CALA Settlement Procedures 5 — Questions and Answers
Question 1: Diminished value (DV) claims arise because:
- The repair shop underestimated repair costs
- A vehicle's market resale value is reduced even after a proper repair (Correct answer)
- The insured failed to maintain the vehicle properly
- The at-fault driver had insufficient insurance
Correct answer: A vehicle's market resale value is reduced even after a proper repair
Even after quality repairs, a vehicle's market value may be lower because its accident history is disclosed to future buyers.
Question 2: An insured's vehicle sustains hail damage totaling $4,800 ACV, with ACV of the vehicle at $5,500. The insurer will most likely:
- Pay $4,800 and return the repaired vehicle
- Declare a total loss because repair costs approach or exceed ACV (Correct answer)
- Require the insured to pay the difference
- Deny the claim as cosmetic damage
Correct answer: Declare a total loss because repair costs approach or exceed ACV
When repair costs approach or exceed the vehicle's ACV, declaring a total loss is typically more economical for the insurer.
Question 3: A settlement involving a Medicare beneficiary may require a Medicare Set-Aside (MSA) arrangement primarily to:
- Maximize the settlement amount paid to the claimant
- Protect Medicare's interests by allocating funds for future injury-related medical costs (Correct answer)
- Avoid paying the claimant's attorney fees
- Ensure the claimant cannot reopen the claim
Correct answer: Protect Medicare's interests by allocating funds for future injury-related medical costs
An MSA ensures Medicare is not billed for future injury-related treatment that the settlement funds were intended to cover.
Question 4: When settling a claim under a policy with stacked uninsured motorist (UM) coverage, the insured can:
- Only claim up to the single-vehicle UM limit
- Combine UM limits across multiple vehicles on the policy for a higher total limit (Correct answer)
- Use UM coverage only if the at-fault driver had no insurance at all
- Stack coverage only on vehicles of the same make and model
Correct answer: Combine UM limits across multiple vehicles on the policy for a higher total limit
Stacked UM coverage allows the insured to multiply the per-vehicle UM limit by the number of vehicles insured under the policy.
Question 5: An adjuster must apply 'bad faith' standards carefully because bad faith can result in:
- A reduced settlement amount for the claimant
- Extracontractual damages awarded against the insurer beyond policy limits (Correct answer)
- Mandatory arbitration without appeal
- Automatic license suspension for the adjuster
Correct answer: Extracontractual damages awarded against the insurer beyond policy limits
Bad faith judgments can expose the insurer to punitive damages and verdicts far exceeding the policy's limits.
Question 6: Under an 'agreed value' auto policy (as opposed to ACV), a total loss is settled by paying:
- The NADA retail book value at the time of loss
- The amount specifically stated in the policy at inception, without depreciation (Correct answer)
- The lowest of three market comparables
- The original purchase price minus accumulated depreciation
Correct answer: The amount specifically stated in the policy at inception, without depreciation
Agreed value policies pay the pre-determined amount stated in the policy, avoiding disputes over depreciation at total loss.
Question 7: When settling a total loss, the insurer's payment of ACV should reflect:
- The original purchase price of the vehicle
- The vehicle's fair market value immediately before the loss, considering age, mileage, and condition (Correct answer)
- The highest dealer asking price for a comparable vehicle
- The insured's outstanding loan balance
Correct answer: The vehicle's fair market value immediately before the loss, considering age, mileage, and condition
ACV is the fair market value of the vehicle just before the loss, accounting for depreciation due to age, mileage, and pre-existing condition.
CALA Settlement Procedures 5
Diminished value (DV) claims arise because: