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Oregon Adopts a Narrow Acceptance of Motor Vehicle Inherent Diminished Value Claims

We have all seen the CARFAX ads, a staple of televised sporting events. The wrecked car advertised as a car with new paint; the car caught in a hurricane advertised as a car with new upholstery; the car that sustained smoke damage advertised as one hot car. The message is clear. The potential buyer of a used car needs a CARFAX vehicle history report because damaged cars, even after repairs, have diminished values.
Automobile insurers have successfully defeated in almost all states court challenges that have sought to require payment for the diminished value of vehicles when insureds have claimed that repairs to their vehicles have not restored their vehicles to fair market value. Insureds recently won a victory in Oregon when the Supreme Court of Oregon ruled that the language of a specific motor vehicle insurance policy entitled an insured to payment of a vehicle’s inherent diminished value in addition to the cost of repairs. While the supreme court found in Gonzales v. Farmers Ins. Co., 345 Ore. 382, 196 P.3d 1 (Oct. 23, 2008), that the meaning of “repair” in the policy included the duty to pay the diminished value of the vehicle, the decision is one that likely has only a narrow application even in Oregon.
The inherent diminished value of a vehicle is the amount that a vehicle’s resale value has been reduced, after it has been fully repaired, solely because the vehicle now has a significant history of damage. A relatively new vehicle in pristine condition and with no history of damage may sustain a substantial decrease in value even after it has been repaired, while an older high mileage vehicle may sustain no diminished value after it has been repaired. For example, in Hyden v. Farmers Ins. Exch., 20 P.3d 1222 (2000), the Court of Appeals of Colorado ruled favorably for a diminished value claim in which an insured claimed that his $23,000 Jeep Cherokee was worth only $7,500 even after the insurer had incurred repair costs of $16,868.96.
The Oregon Supreme Court, relying upon its own rulings from 1930 and 1941, held in Gonzales that that the term "repair” in the policy at issue required the insurer to restore the plaintiff’s vehicle to its pre-loss physical condition, and if the insurer was unable to do so, then the insured was to be compensated for the diminished value of the vehicle. The supreme court specifically ruled that the insured had met his burden of proof to defeat the insurer’s motion for summary judgment when he produced evidence that established that there was a genuine issue of material fact as to whether his vehicle had been restored to its pre-loss condition.
The Gonzales decision, while a victory for insureds and advocates of the concept of inherent diminished value, will likely have little impact on the motor vehicle insurance industry. First, the inherent diminished value concept has been rejected by the courts of most states. Furthermore, the supreme court clearly limited the impact of its ruling by initially stating that: “We begin our analysis by noting that this case calls for the interpretation of the terms of the automobile insurance policy that defendants issued. This case does not call on the court to decide the principles applicable generally to diminished value claims in property damage disputes of all kinds.”
Finally, the insurer expressed concern that a favorable decision for the insured could lead to a future ruling that insureds were entitled to stigma damages: an insurer’s obligation to compensate an insured for that diminished value that resulted from the stigma that was attached to a vehicle because it had been wrecked. The supreme court noted that it was not ruling on the stigma issue: “Because this case involved a genuine dispute about whether defendants had restored the vehicle to its preloss condition, we need not decide whether the policy requires payment for a claim based solely on ‘stigma.’”
Insurers can protect themselves from inherent diminished value claims by carefully defining terms such as “repairs” in their policies. If you work for a firm that represents insurers, you should examine the relevant language of the policies of your clients to determine if the language clearly excludes inherent diminished value claims. Many courts have ruled that insurers can specifically exclude payment for inherent diminished value and similar damages.
[Editor's Note: Readers with a subscription to can quickly and accurately research the law on inherent diminished value by using the More Like This Headnote feature for the Lexisnexis Headnote #3 in Gonzales v. Farmers Ins. Co., 345 Ore. 382, 196 P.3d 1 (Oct. 23, 2008).]