The Diminished Value Exclusion

In auto insurance, diminution in value means a reduction in the value of a vehicle that has been damaged in an accident and then repaired. Even if the auto has been expertly repaired with high-quality parts, it may have a lower resale value than a comparable vehicle that has never been involved in an accident.

This perceived loss of value is excluded under the physical damage section of the standard business auto policy by the diminution in value exclusion. The exclusion may limit your recovery for a physical damage loss involving a vehicle you own or hire.

Owned Autos

The following example demonstrates how the exclusion may affect physical damage claims involving vehicles you own. Suppose your firm owns a one-ton van that's insured for comprehensive and collision under a commercial auto policy. One day, an employee of yours accidentally backs the van into a tree, damaging its rear doors. You file a claim under your collision coverage. As stated in your policy, your insurer will pay the lesser of:

• the actual cash value (ACV) of the damaged vehicle when the loss occurred; or
• the cost of repairing or replacing the vehicle with parts and materials similar to those the vehicle contained before the loss

You take the van to a local body shop, which estimates repairs will cost $3,500. Your insurer agrees and the van is repaired for $3,500. Your policy includes a $500 deductible, so your insurer pays you $3,000.

You determine that your van had a "blue book" value of $10,000 before the accident. Because the vehicle has been in an auto accident, potential buyers will consider it less valuable than a similar van that hasn't been involved in an accident. The market value of your van is now only $9,000. Your insurer will not pay for the $1,000 decline in value.

While diminished value is not covered by physical damage insurance, it usually is covered by auto liability insurance. Thus, if a vehicle is damaged in an accident for which another driver is liable, you may be able to include a charge for diminution in value in the damages you seek.

Hired Autos

If your business hires an auto that's damaged in an accident, your business may sustain an out-of-pocket loss due to the diminution in value exclusion. The following example demonstrates how this may occur.

Suppose you own a small construction company. You need to attend a two-day meeting 200 miles away so you rent a car from Ready Rentals, a local car rental agency. You rent the vehicle in the name of your business using a business credit card. Your company has purchased a commercial auto policy that includes liability and physical damage coverage for hired autos. Consequently, you decline Ready Rentals' offer to sell you auto liability insurance.

Loss Damage Waiver

Ready Rentals offers to sell you a loss damage waiver (LDW). The LDW will absolve you of any obligation to pay for physical damage the vehicle sustains during the term of the lease. Unfortunately, this protection comes at a steep cost, $30 per day, so you decline the offer. After all, why should you buy an LDW when your firm already has physical damage insurance on hired autos? You sign the rental contract and are soon on your way.

Your meeting has ended and you making your return trip in the rental car. Suddenly, you hit a patch of ice and skid into a tree. You aren't injured but the front end of the rental car is badly dented. You return the car to Ready Rentals and fill out an accident report. You also file a claim with your commercial auto insurer.

What are Those Charges?

One month later you receive a $7,000 bill from the rental agency. The charges include the following:

• $3,600 for repairs to the rental car
• $600 charge for loss of use
• $2,500 for diminished value
• $300 in administrative fees, including charges for towing and storage

The loss of use charge represents the income the agency lost because the damaged vehicle was unavailable to rent to other customers. The rental agency claims that repairs took 15 days. It has charged you the full $40 per day rental fee for each of those days.

Because your policy includes hired auto physical damage coverage, your insurer pays $3,100 ($3,600 minus your $500 deductible) for the damage to the rental vehicle. It also covers loss of use. However, the most your insurer will pay is $20 per day for each of the 15 days or $300. Your physical damage insurance doesn't cover administrative fees and it specifically excludes diminution in value. Your business is now facing $3,100 in out-of-pocket expenses: $300 for loss of use, $2,500 for diminished value, and $300 for administrative fees. These expenses are in addition to your $500 deductible.

Credit Card Coverage

Many credit card contracts provide coverage for damage to a rental vehicle caused by theft or collision. This coverage is available when the cardholder has rented a vehicle and declined the loss damage waiver. It is excess over any available auto physical damage coverage.

In the scenario outlined above, you obtained a rental vehicle from Ready Rentals using a business credit card. Because the rented vehicle was insured under your auto policy, you must wait until you have received a payment from your auto insurer before filing a claim with your credit card company. Your credit card company might reimburse you for the $500 deductible but it is unlikely to pay for diminution in value, loss of use or administrative fees.