Many insure companies have attempted to utilize a formula called “17c Formula” to calculate diminished value. While appearing sound initially, the formula is severely flawed. Below is the actual formula and explanation. Beware, as most insurance companies model their DV formulas parallel to this.
ACV – Actual Cash Value. For purposes of our calculations, lets use the NADA retail value.
BASE LOV – Base Loss Of Value – 10% of the ACV is normally used as the starting point in most LOV formulas.
DAMAGE SEVERITY MODIFIER – This represents the extent and nature of damages based on the actual physical damage on the vehicle without the cost to repair as the basis.
MODIFIER EXTENT OF DAMAGE
1.0 Severe damage to the vehicle’s structure.
0.75 Major damage to the vehicle’s structure and panels.
0.50 Moderate damage to the vehicle’s structure and panels.
0.25 Minor damage to the vehicle’s structure of vehicles.
0.0 No structural damage and/or replaced panels on the vehicle.
The modifier can be adjusted as necessary to fit the damages.
MILEAGE MODIFIER – 20 years ago, most cars generally had no realistic market value after 100,000 miles. Insurance companies like to keep this tidbit thrown into the mix to depreciate your vehicle as quickly as possible. Of course some vehicles still fall within these limitations, but others, like some Hondas, Toyotas, BMW’s and Mercedes hold their value well above the 100,000 mile limit. The modifier is a factor of the milage of the vehicle and the mileage where the vehicle would no longer be considered for retail sale. This can be from 0.0 to 1.0.
THE MILEAGE MODIFIER
The modifier should be adjusted to reflect the actual mileage based on the following:
MODIFIER MINUS MAXIMUM MILES FOR RETAIL SALE MINUS ACTUAL MILES
MAXIMUM MILE FOR RETAIL SALE
THE APPLICATION OF THE LOSS OF VALUE FORMULA
10% of ACV x Damage Modifier x Mileage Modifier = Loss of value
This is why the 17c formula is NOT an accurate measure of the lost value:
According to the documentation formula,
Most Value Books calculate mileage in their results (go to www.kbb to see for yourself). The formula states ” … including additions and subtractions for ….. mileage.” So why should the insurance company be allowed to further reduce the settlement based on mileage ?
Most Automotive price guides consider mileage during the price assessment, essentially calculating the retail price based on, mileage and deducting accordingly. To again consider mileage within the DV formula is like receiving double taxation. Deducting mileage twice only serves to benefit the insurance company by further reducing the amount of the settlement.
The other area that falls short is the Modifier Extent of Damage. They don’t even take in consideration the cost of the repair.
“A basic guide for the damage severity modifier is below:
MODIFIER EXTENT OF DAMAGE
1.0 Severe damage to the structure of vehicle.
0.75 Major damage to structure and panels of the vehicle.
0.50 Moderate damage to structure and panels of the vehicle.
0.25 Minor damage to structure of vehicle.
0.0 No structural damage and/or replaced panels.”
Let’s get real here. If the car has paint damage, there is no way it can be brought back to factory specs. From chemical to the type of paint booth or machine used to apply the paint is going to be considerably less effective than a multimillion dollar factory machine and paint booth. So how can no structural damage and no replaced panels be zero dollar diminished value? Someone’s gonna pay, and if the insurance company has a say in it, it’s gonna be you.
Below is an example of the 17c formula.
“17c”: “APPLICATION OF LOSS OF VALUE FORMULA
10% of ACV x Damage Modifier x Mileage Modifier = Loss of value”
2010 BMW 750i pre-loss value = $80,000 with 2,500 miles incurring $30,000 in
Applying the formula above:
$80,000 x 10% = $8,000 initial DV
$8,000 x Damage Modifier 1.0 = $8,000 (severe damage)
$8,000 x Mileage Modifier 1.0 = $8,000 (low mileage – no “deduction”)
Loss of Value = $8,000.
Okay, Excuse my language, but who in the hell in their right mind is going to pay $72,000 for a 7 series BMW that has had $30,000 in damage done to it even if it was repaired by BMW’s factory specialists? That’s absurd. Most of the dealers I know in the area wouldn’t even put the car on their lot. They’d be so scared of the liability of an unknown problem, they’d just shy away. So who sells this car? Well, actually the owner is probably going to be the owner for a LONG time. Anyone who could afford to pay $72,000 for a BMW is not going to want one that’s had $30,000 in previous damage.