The 17c Formula

Since the class action lawsuit, entitled Mabry v. State Farm Mutual Auto. Ins. Co., No. SS-99-CV-4915, in Georgia, many insurance companies have attempted to utilize a version of an older model of a formula for calculating diminished value once used by the Infinity Group Insurance Company (1991).

The formula, while appearing reasonable at first glance, has several areas of serious concern. In order to expose the deficiencies, inconsistencies and other shortcomings of this formula, we have included the information provided by the class action lawsuit below, interspersed with the reasons why the formula is defective. Please keep in mind that most insurers will undoubtedly model their Diminution of Value formula along the same lines.

Here is the actual formula and explanation:

ELEMENTS OF LOSS OF VALUE FORMULAS

ACV - For purposes of our calculations, we will use the NADA retail value, including additions and subtractions for options and mileage. The NADA edition applicable at the time of loss of value claim is presented should be used.

BASE LOV - As is the case in most loss of value formulas, we will use 10% of the ACV as a starting point in our formula.

DAMAGE SEVERITY MODIFIER - This is the subjective decision which must be made by the adjuster. The nature and extent of damages should be based on the actual physical damage sustained by the vehicle, without using the cost to repair as a basis. The modifier can be from 0.0 to 1.0 with 1.0 reflective of extensive damages. It should be stressed that in some minor accidents the 0.0 modifier is appropriate as no loss of value would have been sustained. A basic guide for the damage severity modifier is as follows:

MODIFIER EXTENT OF DAMAGE

1.0     Severe damage to the structure of vehicle.
0.75   Major damage to structure and panels.
0.50   Moderate damage to structure and panels.
0.25   Minor damage to structure of vehicles.
0.0     No structural damage and replaced panels.

As this is subjective decision, the modifier can be adjusted as necessary to fit the damages. (EXAMPLE 1 - No frame damage, a replaced bumper and repaired body panel may call for a modifier of 0.1.
EXAMPLE 2 - Heavy frame damage to the front with moderate additional damage to the rear may call for a modifier of 0.85.)

MILEAGE MODIFIER - Generally, when a vehicle reaches 100,000 miles, it no longer has a realistic market value. There may be some cases where that is not so, but for most cars this figure should be accurate. The modifier is a factor of the actual mileage of the vehicle and the mileage where the vehicle no longer would be considered for retail resale by a dealer. The modifier can be from 0.0 to 1.0 reflective of zero miles. A basic guide for the mileage modifier (based on 100,000 mile limit) is as follows:

MILEAGE MODIFIER

0              1.0
20,000     0.8
40,000     0.6
60,000     0.4
80,000     0.2
100,000   0.0

The modifier should be adjusted to reflect the actual mileage based on the following:

MODIFIER - MAXIMUM MILES FOR RETAIL SALE - ACTUAL MILES
MAXIMUM MILE FOR RETAIL SALE

APPLICATION OF LOSS OF VALUE FORMULA
10% of ACV x Damage Modifier x Mileage Modifier = Loss of value

Here is why the 17c formula is NOT an accurate measure of the lost value:

According to the documentation formula, "For purposes of our calculations, we will use the NADA retail value,.." The NADA book value of a vehicle can differ greatly from one geographical area to the next. A vehicle in California can generally be worth substantially more than an identical vehicle would be worth in New York.

NADA calculates mileage in their results (go to www.nada.com to see for yourself). The formula states " ... including additions and subtractions for .. mileage." Why then should the insurer be allowed to further reduce the settlement based on mileage ? MILEAGE MODIFIER .The modifier is a factor of the actual mileage of the vehicle .. The modifier can be from 0.0 to 1.0 reflective of zero miles. A basic guide for the mileage modifier . is as follows:

MILEAGE MODIFIER

0               1.0
20,000     0.8
40,000     0.6
60,000     0.4
80,000     0.2
100,000   0.0

The NADA guide considers mileage during the price assessment, essentially calculating the retail price based on, among factors, mileage and deducting accordingly. To again consider mileage within the DV formula is not unlike receiving two sentences for the same crime. This "double deduction" is to the detriment of the vehicle owner and serves only to benefit the insurer by further reducing the amount of settlement.

Another less than sensible portion of the formula states
"The NADA edition applicable at the time ...(the)...claim is presented should be used." The edition that should be utilized is the version that was applicable at the time of the loss - not the edition applicable at the time the claim is filed. The loss of value occurs at the very instant of impact - not several months later when the vehicle has incurred additional normal depreciation.

Yet another area that defies all logic and common sense; "The nature and extent of damages should be based on the actual physical damage sustained by the vehicle, without using the cost to repair as a basis". How can one possibly measure the extent of damage without consideration of the cost of the repair? The only standard non-subjective measure of the extent of damage is the cost of the repair. This statement is self contradicting in and of itself.

The portion of the formula that is most realistic, ALTHOUGH COMPLETELY INACCURATE, is the "Damage Modifier. It is generally agreed among the majority of Diminished Value assessors that different types of damage (ie: structural, cosmetic etc.) will have a different impact on the post repair value, however, the formula falls short when addressing cosmetic damage.

"A basic guide for the damage severity modifier is as follows:

MODIFIER EXTENT OF DAMAGE

1.0     Severe damage to the structure of vehicle.
0.75   Major damage to structure and panels.
0.50   Moderate damage to structure and panels.
0.25   Minor damage to structure of vehicles.
0.0     No structural damage and replaced panels."

If one were to adhere to the formula and utilize a multiplier of 0.0 it would result in a zero dollar settlement, - proclaiming no Diminution of Value. Application methods, chemical composition and several other differences combine to make duplication of factory finishes impossible in the repair industry. Additional layers of primer, paint and clearcoat are more susceptible to failure. Under identical environmental conditions, a repaired panel is more likely to cause future concerns than one that has not been repaired.

The model then goes on to list several examples of the formula being used to evaluate the Diminished Value of an array of automobiles. For clarity we have included an example of our own. The example below is purely hypothetical; however it clearly demonstrates the uselessness and absurdity of the "17c" formula.

"17c": "APPLICATION OF LOSS OF VALUE FORMULA
10% of ACV x Damage Modifier x Mileage Modifier = Loss of value"

Our Example:

    2002 Cadillac pre-loss value = $40,000 with 2,500 miles incurring $25,000 in
    damages.

Applying the formula above:

    $40,000 x 10% = $4,000 initial DV
    $4,000 x Damage Modifier 1.0 = $4,000 (severe damage)
    $4,000 x Mileage Modifier 1.0 = $4,000 (low mileage - no "deduction")

    Loss of Value = $4,000.

This would preposterously assess the post repair value of the example vehicle at $36,000.00. This is totally unrealistic in the used vehicle market - the real world. No reasonable consumer would ever pay $36,000 for a vehicle that had a pre-loss value of $40,000 that had sustained $25,000 in damages. Such significant damage would be severely penalized in the retail market - and not many dealers would even consider retailing such an automobile. The devaluation of such a unit would be more accurately assessed in the range of $15,000 to $19,000 - resulting in a post repair value of $21,000 to $25,000.

When Collision Consulting calculates the Diminished Value of a vehicle, we use a much more accurate and fair method of assessment. The first step is to determine the average pre-loss retail value of the automobile in question. To do this we utilize several internet resources including N.A.D.A., Kelly Blue Book, Edmunds, and Auto Trader. To be as accurate as possible, we use the vehicle owner's geographical market area. This is accomplished by considering the owner's zip code while researching prices.

We seek vehicles with the same options and similar mileage, however, if a sufficient sampling of "equivalent" vehicles is not available, we will expand the input to include vehicles with different options and mileage and adjust accordingly.

There are several sound reasons for using retail prices to determine the pre-loss value. The vehicle owner is a retail consumer, and paid retail price for the automobile. It is also common knowledge that a dealer will not offer a retail price to a consumer when they trade their vehicle in, and they are basing their trade in price on the assumption that the consumer is going to purchase another vehicle from them. Another consideration is disclosure. If a dealer discloses the previous damage history, the chances of selling the vehicle to a prospective buyer is greatly reduced especially when there would normally be other similar vehicles available without a damage history available on the same lot. Also, a vehicle suffers depreciation in the eyes of a dealer once it has been titled and driven off the lot. Consumers should not be negatively impacted by this depreciation when considering Diminution of Value. While the terms depreciation and diminished value are often interchanged in some legal documents and in fact, some case law calls DV depreciation, Diminished Value and depreciation are two entirely different things. Depreciation is an expected and anticipated and measurable reduction or lessening of value sustained over a pre-determined time frame. DV on the other hand is a sudden and unexpected loss in value irrespective of the naturally occurring depreciation one comes to expect, and can be traced to an event or set of events caused by an unexpected hazard or peril. The term depreciation can be distinguished from DV by stating that there is a naturally occurring loss in value that comes with age and use of an auto. Both are subject to value adjustments based upon condition and market.

Once the average retail pre-loss value is determined, the amount of damage (in dollars) is calculated as a percentage of that value (damage amount divided by pre-loss value). This percentage is then weighed against the vehicle's pre-loss value on a sliding scale. The greater the value of the vehicle, the greater the Diminishment of Value. Similarly, the greater the damage as a percentage of value, the greater the DV. Conversely, the lesser the value or the lesser the damage as a percentage of the value, the less the proportionate amount of Diminution of Value.

Consideration is also given to the "type" of damage. A vehicle that has been "keyed" by a vandal and requires $4,000 in refinish work will suffer a less severe impact on value than a vehicle that has sustained $4,000 in collision damage. Similarly, frame damage/repair has a more significant impact on the post repair value than sheet metal repairs. Additionally, heavily damaged and REPAIRED panels will have a greater influence than if the panel was replaced. It also bears mentioning that aftermarket parts, (parts made by other than the vehicle manufacturer), when used in collision repairs, will have a greater effect on the post repair value than Original Equipment parts would.

The end result of Collision Consulting's method of calculation of Diminution of Value is far more realistic and accurate than any formulae proposed by insurance companies, certainly far more credible than the "17c" formula.

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