Third Parties v. First Parties

When it comes to automobile accidents and claims under insurance policies, it is important to differentiate the relationship of the parties. First parties are those in direct contractual relationship with an insurance company, i.e., "the Insured". Third parties are those outside of the insurance relationship. In diminished value matters, the first party is typically the person responsible for the collision and whose insurance company will pay the claims. A third party is typically the person not responsible for the collision. In other words, the first party is the tortfeasor (one at fault) causing damage to the third party.

While this may seem academic, it has great practical significance. If you are a first party seeking recovery for diminished value to your vehicle, your right to recover is governed by the terms of your policy. Why? Because your right of recovery is based on contract law. As the insurance policy is a contract, the terms of the contract govern unless they are ambiguous or violate public policy.

Third parties, conversely, have the right to recover against the person causing the accident based on tort law. A third party's recovery is not limited by the terms of an insurance contract to which that person has no connection. Instead, tort law demands that the injured party be "made whole". As the decrease in the third party's vehicle's value is part of the damage caused by the tortfeasor, the third party is certainly entitled to seek compensation for that decrease in value.

Many insurers recognize third party diminished value and pay those claims without protest. In some circumstances, the insurer may assert that it has no obligation to pay for any diminished value loss found to have been caused by its insured based on the terms of the policy. However, that policy cannot prevent the injured party from seeking recovery for diminished value loss directly from the insured/tortfeasor, much as a party can recover damages in excess of the limits of an insurance policy. Nonetheless, the insurer has an obligation to defend its insured in a lawsuit brought by the third party related to the collision. Keeping in mind the financial cost of fulfilling the duty to defend and the possibility of facing a "bad faith" claim brought by its insured are often incentives for insurers to pay the diminished value suffered by the third party.

Uninsured/Underinsured Motorist Coverage

Another wrinkle in the first party/third party analysis arises if you seek recovery through your own policy under the uninsured/underinsured motorist coverage rather than under your collision coverage. Although you are seeking payment under your own policy, in these circumstances, you typically are not subject to the limitations contained in the collision coverage, as you are not "at fault".

Diminished Value Class Actions

Although there is considerably more conflict over first party diminished value cases than third party ones, the recent class actions involving diminished value payments have been first party focused - mostly because of the anticipated difficulty identifying third party class members and all of the individual defendants necessary for the lawsuit. Of course, the dynamics of the relationship are entirely different when attempting to recover under the collision coverage provisions of your own policy, and the headlines which periodically appear declaring victory for insurers and denouncing diminished value as a recoverable element of automobile damage are often misleading.
(See, e.g. Diminished Value Payments When Your Car Has Been in a Wreck; Page
2: Diminished Value Payments Becoming Unlikely, insure.com/auto/collision/
diminishedvalue2.html.) These articles almost always refer to first party cases and are, therefore, not necessarily applicable to third party claims.

Against 1st Parties

Florida recently settled the conflict among its appellate districts by finding that under insurance policy language stating that the insurer could elect to "pay the loss in money or repair or replace damaged or stolen property with other of like kind and quality", the first party insured was not entitled to collect diminished value after a repair. Siegle v. Progressive Consumers Insurance Co., 819 So. 2d 732, 2002 Fla. LEXIS 1097 (Fl. 2002).

Additionally, the Maine Supreme Court tackled this issue of first impression in Hall v. Acadia Insurance Co., 2002 ME 110, 801 A.2d 993 (Me. 2002). In its decision, the Maine high court found that the insurer's requirement to "repair" a vehicle did not include compensating the insured for its decrease in value.

Favoring 1st Parties

As a result of the Georgia Supreme Court's November 2001 ruling in State Farm Mutual Automobile Insurance Company v. Mabry, 274 Ga. 498, 556 S.E.2d 114, 2001 Ga. LEXIS 910 (Ga. 2001), Georgia currently has the strongest precedent finding that insurers must compensate policy holders (first parties) for their diminished value losses. The Georgia Supreme Court determined that "[t]he insurance policy, drafted by the insurer, promises to pay for the insured's loss; what is lost when physical damage occurs is both utility and value; therefore, the insurer's obligation to pay for the loss includes paying for any lost value." Id., 2001 Ga. Lexis at *27.

The Mabry court required State Farm to develop "an appropriate methodology and procedure" to determine diminished value. The method the parties agreed to use in the settlement of that lawsuit has come to be known as the "17c formula", and other insurers settling Georgia claims have adopted this formula.

The "17c Formula"

The 17c formula, however, is as mind-boggling as it is inaccurate.¹ The formula begins with false presumptions that the National Automobile Dealers' Association ("NADA") sale value for the vehicle will be an appropriate initial vehicle value and that 10% of that NADA value will represent the maximum decrease in value suffered. Often there are no NADA values for particular vehicles, especially in the beginning of a vehicle's model year. Additionally, the 17c formula provides no explanation substantiating why 10% of the NADA value is an appropriate base figure for the decrease in value. Then, there are multipliers and discounts and subjective determinations as to how severely a vehicle has been damaged, none of which have any real relationship to the actual change in fair market value of the particular vehicle.

Insurers using this "formula" are, in many instances, paying diminished value for vehicles, which have not truly suffered any decreased value. Likewise, the actual diminished value suffered on other vehicles is significantly greater than as calculated under the 17c formula, and consumers are not being properly compensated for the decrease in value. As a result, how will any insurer be able to project future diminished value claims with any degree of accuracy?

Additionally, consumers are often falsely led to believe that the 17c formula is the only applicable method for determining diminished value, when this is simply not the case. For those who contest the 17c-determined amount, insurers also place the responsibility on their insureds to "disprove" the 17c amount, which leaves claimants uncertain of their rights. Under the Mabry decision, however, the burden is on the insurer to establish that its valuation method is an "appropriate methodology and procedure". It is important for consumers to know that they have the right to a second opinion and do not simply have to accept the dollar value resulting from the 17c formula. Nor should they, because it is almost never correct.

The Result?

In the end, consumers need to pay attention to their rights as both first and third parties, and they need to ask questions. If there is something you do not understand, ask. And get the response in writing. Written confirmation always goes a long way toward understanding what you have been told - and determining whether that statement is accurate. If you are claiming as a third party and are told that state law or the insured's policy does not allow payment to you for diminished value, demand the law in writing. As to the policy, that is between the insurer and its insured. It has no application to you.

E. L. Eversman