Wednesday, February 18, 2015

Diminution in Value - A reliable science?

In the context of motor torts, residual diminution in value (“residual DV”) generally refers to the perceived reduction in market value for repaired automobiles involved in accidents caused by the action of a third party.  More specifically, residual DV would be the difference in market value of a vehicle immediately prior to the accident and immediately after the accident and repair.  Residual DV is a potential issue even if an automobile is repaired professionally and properly.  The claim is based on the theory that the resale value of a vehicle that has been in an accident is often diminished due to the stigma carried by a vehicle with an accident history that may have been structurally compromised. 

DV claims are more commonly made against a negligent third party that caused damage to the automobile, as diminution of property is generally not included in Maryland automobile insurance policies.  In lieu of a recognized diminution in value, most automobile insurance policies cover the actual cash value (“ACV”) of the damage or the actual cost to repair the damage.  A few insurance companies have included language in policies stating that diminution in value is not compensable, but generally it is not addressed.  Although most states, including Maryland, have not recognized an automobile insurer’s obligation to indemnify for this type of loss, the DV theory is currently gaining strength as a major consumer concern, particularly for newer or more expensive vehicles.  The Maryland Court of Appeals has recognized that if a plaintiff can prove that, after repairs, his vehicle has a diminished market value from being damaged, then he or she can recover, in addition to the cost of repairs, the diminution in market value, provided the two together do not exceed the diminution in value prior to the repairs.  Fred Frederick Motors, Inc. v. Krause, 12 Md. App. 62, 66-67, 277 A.2d 464, 467 (1971).  As such, there are certain aspects to keep in mind when reviewing residual DV claims.

First, the residual DV should not exceed the combined repair costs and gross DV of the vehicle – gross DV being the difference in market value of your vehicle immediately before and immediately after the accident.  In other words, after the vehicle has been repaired, any residual DV award should certainly not exceed the gross DV of the vehicle.  By way of example, and without going into valuation methods, if a vehicle is worth $50,000.00 before an accident, and only $30,000.00 after being damaged from the accident, the gross DV would be $20,000.00.  If after $15,000.00 in repairs, the vehicle is valued at $40,000, then the residual DV is $10,000.  Even though the cost of repairs ($15,000.00) and the residual DV ($10,000.00) total $25,000.00, the maximum DV could only be $20,000.00 (the gross DV).  Should the residual DV award be more than $20,000.00, there would be double recovery, not to mention that the vehicle would have been considered a total loss based on those values.

Second, proof of residual DV can be difficult to prove, as there is no standard methodology in Maryland for determining the perceived loss in value.  Often property valuation experts will opine that the only absolute measure of a diminution of value loss is an actual vehicle sale that includes complete disclosure of the damage history.  At that point, a discrete number can be reached from the deduction of proceeds of the sale from the pre-loss value  of the car.    Because the circumstances of a DV claim usually involve the claimant retaining the subject vehicle, there would be no actual sale.  Even if there was an actual sale of the vehicle, there could have been other factors not reflected from the sale price, such as continued use and natural depreciation, which could have affected the purchase price of the vehicle at the time of sale.

Finally, as obvious as this may sound, an expert in a residual DV claim must actually formulate an independent opinion concerning residual DV.  Because determining residual DV is a continually evolving theory among Maryland courts, with no clearly delineated approach, it is common for expert appraisers and property valuation professionals to outsource the diminished value calculation to a valuation service prior to providing expert testimony.  Formulations of diminished value solely based on outsourced determinations of residual DV would generally not be admissible at trial as expert opinion for evidentiary reasons.

Despite the lack of what some may refer to as a “reliable calculation,” residual DV claims are a constant presence, typically in District Court. It is important for the attorneys handling those claims to have a firm grasp on applicable Maryland law related to the calculation of DV. The attorneys at RSRM are experienced at handling residual DV claims.  

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