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Car wrecked? 'Diminished value' may be your loss

Your brand new sports car is rear-ended at a stop sign. The other guy's insurance company pays for all the repairs at the best body shop in town using only original parts. It even paid for a luxury rental while your car was being fixed.

Are you happy?

Well, you might be if you plan to drive the car until the wheels fall off. Probably not if you think you may want to sell or trade the car in the next few years. Because one thing's for certain: No matter how well your car has been fixed, it's not worth as much as it was moments before the guy on the cell phone piled into you from behind.

Why? Because your car now has a record of being wrecked that will follow it wherever it goes. And if any potential buyer checks with several growing car-history services, they're not going to be willing to pay as much for it as they would have before it was hit -- regardless how well it's been repaired.

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It's your loss
The difference between what your car was worth pre-crash and post-crash is called "diminished value." The difference, according to consumer organizations, can be as much as 18 percent.

Most insurance companies and state insurance departments say insurers are not obligated to pay for diminished value. Others -- most notably the state of Georgia -- say they are. How successful you may be in making a diminished-value claim depends largely on what state you call home.

One company that built its business on the concept of diminished value is CarFax.com.

"Accident damage can affect both the safety and reliability of the vehicle, even after repairs have been made," says Scott Fredericks, vice president of CarFax, which maintains a database of damaged vehicles around the country.

No matter how well a car has been repaired, Fredericks says, consumers should be wary of any vehicle that has been in a serious accident. Frame repairs, flood damage and any accident that causes an airbag to deploy should get extra scrutiny.

"Naturally the level of concern will depend largely on how the vehicle was damaged and how well it has been repaired," he says. So, if you thought your vintage Mustang was worth $10,000, it might be worth only $6,000 after a storm blows a tree onto it -- even after it's expertly repaired. The markdown is because future buyers may be wary of hidden problems or damage that went unnoticed during the repairs.

Insurers not liable
"The presumption some people have is that this is somehow the insurance company's responsibility," says P.J. Crowley, president of the New York City-based Insurance Information Institute.

Insurance policies in most states guarantee that a car will be repaired to pre-accident condition. Unless state courts mandate otherwise, they don't compensate for perceived loss of value.

"We do not believe that it is automatic or inherent that an auto's value diminishes after an accident if the proper repairs by a skilled professional are made as they should be," says Gary Stephenson, spokesman for State Farm Auto Insurance in Bloomington, Ill., one of the nation's largest auto insurers.

Courts in states including Texas, Maine, South Carolina and Delaware agree with State Farm. In past cases, they've ruled against the idea of diminished value.

However, judges in several states, including Georgia and Kansas, have ruled insurers must compensate policyholders for any real loss of value from an accident.

Still others say it depends on who is at fault for the accident. In Louisiana, if you are at fault, the courts have almost universally said that diminished value does not come into play," says Don Beery, of Eustis Insurance and Benefits in New Orleans. "Third-party claims, on the other hand, depending on your company and your state, can be interpreted differently."

If someone hits you and his or her insurer picks up the bill, you might be covered, since some courts have decided that a loss includes lost value.

But since lost value was not considered when the policies were being priced, insurance companies say, they would lose too much money if they were forced to pay these claims.

"To expand auto coverage beyond proper repair to include payment for diminished value would add more costs and claims and would drive insurance rates upward for everyone," Stephenson says.

Some insurers argue that some cars even gain value after they are in an accident. Take a car with a bum engine and 100,000 miles on it. It gets hit head-on and needs a new engine. If the insurer pays for all the repairs plus a new engine, that car is worth more than it was before the accident. In that case, the insurer could ask the owner to pay for part of the repairs.

What you can do
Owners of damaged cars trying to sell or trade in their cars are left with the choice of trying to hide the damage and hoping no one finds out; biting the bullet and accepting the lower price, or fighting their insurers.

To do the latter, start by finding out how much the car would have been worth before it was damaged, either on the Internet or by checking used car sales in your area.

With an accurate price in hand, first try the insurance agent who sold you the policy. "If it is a dedicated agent who only sells one insurance company, you may have a hard sell. But if you went through an independent agent, they will be more likely to fight for you," Beery says. The next step is your state insurance commissioner. As a last resort, there are the courts -- an obviously expensive alternative.

Michael Giusti is a freelance writer based in Louisiana.

 
-- Posted: Dec. 1, 2003
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See Also
The right rental car insurance can prevent a financial wreck
Form letters to deal with your auto issues
Dealer vs. independent repair shops
Insurance glossary
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