Your car may be worth less after an accident: Learn about diminished value

This article has been updated from a previous version

When a car goes through a major repair or rebuild after a collision, its resale price will inevitably take a hit in value, even if the repairs were done perfectly and the car is restored completely.

Unfortunately, that loss is not covered by car insurance providers in Canada.

In the U.S., some states allow car owners to claim, “diminished value,” also referred to as “accelerated depreciation” from an at-fault party’s insurance company. But in Canada, that isn’t the case.

According to the Insurance Bureau of Canada, no province or territory in Canada offers similar coverage for diminished value or accelerated depreciation. Moreover, insurance rules differ from province to province, and this can also create challenges, even if you want to take your case to court.

In Ontario, for example, no-fault insurance prevents you from suing the driver who caused the accident for compensation on your vehicle’s lost value.

There are two main types of diminished value:

Inherent diminished value

Inherent diminished value refers to the perceived loss of value of a vehicle following a collision-related repair, assuming the vehicle has been repaired to its original condition, except for the fact that it now has the stigma of having been in a collision. This stigma reduces the value a person may get for the vehicle when they try to sell it or trade it in, compared to what they would have gotten before it was involved in a collision.

Repair-related diminished value

Repair-related diminished value occurs when the quality of repairs is in question. Examples of this include:

• If the paint colour is not a perfect match.
• If generic or aftermarket parts were used rather than name-brand ones.
• If the car has an extra rattle when being driven that it didn’t have before.

In these cases, the quality of the repair leaves a definite loss in value on the vehicle beyond the perceived loss that already exists from a collision.

Related: Do you need gap insurance for your new vehicle?

How would people know my vehicle was in an accident?

Owners are required to disclose damage to vehicles over $2,000 to potential buyers.

Plus, vehicle history reports from companies like Carfax, Carproof, and Transport Canada are also available for a prospective buyer of a used vehicle to check for themselves if it has sustained major damage.

Your policy only covers direct losses

In Canada, being compensated for diminished value is challenging.

Auto insurance policies here are designed to only cover direct losses. That means insurance companies have to pay for repairs to your vehicle to restore it to its pre-collision condition or declare it a total loss if that is the lower-cost option.

But any reduction in the car’s value after repairs is considered an indirect loss and is, unfortunately, not covered under your policy.

If repairs do cost more than the car’s value, then your insurance company will usually write it off.

But the decision is entirely up to the insurance company, which has the right to send the vehicle for repair or rebuild rather than offer a payout. Often, they will choose to repair it because that is the cheapest option. And if the repairs to the car are extensive, it can negatively affect its value.

Fighting for compensation

Because there is no official diminished value coverage in Canada, drivers have had to take matters into their own hands when it comes to recouping significant losses in value on their cars.

In a few incidents, Canadian insurance companies quietly paid out diminished value claims. But where they were not able to, drivers have had to fight the claims in court by suing either their own insurance providers or the at-fault driver’s provider. While some insurance companies might negotiate settlements to avoid court action if drivers ask, one big problem is proving exactly how much value a driver will lose when they go to sell their vehicle.

Find out what your car is worth first

Before you ask your insurance provider to compensate you for the loss in value to your vehicle, or decide to take someone to court, make sure you obtain a report with a dollar amount of value and loss. It could help to convince the insurance company to pay.

Seek an independent, impartial appraisal from a service such as Carfax to get an unbiased opinion of your vehicle’s value, and what kind of impact a repair may have on that value. Never base the value of your car (either before or after the crash) on what a dealership may tell you. They are expert negotiators with a vested interest.

Whether or not diminished value is a “direct loss” continues to be debated in and out of the courts in Canada, but historically, insurance companies have a tendency to settle out of court when these cases do come up.

If you have been involved in an accident that requires a major repair, it’s important to understand your rights and find out as much as you can about the impact it will have on the value of your vehicle. Once you are armed with information, discuss your concerns with your car insurance provider.