What Is a Diminished Value?

Diminished value is a term used in the auto industry to describe how a car that has been in an accident is often valued less than if it had not been in an accident. Even if it has been properly repaired, the car will not have the same value on the resale market as a car of the same model and year that has not been in an accident. As a result, the diminished value is the difference between the market value of the car had it not been damaged and the amount for which it is sold. Many insurance companies offer policies which compensate car owners for this depreciation in value as long as someone else was at fault in the accident.

When a person with car insurance gets into an accident, the insurance company will generally pay off a claim which the person can use for repairs. Even if the car is repaired to the point where it is running smoothly and looks exactly the same as it did prior to the accident, there is often a stigma attached to the car in the eyes of potential buyers. This concept is known as diminished value, which is the amount of value the car loses after it has been involved in an accident.

As an example of how this concept works, imagine a man who owns a car and gets into an accident with it. The car is repaired perfectly and the man decides at some point to sell it. A car of the same model and year normally sells for $20,000 US Dollars (USD). Once the owner discloses the accident to potential buyers, the best offer he receives for it is $12,000 USD. In this case, the diminished value is $8,000 USD, which is the difference between the normal market value of $20,000 USD and the $12,000 USD received.

The reason that diminished value exists is that buyers of used cars often will hesitate at owning a car that has been involved in an accident. Even if the repairs are successful, the notion that the car is somehow damaged still persists. Since that is the case, sellers of cars that have been in accidents have no choice but to sell the car at a discount.

Luckily for car owners, there is some way to recover diminished value. There are certain insurance policies which allow for protection against the loss in value of a car involved in an accident. In addition to payment for repairs, these policies will also help offset the loss in value, provided that the policy-holder wasn't at fault in the accident.