Type of Insurance Requested
David Surles, IIAT Contributing Author
When an automobile is repaired to its pre-damaged condition, a policyholder or claimant may assert that the vehicle’s market value after repair is less than its market value before the damage, commonly referred to as the “diminished value.”
First-Party Physical Damage Losses
The Texas Department of Insurance first addressed this issue in Commissioners Bulletin No. B-0027-00 on April 6, 2000. In that bulletin, TDI said an insurer is not obligated to pay a first-party claimant for diminished value when an automobile is completely repaired to its pre-damage condition.
The 2003 Texas Supreme Court decision in American Manufacturers Mutual Insurance Co. vs. Schaefer ratified the TDI bulletin and made it perfectly clear that Texas auto policies do not cover diminished value. In its decision, the Supreme Court ruled that Texas policies do not obligate an insurer to pay for this diminished value, because the coverage is clearly limited to the lesser of the three amounts shown in the Limit of Liability condition under Part D – Coverage for Damage to Your Auto.
The value of a physical damage loss on a personal auto policy is determined by the Limit of Insurance section in Part D (Coverage for Damage to Your Auto). That section says the company is liable for the smallest of the following amounts: (1) the actual cash value of the property; (2) the amount necessary to repair or replace the property with other of like kind and quality; or (3) the amount stated in the Declarations. These measures of loss don’t necessarily indemnify an insured for the full amount of financial loss, however, because sometimes a vehicle isn’t worth as much after a loss even if it has been repaired to its pre-loss condition.
Third-Party Property Damage Claims
In the 2000 Commissioners Bulletin, TDI said that the opinion expressed in the Bulletin did not preclude an obligation to pay a third-party claimant for the diminished value of a vehicle following repairs. Such claims are often made and settled accordingly.
Uninsured Motorist Claims
But wait, there’s more! TDI also stated in the 2000 Bulletin that an insurer might be obligated to pay a first party claimant under the uninsured motorist coverage provisions of the policy for diminished value.
The Fort Worth Court of Appeals ratified the TDI Bulletin in its 2013 decision in the case of Noteboom vs. Farmers Texas County Mutual Ins. Co. The court allowed recovery for the cost of repairs, loss of use and diminished value as calculated based on a comparison of the vehicle’s value before the accident and after the repairs.