If a person has a car accident and has coverage for an automobile’s physical damage, the insured expects the insurance company to pay for the damage and “return the auto to its previous state”; a state in which the car was before the accident in question. The insurance company does in fact pay; however, the actions taken by the car owner after the repairs are made, such as the sale of the car, are typically impeded by diminished value caused by the repairs.
This car owner suffers monetarily because the car is not worth as much as it was before the damage happened and repairs made. For example, a car’s valued market price is $10,000 and the owner has an accident of which repairs cost $4,000. The owner decides to sell after repairs are made, but because the car was in an accident, the seller only receives $8,000 for the car, which leaves the owner out of pocket for $2,000.
Because of the various interpretations of the statement “previous state,” insurance companies usually will not pay for that $2,000 the car owner lost during its sale because they did return the car to its previous state, according to the repairs made. The insurance companies argue that the car has experienced a diminished value and there is nothing they can do. However, diminished value insurance can be added to a Physical Damage auto policy in some states. This form of coverage will pay out the difference between the original sale price and the diminished value price, should there in fact be a difference.
Automobile physical damage and diminished value insurance coverage protects an automobile owner for when damage to the car through the event of fire, theft, or other such loss suffered to the car, including diminished value in some cases, such as a third-party claim.
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