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. The second box below contains 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
1.00 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.
0.00 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
00,000 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:
The very first problem is that the formula uses the retail value – private owners can’t sell their automobiles in a retail setting – they’re not dealers. Private owners have two options: the private party market (“For Sale by Owner”) and dealer trade-in.
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
00,000 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. Additionally, the cost of repair is the number one factor considered by potential purhasers.
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
1.00 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.
0.00 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 Hypothetical Example 1:
An almost brand new vehicle with a pre-loss value of $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 private party market – most people would simply walk away and decline the purchase and not many dealers would even consider retailing such an automobile so their trade offer would be below even the lowest published trade value. The devaluation of such a unit would be more accurately assessed in the range of $15,000 or more.
Our Hypothetical Example 2:
A 6 year old premium level (“Touring” model) minivan with a pre-loss value of $18,500 having 90,000 miles sustaining $12,000 in
damages.
Applying the formula above:
$18,500 x 10% = $1,850 initial DV
$1,850 x Damage Modifier 1.0 = $1,850 (severe damage)
$1,850 x Mileage Modifier .1 = $185 (high mileage – low modifier)
Loss of Value = $185. This would mean that a discount of less than $200 would be enough to make a buyer overlook the $12,000 in collision damage. Obviously, that is not realistic.
The formula is extremely flawed in that it completely ignores the cost of repair.
Summary:
- The retail market is not applicable to private owners.
- The formula maximizes the diminishment at 10% of the value.
- Multiplying any number by another number less than 1 reduces the first number.
- The formula “double-dips” on the mileage.
- The mileage modifier based on 100,000 miles is not reflective of modern automobiles.
- The formula ignores the number one factor that people consider – the cost of repair.
- The result of the formula is much lower than the real-world diminishment would be.
Conclusion:
The 17c formula underestimates the amount of diminishment, thereby cheating vehicle owners of the compensation they justly deserve.
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