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When property of any kind is damaged and repaired the resale value of the property can easily be diminished because of the stigma carried by the repair. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired. The resale value most likely will be less than that for a comparable automobile that has not been damaged. In other words, the damage results in a reduction — or "diminution"— in the resale value of the automobile.

When the property is insured, the insured's claim for this reduction in value may be made against a third party that negligently caused the damage to the insured's automobile or it may arise from a first-party claim against the insured's own physical damage coverage. The key to recovery of the diminution in value depends on the particular state where the damage occurs, the wording of the insurance policy involved, mandates by state insurance departments, and the holding of the various courts.

With regard to first-party claims by a person insured against an insurer, while it is perhaps arguable, the ISO contract language — specifically the Limit of Liability condition — appears to cover only the actual cash value of the damage or the actual cost to repair the damage. There is nothing in the policy wording that even appears to contractually cover any reduction in market value. Even if the insured could prove the amount of reduction in value collecting from an insurer requires a change in the policy wording.

The policy usually allows the insurer to deduct for "betterment" or depreciation, although the burden of proof is on the insurer to demonstrate such depreciation or betterment. In physical damage claims, the policy would allow the carrier to deduct for an "improvement" in value (i.e., betterment) due to repairs with newer parts, but will not compensate the insured for a reduction in value due to the same accident.

Third-party claims (claims against an insured person for damages done to the property of some third person) for "diminution of value," on the other hand, have generally been found by the courts to be covered by auto insurance since the measure of damage in tort claims (which the insurer promises to pay) is the difference in value of the property before the loss and the value of the property after the loss. For example, Texas court cases have found that legal liability for third-party damages includes diminution of value.1

There is a disparity between the various states on the subject. The following is a review of how those states consider the issue.

In 2001 the decision of the Georgia Supreme Court in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) caused serious concern among insurers since it awarded the insured both the cost to repair and the diminution in value of the car after it was repaired. Insurers believed this decision was a judicial rewriting of the wording of the policy and generated suits across the country seeking recovery for diminution of value payments in suits against insurers and third-party-defendants.

This article attempts to review the opinions of the various states on the issue and has been updated from earlier articles.

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