

Impact of form

ISO’s notice concerning the introduction of this form states that the form is strictly a clarification of the PAP’s coverage intent. Their notice mentions that an insurer is responsible to claimants when the compensation is not sufficient to pay for an adequate repair job. In such instances, their opinion is that the PAP obligates an insurer to provide additional compensation. ISO’s point appears to be related to situations which may involve a form of claims-related DV (repairs that are inadequate because of an insurer’s action). Of course, the problem still exists over the understanding of what constitutes an adequate repair job.

While ISO believes that the clarification made by the 13 01 endorsement has no impact on losses paid under Part D-Coverage For Damage To Your Auto-there may be a measurable impact if the form assists in avoiding claims for DV under a modified policy which end up being paid under older or unmodified versions of the PAP.

Analysis

The PP 13 01 adds the following item to the PAP’s Definitions section:

“Diminution in value” means the actual or perceived loss in market or resale value which results from a direct and accidental loss.

This endorsement then adds a new exclusion:

We will not pay for loss to “your covered auto” or any “nonowned auto” due to “diminution in value.”

The new definition and exclusion are intended to make it clear to all parties that the PAP is not obligated to reimburse a first-party claimant for any loss attributed to a reduction in a car’s market value that is the direct result of damage to a covered car.

The need for this endorsement should be closely examined since the wording of the PAP does not indicate any obligation to protect an insured for a covered automobile’s “diminution in value.” In essence, this exclusion bars coverage for an indirect loss when the policy’s language only obligates an insurer to pay for direct and accidental losses. While proponents of DV may maintain that DV represents a real and direct source of loss, there are no single set of standards for determining DV. The pre-accident values of cars are established by many methods with wide ranging results. There is debate over when or whether DV is experienced since it makes a difference if a car is kept, sold or traded in; the timing of a transaction after a repair is an equally important factor.

Example: Melanie and Alex both have had recent collisions with their cars which resulted in $2,500 in damages. They both own the same make and model car. They are insured by the same company and their policies have both collision and other than collision coverage. Alex had just put his car up for sale a couple of days before his accident while Melanie plans to hold onto her car for at least three more years and then she’ll trade it in. If the PAP was actually responsible for covering any diminished value that occurs at the time of loss, how can Melanie and Alex receive equitable treatment when any claim for diminished value is substantially affected by their plans for their cars?

It is quite important to address a situation when evidence shows that coverage intent is ambiguous, However, it is problematic to make a change in the absence of such evidence.

Consider the following:

* Does the creation of this endorsement represent a concession or admission that the unendorsed policy should cover “diminution in value”?

* What is the position of a company that uses an older (’89 or ’94) edition of the PP 00 01 Personal Auto Policy which does not include the PP 13 01?

* What is the position of a company that uses the 06 98 edition of the PP 00 01 Personal Auto Policy and has yet to adopt (or declines to use) the PP 13 01?

Remember, the very first time that an insurer relies upon the language in the exclusion to deny a claim, another party may use that as a basis to maintain that coverage exists when a policy does not contain that exclusion. In other words, if you have a policy that has not been clarified by the endorsement, you may now be able to claim that your policy is ambiguous on that point and coverage should be granted.

There may be other ramifications due to the introduction of the PP 13 01-Coverage For Damage To Your Auto Exclusion Endorsement. For instance, should:

companies file the PP 13 01 or some similar endorsement for use with other coverages such as optional Uninsured Motorists Property Damage?

* Part D-Coverage For Damage To Your Auto be further clarified by an exclusion that explicitly bars coverage for damage that is intentionally inflicted by the insured?

The latter consideration might become necessary because of the use of an endorsement that may improperly address a coverage question. Under Coverage D, there is no explicit exclusion for intentional losses that is inflicted on a covered car by an insured. Of course, such losses are likely to involve fraud; so they could be excluded under that circumstance. However, consider the following example of an intentional loss:

Bill Short-temper pulls his ’97 Saturn into his driveway and, before he turns off the ignition, the engine dies. The car has been “dying” on him for three months and four separate trips to his dealer’s service shop have failed to correct the problem. Bill is so furious that he gets out of the car, slams the door, picks up his daughter’s softball bat and smashes in every window in the Saturn. The next day Bill files a claim, truthfully explaining the loss. The insurer denies the claim. Bill argues that breakage of glass is considered an other than collision loss and that there is no exclusion for intentionally breaking the glass. When the insurer points out that the policy only covers “accidental” losses, Bill argues that his policy also only covers direct losses; yet it has the PP 13 01 which arguably excludes an indirect loss. The insurance adjuster is … confused.

This may seem like an outlandish example. However, if there is no evidence of fraud, the only basis for excluding an intentional loss that technically qualifies for coverage (such as breakage of glass under collision) is by relying on the insuring agreement which states that the policy pays for accidental losses. This reliance upon the policy language is logical. However, it seems every bit as logical to rely upon the policy to only pay for direct losses (with specific exceptions such as loss of pay because of court appearances); yet we now have an endorsement that may unintentionally challenge that logic.

Conclusion

It will be interesting to monitor the impact of this endorsement. While it may successfully act against claims for “diminution in value,” it may also open the door to other problems. The property and casualty insurance industry may have been better served by permitting a body of court cases to establish the applicability of the PAP to DV claims and then, if necessary@ address any need to modify the automobile policy’s language or provisions.

The author

Bruce Hicks, CPCU, CLU, a specialist in personal lines coverages, is an editor of PF&M Analysis Service, published by The Rough Notes Company.

Copyright Rough Notes Co., Inc. Nov 1999

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