Say your car is worth $5,000, according to the National Automobile Dealers Association guide. Say you're in an accident and you have to make a claim on your collision insurance. Your insurer pays for the repairs on your car (minus your deductible) and you decide to sell the car. As you shop your car around, you find that you can't get anything near $5,000 for it because it was wrecked and repaired. What happened? Your car has experienced diminished value (also known as diminution in value). So, can you make a claim for this "loss" under your auto insurance policy?

Policyholders have contended that their insurers are obligated to return their automobiles to "pre-loss condition" after accidents. A monetary value is usually attached to that condition, and policyholders say that a car that's been in an accident will fetch a lower price when sold compared with a similar car that hasn't been crashed — that a car's value inherently diminishes after it's been in an accident, regardless of the quality of the repair. Consumer advocates have long held that policyholders are entitled to a diminished-value check from their insurers if they can document that their vehicles have not been returned to pre-accident condition.

The diminished value debate raged for years because most car insurance contracts were silent on the issue of whether the insurer is liable for any real or perceived decrease in a vehicle's value after a crash, even if the vehicle has been repaired to its original condition. Insurers argue that diminished value is not covered, but consumers disagree — and there's a long list of court cases where policyholders clashed with their insurance companies over diminished value payments.

But the Insurance Services Office (ISO), which provides insurance forms and data, authored policy language that insurers can now use in 45 states and Washington, D.C., that officially takes insurers off the hook for diminished value payments in physical-damage coverage claims. The ISO's exclusion for diminished value has not been approved in Georgia, Hawaii, Kansas or Maryland. Massachusetts has not adopted ISO policy language, but a May 2002 "advisory opinion" from the department of insurance states that diminished value is not covered under collision policies in the state. (Hawaii and Massachuetts are both under independent insurance bureaus.)

Here's how car insurance policies sometimes come into being: The ISO submits sample property/casualty policy language to state insurance departments across the country that help insurance companies alter and clarify their own insurance policies. Some state insurance departments must approve the ISO's filings before an insurance company can adopt any policy language proposed by ISO.

One ISO filing specifically excludes payment for diminished value and says: "Diminution in value means the actual or perceived loss in market or resale value which results from a direct and accidental loss." So, if you live in a state where the insurance department has approved this form, called PP 13 01 12 99, and your insurer has adopted the language, you'll have no chance of getting money for the "diminished value" of your car if you cause an accident. If you want to know if this applies to your policy, check near the back of your policy paperwork for this "auto exclusion endorsement."

In addition, auto insurers that use their own policy wording are also now including specific exclusions for diminished value.

For example, State Farm uses its own policy language, not the ISO's, and excludes diminished value claims in all states except Georgia.

"We do not believe that it is automatic or inherent that an auto's value diminishes after an accident if the proper repairs by a skilled professional are made as they should be," says a spokesman for State Farm Auto Insurance.

Progressive says its policies exclude diminished value in all but a handful of states, and the company uses its own policy language where permitted by law.

Courts in states including Texas, Maine, South Carolina and Delaware have agreed with insurers. In past cases, they've ruled against the idea of diminished value. For example, in Carlton vs. Trinity Universal Insurance in Texas in 2000, the court ruled that diminished value "cannot be deemed a component part of the cost of repair or replacement," and therefore an insurer is not contractually liable to cover a loss in value.

The Independent Insurance Agents of Louisiana (IIAL) expressed their concern about ISO's policy language. In a memo obtained by Insure.com from Jeff Albright, executive vice president of the IIAL, to Kathlee Hennigan, director of property/casualty consumer affairs at the Louisiana Department of Insurance, Albright says, "There are instances where this diminution of value could cause significant loss to a policyholder. One good example . . . would be common in flood losses."

Albright says that in several flood-damaged cars his group has seen, a vehicle's entire electrical system was damaged and the insurance company did not total the vehicle. Instead, insurers paid for repairs to "substantial portions" of the electrical systems. "The problem is that this type of work is almost always done at a dealership, which identifies the vehicle in a nationwide computer network as a flood-damaged vehicle. The resale value of that vehicle immediately plummets to pennies on the dollar," he says.

Since lost value was not considered when the policies were being priced, insurance companies say, they would lose too much money if they were forced to pay these claims.

"To expand auto coverage beyond proper repair to include payment for diminished value would add more costs and claims and would drive car insurance rates upward for everyone," says a State Farm spokesperson.

Third-party claims

There's one way you may be entitled to a diminished value claim: If someone else hits you and you make a damage claim on that person's insurance. That's called a third-party claim and it's possible to get diminished value damages as a third party because you don't have a contract with that insurer. The ISO's diminished-value exclusion form applies only to first-party physical-damage claims, not to third-party liability claims. Also, in tort claims, the measure of damage is generally calculated as the difference in value before and after the loss, sometimes making diminished value a viable claim. However, there is still a wide variation among state case law in pinpointing when a third-party claimant is entitled to diminished value.

Collision-repair industry has mixed feelings

The Automotive Service Association (ASA), an auto industry group, contends that "your vehicle can and should be restored to pre-accident condition." The ASA outlines several steps repair facilities should take to ensure a "proper" and "quality" repair of your vehicle: Repairers should use the best refinishing and paint products and specialists; repairers should use only highly skilled welders who do repairs in accordance with the vehicle manufacturers' recommended procedures; and repairers should be able to pinpoint all damage. In short, the ASA contends the "repair should be a comprehensive reconditioning to original specifications."

Auto manufacturers spend hundreds of millions of dollars on equipment that precisely aligns car parts and paints car surfaces. Auto repair shops, even the most advanced, cannot afford and do not have the space for manufacturer-type equipment; therefore, the repairer is never going to return your car to the way it was when it came off the factory assembly line, says Paul Griglio, a Lake Orion, Mich.-based consultant who tests the quality of auto manufacturer vehicle assembly and paint processes. "Body shops can't afford the technology that the auto manufacturers possess," Griglio says.

"Body shops do the repairs by hand, and when you do it by hand, you have to eyeball it." The average person may not be able to tell the difference in the quality of the repair, but auto appraisers can, Griglio says.

But does that mean policyholders always deserve diminished-value payments? "Every time somebody has an accident, is that person due money in his or her pocket? Or is he or she due money only when, after trying to sell the car, he or she finds out that it's worth less because of the accident?" ponders Sheila Loftus, founder of CRASH Network, which provides information to collision repairers. Continue to page 2: Making the case