Diminution of Value Coverage Implications

1. Diminution of ValueCoverage Implications Presented by Bill Wilson, CPCU, ARM, AIM, AAM Director, IIABA’s Virtual University

2. Coverage Issues • Diminution vs. Betterment • What is Diminished Value? • Sources of Diminished Value • Policy Coverages • Rental Cars

5. Diminution vs. Betterment • 1989 Personal Auto PolicyA. 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.

6. Diminution vs. Betterment (cont’d) • 1994-2005 Personal Auto PolicyA. 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 propertywith 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.

7. 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” indicatesa 10% annual (80% max.)betterment deduction. Claim SettlementCost to repair $1,800 Less 80% - 1,440Subtotal 360 Less deductible - 500Payable $ 0 Diminution vs. Betterment (cont’d)

8. What is Diminished Value? • Policy Definition • Dictionary Definition • Case Law Definition

9. What is Diminished Value? (cont’d) • Policy DefinitionISO PP 13 01 12 99Coverage 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.”

10. 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

11. 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

12. Sources of Diminished Value • Substandard repairs • Non-OEM parts • Psychological or perceived reduction in value

13. Policy Coverages • First- Party Physical Damage Claims • Third-Party Liability Claims • UM/UIM Claims • Case Law

14. Policy Coverages (cont’d) • First- Party Physical Damage ClaimsISO PP 00 01 01 05Personal Auto PolicyINSURING AGREEMENT“We will pay for direct and accidental loss to ‘your covered auto’ or any ‘non-owned auto’….”

15. 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 propertywith 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.

16. 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.…”

17. 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)

18. 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.”

19. 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)

20. 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)

21. 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

22. Rental Car Issues (cont’d) • Rental AgreementsLoss 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.

23. Rental Car Issues (cont’d) • Personal Auto Policy • Physical damage coverageTransportation Expenses…“Expenses for which you become legally responsible….”vs. • Liability coverage

24. Rental Car Issues (cont’d) • Business Auto Policy • Physical damage coverageLoss of Use Expenses…“[E]xpenses for which an ‘insured’ becomes legally responsible to pay for loss of use….”vs. • Liability coverage

25. 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

26. Loss valuation Loss settlement Loss payment Loss damage waiver Indirect losses Administrative expenses Other insurance Excluded autos/areas Excluded uses/drivers Others Rental Car Issues (cont’d) Top 10 Reasons to Purchase the Rental Car CDW/LDW

27. Additional Resources • IIABA’s Virtual Universityhttp://www.iiaba.net/VU/Nonmember/CPCU2006.htm • EmailBill.Wilson@iiaba.net • CPCU Journalhttps://webster.cpcusociety.org/source/pubs/index.cfm