Dealerships in Georgia say it may be too soon to fully gauge the impact on body shops of a recent Georgia Supreme Court ruling that State Farm mustpay its auto policyholders for diminished value.
“It really hasn't hit us full force, but long term I know it will affect us,” says Scott Porter, body shop manager for Curry Honda in Chamblee, GA.
The ruling, and State Farm's subsequent $250 million settlement, have attracted national attention because the battle over diminished value — in essence, the decrease in the value of a vehicle after it has been in an accident — isn't limited to Georgia.
State courts around the country are weighing in on similar lawsuits that could impact how dealership shops fix vehicles, how many vehicles get totaled and what everyone pays for auto insurance.
Though nothing new, diminished value made it on to most collision repairers' radar screens in the mid-1990s when a former body shop owner began marketing a system that purported to establish how much a vehicle's value had declined following an accident and repairs.
Two types of diminished value are discussed. Inherent diminished value is that which occurs simply because the vehicle was involved in a wreck, regardless of how well it was repaired.
Diminished value proponents also speak of repair-related or insurer-related diminished value. Insurer-related diminished value, they say, could result from the insurer's refusal to pay for necessary repair procedures, or the required use of poor quality non-OEM parts.
Repair-related diminished value could result from such things as failure to put on parts for which the shop was paid, mismatched paint, overspray, crooked stripes, poor welds, or poor sheet metal repair.
High courts in Louisiana, Florida and Delaware rejected diminished value claims.
But the Georgia Supreme Court came to a different conclusion against State Farm.
Supreme Court Justice Robert Benham said “value, not condition, is the baseline for the measure of damages in a claim under an automobile insurance policy in which the insurer undertakes to pay for the insured's loss from a covered event.”
Georgia's insuranance commissioner subsequently said all auto insurers must pay state policyholders for diminished value.
State Farm agreed to settle the Georgia class action suit, providing $100 million to as many as 700,000 policyholders who've filed claims since 1993. The insurer also agreed to pay $50 million for court and attorney costs, and up to $100 million for future claims over the next six years.
Insurers point to their state court victories elsewhere and insist they'll eventually have the legal decisions they need to avoid most diminished value claims.
“The entire theory of diminished value is dubious because there is no way to accurately determine the exact value and condition of the vehicle at the time of the accident,” argues James Taylor, a regional manager for the National Association of Independent Insurers. “The role of auto insurance is to repair or replace a damaged vehicle to pre-accident condition; it is not designed or priced to guarantee the value of a car before or after the repair is made.”
Anyone seeing the Georgia case as a victory for collision repairers is missing the bigger picture, says Bill Hardt, a State Farm assistant vice president for property damage claims.
“What's going to happen to shops if because of diminished value the cost of repairs jumps by 15%, 20%, or 25%?” he asks. “First of all, your insurance premiums will go up. Second of all, you're going to be fixing a lot fewer cars because we'll be totaling them.”
Porter and other Georgia dealership body shop managers agree this is a potential problem.
“We've lost out on some bigger sized collision repairs because, when it starts getting close (to being a total), insurers will figure out what that diminished value is going to be and will sometimes go ahead and total a car,” he says.
John Yoswick is a freelance writer based in Portland, OR.