Date of Loss v. Date of Disposal
The accrual date for determining and paying diminished value has created confusion for those seeking recovery and for those paying the resulting decrease. There are different arguments as to when any diminished value loss should be paid. The two dates standing out most prominently are: 1) The date of loss (accident date); and 2) the disposal date (date of sale).
Date of loss has always been the traditional date the insurance industry uses for determining value and loss issues. It is, therefore, surprising that many insurers argue diminished value compensation is not owed until the damaged vehicle is sold, traded-in, or returned on lease. This position focuses on the point at which the decrease in value is realized as opposed to when the decrease in value is caused. There is a certain appeal to this idea because it suggests that the cause and effect are “inchoate” or not yet complete. As a result, any prior payment of the diminished value loss is either unnecessary or a windfall to the claimant. Nonetheless, this analysis is flawed, and the date the accident occurred is the appropriate date for calculating diminished value loss.
Automotive Value Relativity
As a vehicle ages, its natural depreciation accumulates, reducing its fair market value. Collision or other damage accelerates that decrease in value and makes the vehicle worth significantly less today, in contrast to its peers. If a vehicle has been damaged, at some point, we expect the natural depreciation to “catch up” to the loss in value caused by the collision’s accelerated depreciation. This is like an Automotive Value Theory of Relativity (if Einstein will forgive the reference). The natural depreciation remains constant. External factors alter the premature loss in value or subsequent retention or increase in value. If a vehicle has been damaged and its depreciation is accelerated as a consequence, we anticipate that, at some point in the future, the natural depreciation will become so great that the accelerated depreciation will become subsumed within it. In other words, at some point, the vehicle’s value will naturally drop so low that it simply will not matter to the purchaser if it has been damaged.
Perceived Economic Benefit
Of course, using disposal date as the date of payment, if a person sells, trades in, turns in at lease end, or the vehicle is later declared a total loss prior to the time when natural depreciation has alleviated the accelerated depreciation, diminished value would then be determined and paid. The obvious reason insurers argue that the disposal date, rather than date of loss, is the proper time for determining and paying diminished value is one of cost. The newer a vehicle is when damaged, the greater the diminished value will be using the accident date for the determination. As the vehicle ages, the collision damage will have a lower impact on its overall value and any diminished value payment will be correspondingly lower. This seems to be preferable in two ways for insurers. It results in a delayed payment, allowing the money to be retained and invested, and it creates the virtual certainty that the diminished value payment will ultimately be less. Instead of a “windfall” for the claimant, the insurer reaps the benefit of the delay.
This is a shortsighted approach, however. Is it really economically feasible to keep a claim open for another five years or to have a second claim opened and processed at a later date? Imagine the confusion and difficulty apportioning the diminished value payment between responsible parties if the vehicle is involved in a second accident before disposal. While insurers and attorneys may have forever to argue about these issues, using the disposal date as the valuation point leaves insureds and third parties, alike, unhappily stuck in the middle – without any clear or immediate resolution.
Additionally, date of loss is the insurance industry standard for valuing claims. Do insurers really want to suggest that a later date in time can be substituted for valuing and paying losses? Consider if your house burned down today, but you decided to wait ten years to have it rebuilt. Will you be entitled to use the actual rebuild date, with all of the possible inflationary costs and unknown price variables, to determine what your insurer must pay to replace your home?
Under traditional tort law, which applies to third party claimants, the date of the accident is used to determine loss. Although part of the argument for using the alternate date is that the elements of the diminished value aspect of the negligence claim have not occurred until the vehicle is disposed of, this is not legally correct. While varying among jurisdictions, property damage negligence claims are subject to statutes of limitation. That means that a person has a limited amount of time to file a lawsuit to recover loss associated with the accident. The date of the accident is the traditional legal starting date for the filing time within which a lawsuit must be filed to recover damages according to the applicable statute of limitation. Just because diminished value is intangible at the collision date, does not mean that it has not occurred, cannot be calculated, or should not be paid.
Furthermore, negligence claims are not divided into sub-claims based on some portion of the damages being realized at a later date. For example, if a person has been badly injured in an accident and will require additional medical care for years into the future, that person does not submit new claims for damages every time treatment cost is incurred. Instead, the anticipated costs are calculated, assigned a present value, and paid.
The Answer is Date of Loss.
The date the collision occurred is the date the law uses for initiating the statute of limitation for an action to recover damages negligently caused to property. Unless legislators and courts are willing to carve out the “diminished value loss” exception to their jurisdictions’ statutes of limitation, we are certain to see dramatic increases in the lawsuits filed against at-fault insureds for these losses. That will hardly be a satisfactory result for anyone. Essentially, it is a lose-lose proposition in terms of time, money, and goodwill for insurers to argue that the disposal date is the proper date for determining diminished value losses. If for no other reason than finality, date of loss is the appropriate date for determining diminished value.