This article is a companion piece to this video

In this episode of On Subrogation: Diminished Value, Rathbone Group partner Jason Sullivan discusses the conditions of diminished value as it applies to subrogation recovery. Is diminished value covered when pursuing a tortfeasor in an insurance claim? It depends…

A Bad Before & After: Determining Recovery of Diminished Value

Diminished value is defined as the difference in value of your vehicle before a collision and after a collision, but also after the vehicle has been repaired. For instance, say your car is worth $20k and you have an offer on it for $20k. But then the buyer finds out the car was in a rear-end accident two years before and is now only willing to pay $18k. The diminished value is $2k.

However, it is rarely that simple when dealing with diminished value in insurance lawsuits. Insurance companies will often use a rough formula to determine the coverage cap on diminished value (DVC):

  1. Determine the actual cash value of the vehicle (i.e. KBB or NADA values)
  2. Determine the percentage cap of diminished value coverage (i.e. 10% DVC on a $20k car is $2k)
  3. Subtract multipliers (0-1) of certain factors (i.e. age, mileage, severity of impact damage)

Take the example of that $20k car:

  1. $20k cash value
  2. 10% DVC = $2k DVC
  3. a. Severe impact damage – multiplier 1 = $2k DVC
  4. b. Old car with high mileage – multiplier .25 = $500 DVC

In this case, coverage for diminished value would be capped at $500.

Determining Whether Diminished Value Can Be Recovered

Diminished value is not always a part of recoverable losses in an auto insurance dispute. It will depend on the state in which the lawsuit is filed as well as what the insurance policy language covers. So the first step a subrogation attorney must take if their client needs to recover from 3rd-party negligence is the state’s tort law: will the state hold the at-fault party responsible for diminished value? About a dozen states will, so carriers do well to retain a subrogation law firm with specialists, adjusters and attorneys licensed in jurisdictions across the nation.

In a certain Indiana case on diminished value, Allgood v Meridian Insurance Co (2005), the state’s supreme court was asked to rule on a specific circumstance:

  • The insured was suing their own insurance company under the claim that the policy covered diminished value.
  • The court determined the argument meant that the case was not one of tort law or making the insured whole; it was a contract issue.
  • The court then looked at the policy language and determined that the policy did not, in fact, cover diminished value.
  • However, in Indiana, should the carrier have paid out the diminished value, they would still have had a right to recover those losses via subrogation.

Therefore, counsel handling a subrogation claim involving diminished value must first determine (1) if the state allows diminished value recovery from a 3rd party and (2) if the insurance policy covers diminished value. These two factors must align in order to pursue recovery of diminished value.For more educational material on subrogation, visit our YouTube channel or podcast library for more episodes of On Subrogation, where Rathbone Group attorneys break down tricky topics into digestible discussions. If you have a question we have not yet covered, reach out at [email protected] or [email protected] to see your subject covered in a future episode of On Subrogation.