The Diminished Value Exclusion

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The term diminution in value refers to the reduction in value that occurs when an auto is damaged in an accident and is then repaired. Even if the auto has been expertly repaired, it may have a lower resale value than a comparable vehicle that has never been damaged in an accident.

A commercial auto policy addresses this potential loss in value via the diminution in value exclusion. This exclusion applies to physical damage coverage. It is typically found at the end of the physical damage exclusions in the commercial auto coverage form.

Owned Autos

The diminution in value exclusion may limit the amount you recover from your insurer for a physical damage loss involving a vehicle you own. The following example demonstrates how this may occur.

Your firm owns a one-ton truck that is insured for comprehensive and collision under your firm’s commercial auto policy. The truck is damaged when an employee of yours accidentally backs it into a wall. You file a claim under your collision coverage. Your insurer will pay the lesser of:

  • the actual cash value of the damaged vehicle at the time of the loss; or
  • the cost of repairing or replacing the vehicle with parts and materials that are similar to those the vehicle contained before the loss.

Actual cash value generally means the replacement cost of the vehicle less depreciation. The insurer might also consider the "blue book" or market value of the vehicle. If the cost to repair the truck is less than its current value, your insurer will pay the cost to repair it. Otherwise, the truck will likely be declared a total loss.

Suppose that your insurer opts to pay the cost to repair your truck. Your local body shop charges $3,500 to fix the vehicle. If your policy includes a $500 deductible, your insurer will pay $3,000. Your truck had a market value of $10,000 before the accident. However, the vehicle has been in an auto accident, so potential buyers view it as less valuable than a similar truck that has not been involved in an accident. The market value of your truck is now only $9,000. Your insurer will not pay you 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. This means that if your vehicle is damaged in an accident caused by another driver’s negligence, and you sue the other driver, you can include a charge for diminution in value as part of damages you seek.

Rental Vehicles

The diminution in value exclusion may generate an out-of-pocket expense if a rental vehicle is damaged during the term of the rental agreement. Consider the following example:

Bob is the owner of Busy Builders, a small construction company. He has an upcoming meeting in Pleasantville, which is 250 miles from Busy Builder’s hometown. Bob rents a car in the name of his business using a business credit card. He rents the vehicle for his two-day trip from Ready Rentals, a local car rental agency. Ready Rentals offers to sell Bob liability insurance and a loss damage waiver.

Loss Damage Waiver - The loss damage waiver (also called a collision damage waiver) will absolve Bob of any obligation to pay for damage to the vehicle. If he is involved in an accident while driving the rental vehicle, and the vehicle is damaged, the damage will be covered in full. Unfortunately, this protection comes at a steep cost. Ready Rentals wants $20 per day for the LDW. Bob decides to decline the LDW. He also declines to purchase auto liability insurance. Busy Builders is insured under a commercial auto policy that includes liability and physical damage coverage for hired autos.

Why should he pay for liability insurance and an LDW when his firm has insurance for rental vehicles? Bob signs the rental contract and is soon on his way.

The next day Bob finishes his business in Pleasantville and begins his drive home in the rental car. About an hour into his return trip, Bob skids on an icy road and accidentally hits a tree. Bob isn’t hurt but the front end of the rental car is badly dented. Bob returns the car to Ready Rentals and fills out an accident report. When he returns to his office, he files a claim with his commercial auto insurer.

What are Those Charges? One month later Bob is shocked at the bill he receives from the rental agency. The total is over $7,000! The charges include $3,600 for the damage to the rental car and $2,500 in diminished value. The rental agency has also included a $600 charge for loss of use, and $350 in administrative fees. The loss of use expense represents the income the agency lost because the damaged vehicle was unavailable to rent to other customers. The rental agency claims that the damaged rental car took 15 days to repair.

It has charged Bob the full $40 per day rental fee for each day the car could not be rented. Administrative fees may include towing charges, storage fees, and other expenses.

Busy Builder’s auto insurer will likely pay the $3,100 for the damage to the vehicle (the insurer will subtract Busy Builder’s $500 deductible). Because Busy Builders has purchased physical damage coverage for hired autos, Busy’s auto policy also covers Loss of Use. However, the policy pays only $20 per day; thus, the insurer will pay $300 for the 15 day period. This means that Busy Builders will be stuck with a $300 out-of-pocket expense for uncovered loss of use. Bob’s physical damage coverage excludes diminution in value, for which the agency has charged $2500.

Commercial auto policies do not cover administrative fees. Thus, the $350 fee charged by the rental agency is not covered under Busy Builder’s auto policy. Busy is now facing $3,650 in uninsured expenses.

Credit Card Coverage - Because Bob declined the loss damage waiver from Ready Rentals, the rental agency will not pay any portion of the damage to the rental car. Bob rented the vehicle from Ready Rentals using a business credit card. Like many credit cards, Bob’s card automatically covers physical damage to rented vehicles. Many credit cards offer this coverage when the cardholder has declined the loss damage waiver. The coverage is typically excess over any available auto physical damage coverage.

To collect any compensation under his credit card, Bob must wait until he has received payment from his auto insurer. Like the auto policy, the credit card coverage excludes diminution in value. It also excludes loss of use and administrative fees. Of Busy Builder’s $3,650 in out-of-pocket expenses, the credit card will pay only the $500 deductible.