COVERAGE FOR DAMAGE TO YOUR AUTO EXCLUSION ENDORSEMENT - PP 13 01

PP 13 01─COVERAGE FOR DAMAGE TO YOUR AUTO EXCLUSION ENDORSEMENT AND DIMINISHED VALUE

(September, 2018)

The PP 13 01–Coverage for Damage to Your Auto Exclusion form adds both a definition and an exclusion to the PP 00 01 form. This form is meant to make it clear that the policy is not obligated to pay for a loss of a covered vehicle's market value.

Background

The PP 13 01 addresses the issue of diminished value (or diminution in value). The “diminution in value theory,” a major insurance consumer concern, claims that damage to an auto often results in a loss of 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 ‘12 Buick Regal. Martha bought a ‘15 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 $6,500. The evening of the same day that Martha put her Buick on her front lawn with a “For Sale” sign in its windshield, a very heavy branch from her oak tree fell and smashed the Buick’s roof. The Buick is repaired for $1,700. However, when Martha later sells the car; the most she can get is $4,300. Martha then asks her insurer to make up the difference. The insurer points out that, while it was obligated to repair her car, the policy does not consider the reduced resale value to be an eligible loss.

 

Forms of Diminished Value

Diminished or Diminution in Value 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 Diminished Value

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 ‘10 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 ‘10. Will and the sales representative look over his ‘10 and agree on a $3,950 trade-in. As they discuss the loan papers, the rep asks Will if the car 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, but the rep won’t budge on the lower trade-in offer.

 

Claim Related Diminished Value

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: 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 Diminished Value

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 repairs 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 after-market 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?

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 their obligation as they are with their own customers.

Analysis

The PP 13 01 adds “Diminution in value” to the PAP’s Definitions section. It explains that the term refers to either a tangible or an imagined reduction in a covered vehicle's market (or sales) value. The reduction has to be due to the vehicle being damaged in an accident (and then repaired).

The endorsement then adds a new exclusion. The restriction bars recovery for any loss of market value to either any covered auto, including a non-owned auto.

The added 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 is 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.

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 the 06 98 or later edition of the PP 00 01 Personal Auto Policy and has yet to adopt (or declines to use) the PP 13 01?

Remember that, 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 that coverage exists when a policy DOES NOT contain that exclusion.

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:

·         the PP 13 01 or some similar endorsement be created 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 last 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 are inflicted on a covered car by an insured. Of course, such losses are likely to involve fraud, so could be excluded under that circumstance. However, consider the following example of an intentional loss:

 

Example: Bill Short-temper pulls his car 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 discover or 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. The next day Bill files a claim, truthfully explaining the loss. The insurer denies the claim. Bill contends that breakage of glass is 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 the policy has the PP 13 01 which excludes an indirect loss. The insurance company 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 fact that the insuring agreement says that the policy pays only for accidental losses. Such reliance upon the policy language seems logical. However, it seems every bit as logical to rely upon the policy to only pay for direct losses; yet we now have an endorsement that (perhaps unintentionally) challenges that logic.

Is Diminished Value Covered?

This is still under debate among insurance companies, lawyers, state courts, consumers (including activist groups), auto parts manufacturers, auto repairs shops and others. The focus on whether such losses are covered concentrates on claims that a policyholder would make to his insurer for damage to his or her own car. Answering this question is only clear from one's viewpoint. Supporters of the DV theory say that these losses are real and should be reimbursed under an insurance policy whenever there is accidental damage to a covered car. Other groups say that such losses are similar to depreciation and were never intended to be covered. Factors which affect this debate are numerous, including:

Related Court Cases:

Floridians Sue to Recover For Diminished Value

”Insurer Must Assess Diminished Value”