Diminution of Value
Coverage Implications
Presented by
Bill Wilson, CPCU, ARM, AIM, AAM
Director, IIABA’s Virtual University
Coverage Issues
 Diminution vs. Betterment
 What is Diminished Value?
 Sources of Diminished Value
 Policy Coverages
 Rental Cars
Diminution vs. Betterment
 1989 Personal Auto Policy
A. Our limit of liability for loss will be the lesser of the
1. Actual cash value of the stolen or damaged property; or
2. Amount necessary to repair or replace the property.
B. An adjustment for depreciation and physical condition will be
made in determining actual cash value at the time of loss.
Diminution vs. Betterment (cont’d)
 1994-2005 Personal Auto Policy
A. Our limit of liability for loss will be the lesser of the
1. Actual cash value of the stolen or damaged property; or
2. Amount necessary to repair or replace the property
with other property of like kind and quality.
B. An adjustment for depreciation and physical condition will be
made in determining actual cash value in the event of a total loss.
C. If a repair or replacement results in better than like kind or quality,
we will not pay for the amount of the betterment.
Diminution vs. Betterment (cont’d)
 Example
√ 1992 Mazda 626 sedan
√ Excellent condition
√ $500 collision deductible
√ Repair estimate: $1,800
($1,000 parts + $800 labor)
√ Vehicle ACV = $4,800
“Betterment Chart” indicates
a 10% annual (80% max.)
betterment deduction.
Claim Settlement
Cost to repair
$1,800
Less 80%
- 1,440
Subtotal
360
Less deductible
Payable
- 500
$
0
What is Diminished Value?
 Policy Definition
 Dictionary Definition
 Case Law Definition
What is Diminished Value? (cont’d)
 Policy Definition
ISO PP 13 01 12 99
Coverage for Damage to Your Auto Exclusion
Endorsement
“’Diminution in value’ means the actual or perceived
loss in market or resale value which results from a
direct and accidental loss.”
What is Diminished Value? (cont’d)
 Dictionary Definition
“A theory of property damages in which the measure
of damages for the breach of a contract or lease is
equal to the difference between the value of the
property in the condition promised and the value as it
exists.” — Merriam-Webster
What is Diminished Value? (cont’d)
 Case Law Definition
“Rule of damages which provides for difference
between ‘before’ and ‘after’ value of property which
has been damaged...[if] loss in value to injured party
is not proved with sufficient certainty, the affected
party may recover damages based on diminution in
market price of property caused by breach.”
— Black’s Law Dictionary
Sources of Diminished Value
 Substandard repairs
 Non-OEM parts
 Psychological or perceived reduction in
value
Policy Coverages
 First- Party Physical Damage Claims
 Third-Party Liability Claims
 UM/UIM Claims
 Case Law
Policy Coverages (cont’d)
 First- Party Physical Damage Claims
ISO PP 00 01 01 05
Personal Auto Policy
INSURING AGREEMENT
“We will pay for direct and accidental loss to ‘your
covered auto’ or any ‘non-owned auto’….”
Policy Coverages (cont’d)
 First-Party Claims (cont’d)
A. Our limit of liability for loss will be the lesser of the
1. Actual cash value of the stolen or damaged property; or
2. Amount necessary to repair or replace the property
with other property of like kind and quality.
B. An adjustment for depreciation and physical condition will be
made in determining actual cash value in the event of a total loss.
C. If a repair or replacement results in better than like kind or quality,
we will not pay for the amount of the betterment.
Policy Coverages (cont’d)
 First-Party Claims
(cont’d)
Non-ISO Personal Auto Policy:
Limit of Liability
“If we repair the property, we shall not be responsible
for any diminution in value of the property caused by
the Loss.…”
Policy Coverages (cont’d)
 Third-Party Liability Claims
“Generally, insurance companies are free to limit
coverage in any manner they so desire. However, an
insurer is not at liberty to limit its liability and impose
conditions upon its obligations that conflict with
statutory law or public policy.”
— numerous court cases (e.g., Farmers Seafood v. Progressive
(LA 2001)
Policy Coverages (cont’d)
 Third-Party Liability Claims (cont’d)
INSURING AGREEMENT
“We will pay damages for 'bodily injury' or 'property
damage' for which any 'insured' becomes legally
responsible because of an auto accident.”
“'Property damage' means physical injury to,
destruction of or loss of use of tangible property.”
Policy Coverages (cont’d)
 UM/UIM Claims
–
Real-life example
– UM/UIM statute
 Does it cover PD?
 How is “PD” defined?
– Case law: Dunn v. Meridian (IN 2005)
Policy Coverages (cont’d)
 Case Law
– State Farm v. Mabry (GA 2001)
– Camden v. State Farm (MO 2001)
– Carlton v. Trinity Universal (TX 2000)
– Siegle v. Progressive (FL 2001)
– Rich v. Liberty Mutual (LA 2001)
– Given v. Commerce Ins. Co. (MA 2003)
Rental Car Issues
 Rental Agreements
 Personal Auto Policy
 Business Auto Policy
 The New York “Solution”
 Top 10 Reasons to Purchase the
Rental Car CDW/LDW
Rental Car Issues (cont’d)
 Rental Agreements
Loss or Damage to the DOLLAR Vehicle: The renter and any additional drivers
are absolutely liable for any loss or damage to the rental vehicle, even if
someone else caused it or the cause is unknown, whether due to theft, fire, hail,
flood, collision, vandalism, or any other cause, subject to limitations imposed by
the law where the vehicle is rented. This liability will not exceed the full value of
the vehicle, plus:
– Actual towing and storage charges;
– Loss of use;
– Diminution in value, regardless of whether the vehicle is repaired or
not;
– All rental charges through the date you report the incident if not returnable
or the return date, whichever is later;
– Any out-of-pocket expenses incurred by us as a result of the loss or
damage to the vehicle;
– A reasonable administrative fee; and
– Pro-rata license plate fees, all as allowed by law.
Rental Car Issues (cont’d)
 Personal Auto Policy
– Physical damage coverage
Transportation Expenses…“Expenses for which
you become legally responsible….”
vs.
– Liability coverage
Rental Car Issues (cont’d)
 Business Auto Policy
– Physical damage coverage
Loss of Use Expenses…“[E]xpenses for which an
‘insured’ becomes legally responsible to pay for
loss of use….”
vs.
– Liability coverage
Rental Car Issues (cont’d)
 The New York “Solution”
– Establishes statutory limits on the types of
losses and expenses and the amounts that
the rental company can charge
– Uses a standalone endorsement PP 03 46
to provide coverage for damage to rental
cars throughout the U.S., territories and
possessions, and Canada
Rental Car Issues (cont’d)
 Top 10 Reasons to Purchase the
Rental Car CDW/LDW
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Loss valuation
Loss settlement
Loss payment
Loss damage waiver
Indirect losses
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Administrative expenses
Other insurance
Excluded autos/areas
Excluded uses/drivers
Others
Additional Resources
 IIABA’s Virtual University
http://www.iiaba.net/VU/Nonmember/CPCU2006.htm
 Email
Bill.Wilson@iiaba.net
 CPCU Journal
https://webster.cpcusociety.org/source/pubs/index.cfm