AutoMuse

I heard someone refer to "diminished value" as pain and suffering for cars. I thought of you!

That's actually a good analogy, except that it boils down to being pain and suffering for the owner. As a lawyer, an ecomonist, and from a risk analysis perspective, think of what happens to the bank or financing company that has a security interest in the vehicle. So the insurer pays for repairs to the car. There is a real, quantifiable decrease in value that occurs as a result of most collisions for which consumers are not currently being compensated. In the third party context, particularly, the bank ends up under secured through no fault of the owner's or its own actions.

In fact, the vehicle owner is probably in default of the security agreement by allowing the vehicle to have acquired an artificially decreased value. It would be like allowing your friend to take the passenger seat out of the vehicle, selling it, and keeping the money. Sure, you're still on the hook for the full financed amount, but the very reason the financing entity takes a security interest is to protect itself just in case you don't come through. Now that your car has been in an accident (again, let's talk about third parties), if you default, your car will be sold at a respossession auction. Instead of bringing $10,000 (you owe $12,000), it only brings $7,000. You now owe the bank $5,000 when you should only have owed $2,000. Why should the tortfeasor get to do this to you or to the bank?

Of course, there are sales tax, manufacturers' warranty, reliability, safety, leasing, security interest, and a pile of other issues involved on this topic. One of the realities of diminished value, however, is that it was probably the largest single factor why so many banks got out of private passenger leasing and is the key reason why negative equity on automobile consumer debt is skyrocketing.

I keep suggesting to insurers that they offer diminished value components to auto policies and charge for it. I also keep suggesting to banks and the finance companies that they insist the owner carry diminished value coverage. That way, everybody is covered -- even first parties -- and everybody is happy. Think of all the money insurers would save by not hiring attorneys to defend diminished value claims. Think of all the money banks and finance companies would prevent from being lost merely as a cost of doing business. And it's really simple. If money is owed on the car, the insurer sends the diminished value payment to the secured party to be applied against the last portion of the note. That way, the bank is covered in the event of default, the consumer is not penalized for the artificial depreciation caused by the collison, and the insurer and bank don't have to worry that the consumer will take the diminished value check and buy a big screen TV.

Obviously, the problem is that you're reading a rag like the New York Times instead of the thorough, informed non-partisan take provided by your friendly neighborhood trade press. ;-)

I guess one way out of this is to explicitly price the contract to include diminished value. I am not an expert on this issue at all, but it seems that the insurers may have written contracts that implied that they would put one back in the original position after an accident, but never charged for the diminished value coverage explicitly. This seems to be a common occurrence as contract terms when they are written may not seem to have a cost. However, after litigation and interpretation, the cost becomes apparent. I think E L's idea of having separate or explicit coverage makes a lot of sense. In fact, I'd probably not buy diminished value coverage for my slightly older car even if I still buy collision. Right now I am forced to buy it even when I don't value it. This is a win-win for the insurance industry and consumers if they could unbundled this coverage.