# How insurance companies calculate diminished value claims

23 September 2013, Comments: 0

Most insurance companies use a diminished value calculation known as “17c”. This diminished value calculation was developed by Infinity Insurance and first implemented in a court by State Farm in a Georgia lawsuit in which State Farm submitted this calculation method as a way to calculate diminished value. The court in that case (*Mabry v. State Farm* ) approved its use–*in that case* –and as a result of the low value produced by the formula, most insurance companies have adopted it or a close variant. (The name 17c comes from the place where the formula was described by the court: paragraph 17 section c.) This formula has absolutely no control over Texas law. Even the Georgia Insurance Commissioner has rejected its authority over any other case than the one in which it was approved. However, it is extremely favorable to insurance companies so they all quickly adopted it. They may not tell you they are using it, but it’s out there. Here’s how the 17c formula works, even in Texas diminished value claims.

## Step 1: Calculate the value of the car

The 17c formula begins with the NADA value of your car. It is a reasonable place to start and they will adjust the NADA number up for whatever upgrades you have on the base model of your car. Then they will adjust the number down for any prior damage and then adjust up or down based on the mileage (keep this is mind). That number produces a retail value or market value on your car. In other words, it produces the reasonable sales price for your car. So far, this part is almost reasonable. NADA is a widely used tool for pricing cars but it does not account for geographic adjustments in value. For example, a car almost always sells at a premium in a wealthier area than a less wealthy area.

So not the worst starting point, but not perfect, either.

## Step 2: Apply an arbitrary cap for damages

17c takes the retail value of the car from step one and multiplies is by 0.10 to produce the “base loss of value”. What this translates to is an automatic 10% cap on the diminished value. There is no factual or logical basis for this cap. It was just made up somewhere in the offices of State Farm. I have never seen any insurance company provide a justification for this cap that is based in fact or reason. The insurance companies *could* survey car dealers to determine the commonly used formulas to discount the price of a vehicle due to prior damage on the sell-side of vehicle transactions. I’ve never seen even a flimsy attempt made to justify this number. Yet, it is commonly used.

## Step 3: Apply a damage multiplier

Now that the insurance company has set an upper limit, it will begin reducing your claim. First it applies a damage multiplier. This multiplier reduces your amount of your claim based on how severe the damage was to your car. If you only have cosmetic damage then the multiplier is very small and severely reduces your claim. If there is substantial structural damage then the multiplier is large and your claim is reduced slightly or not at all.

You take the base loss of value and multiply it by this number based on the level of damage:

- 1: severe structural
damage

- 0.75: major damage to structure and panels
- 0.50: moderate damage to structure and panels
- 0.25: minor damage to structure and panels
- 0.00: no structural damage or replaced panels

Of course, you may find missing from this calculation any mention of mechanical damage. That’s because the underlying premise of this multiplier is that they are *really* only paying for damage that could not be fixed by replacing parts. So damage to the structure is recoverable because all they can do is hammer the structure back to its original shape. But anything that can be replaced or is replaced is not recoverable. That goes back to the value of the repairs, not what the owner will lose in value when selling the vehicle.

This is another reason why this formula is inappropriate. It isn’t compensating you for lost sale value. Buyers don’t care whether a quarter panel was replaced instead of reshaped. They do care that the car was in an accident and had to undergo body work. That is the diminished value.

## Step 4: Double dip on the mileage

Remember when I told you to keep in mind that we discounted the retail value of the car based on mileage? The insurance company is going to double dip with a second multiplier. The mileage multiplier discounts the diminished value claim based on mileage. It works the same as the damage multiplier in the last step but applies these figures:

- 1.0: 0-19,999 miles
- 0.80: 20,000-39,999 miles
- 0.60: 40,000-59,999 miles
- 0.40: 60,000-79,999 miles
- 0.20: 80,000-99.999 miles
- 0.00: 100,000+

That’s right. All of us with vehicles with over 100,000 miles have our claims automatically reduced to zero. Does that make sense to you? It doesn’t make sense to me. It’s bad faith. It’s bad enough that they are double dipping on mileage but they are cutting off an enormous number of vehicles with these arbitrary numbers.

## Put it all together

Ok, so let’s see how this works out.

You have a car several years old with a retail value at $15,000 (step 1).

Apply the 10% cap to determine base loss of value (step 2). 0.10 x $15,000 = $1,500.

Let’s say the damage to the car was moderate so apply a 0.50 damage multiplier (step 3). $1,500 x 0.50 = $750

Let’s say the car is four years old and has 12,000 miles driven per year so it has 48,000 miles. That’s a 0.60 mileage multiplier (step 4). $750 x 0.60 = $450

So $450 in diminished value for moderate damage to the car. That is a little less than 4% of the value of the vehicle. It may sound like a fair number until you realize that if you take that car to a dealership as a trade in the dealership is likely to shave off several thousand dollars in diminished value due to the accident. So you take $450 and you’ll lose several times that when you sell your car. Fair? No.

Insurance companies will tell you all kinds of nonsense about how they *have* to use the formula. They do not. However, they know they can ram it down your throat if you don’t have the expertise to litigate your claim. That’s why hiring a lawyer to prosecute your diminished value claim can assist settlement and, if necessary, litigation.

Category: Insurance

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