Diminished Value: The Hidden Insurance Company Rip-Off

The California auto insurance industry is costing consumers billions of dollars, encouraging auto sales fraud and putting potentially unsafe autos back on the road due to outmoded, dangerous laws regarding "diminished value."

Diminished value is the lower re-sale value of a car which has been repaired following an accident. Even if repaired so that a car appears new, the damage -- especially in major collisions where twisted frames and other serious damage occurs -- drastically lowers the retail market value. Often, the car is "toxic" and will find no buyers at all.


If the value of something in a free market economy is what someone is willing to pay for it, then a car that no one will buy has a value of zero. And that is what often happens to cars that have been in major accidents.

In the past, nationwide crash records were not kept and the sellers of the auto could -- either intentionally or unknowingly -- sell the car to an unsuspecting buyer who had no idea that a car had been in an accident. This lack of records encouraged silence on the part of the seller.

The advent of CarFax and other accident-tracking services is imperfect but has the potential to change that.

The fair market value of a vehicle has always been tied to its condition: age, wear, a mechanic's evaluation of the drive train, tires, visible dents, upholstery and more. CarFax and other services fall into the same category of information that allows a potential buyer to assess the appropriate fair price.

But thanks to a loophole in California state law, insurance companies will not allow CarFax or other repair records to be considered when calculating fair market value for damaged autos.

This is particularly serious in major accidents where frames and other major components have been twisted or destroyed. Insurance companies typically will not "total out" a vehicle unless the repair costs exceed 65% to 70% of the "fair market value" of the vehicle.

However, state law allows insurance companies to refuse consideration of CarFax and repair records in the valuation. Thus, a car which has never been in an accident and one which has been in a serious accident are assigned the same value.

As an example, this means that a vehicle that is worth $16,000 undamaged, but has been in major accident requiring $8,500 worth of repairs and been repaired, is still assigned a value of $16,000 even though a CarFax or other damage report lowers actual fair market value to $10,000 or less -- often no more than salvage value (parts). In this example,  the $6,000 difference between the undamaged value and the damaged but repaired value is called "diminished value."

Car owners owners are then left to eat the thousands of dollars they have lost because of the loophole since the ACTUAL fair market value of their vehicle is not the INSURED fair market value. That is deceptive on the part of the insurers.

Unethical or financially strapped owners are left to hope that no one checks with CarFax or that CarFax doesn't have a report which is very often the case. Thus, the "diminished value" loophole encourages fraudulent sales where the damage is not disclosed.

In addition, because late-model cars are made to crumple in order too protect passengers, the repair attempts to straighten crumpled zones results in micro fractures, metal fatigue and an overall inability to keep passengers safe in the event of a subsequent collision.

This is particularly important in "unibody" cars in which the frame is simply part of the overall structure. When the frame crumples in a major accident, the overall safety integrity is compromised when that vehicle is straightened. No one has any data on how many unsafe cars like this are on the road.

It's time this loophole is closed by the California Legislature.