ThomasGoodwin.com

Recently, The Cincinnati Enquirer ran an article online about police billing motorists’ insurance companies for the cost to respond to accidents. (Adobe .pdf copy of the article). I don’t think the article did a good job of examining both sides of the issue so I have submitted my letter to the editor, although I doubt it will be printed.

So, what is the article about you ask?! Well it seems the Erlanger, KY police chief wants to charge a fee for officers’ time in order to respond to accidents. The article cites statistics that a majority of the wrecks in Erlanger’s jurisdiction involve people that are not residents of the municipality. I didn’t think it mattered where you were from, if you caused an accident you get a citation. If you get caught speeding, you get a citation. I know plenty of people that have received speeding tickets in their home town as well as other cities and states. If Erlanger does not want to help non-residents because of the cost involved, perhaps it should have the decals on the side of their police cruisers amended to read “To protect and serve our community only.”

The article also addresses (from one side) the notion that you can bill an insurance company for responding to an accident. I don’t see how you can levy fees on motorists that have insurance that will cover such a response but not your own community members as the article suggests that Erlanger will do. If you levy the fee on out of town motorists, you would also need to assess community members.

Here is my letter to the editor, just in case The Enquirer decides not to print it:

In response to the article about charging a response fee to drivers involved in a wreck, I want to clear up an inaccurate statement made by Cost Recovery Corp and also respond to the police chief’s comments.

First, for Cost Recovery Corp to assert that insurance companies cannot raise rates in certain areas and that companies will not increase rates if they’re required to pay first responder fees is simply not true. Any actuary that incorporates those added fees into the rate modeling will in fact use these costs to affect rates. Insurance companies will file with the state for higher rates and justify the rate increase by pointing to the evidence that higher claim dollars are being paid out. Insurance regulators want these companies to remain solvent just as much as they want the market to be competitive. First responder fees affect all of the insurance carriers competing in a given market so this will affect everyone, not just those who have accidents.

Police Chief Marc Fields questioned why his community should fund the cost of his officers responding to accidents. My response is quite simply, “isn’t that what fines and citations are for?” Sure fines are to punish someone for wrongdoing and to deter future behavior, but the fines also help fund the municipal government’s operations. Perhaps Chief Fields should have read the article entitled Don’t Speed Here on the front page of The Enquirer about Arlington Heights being a speed trap. That village also responds to a number of accidents on I-75 that don’t involve its own residents. But that village also actively patrols that stretch of I-75 to deter speeding and issue citations to generate revenue. Unlike adding first responder fees, which drives up insurance cost for everyone in a given area over time, issuing citations drives up insurance cost to those that committed the violation.

As always, I welcome your comments and feedback…

If you’ve ever purchased a home before you’ve probably taken out a loan (mortgage) to finance at least part of the purchase. In doing so you were probably told that the bank would order an appraisal of the property. The purpose of the appraisal is to make sure the property is not being purchased for far more than its true market value, thus endangering the bank’s ability to sell the property should you, the borrower, not be able to repay the loan. On the other hand, the bank would not care in the least bit if the property was worth more than the sale price, or in cases where there is a significant downpayment the bank would not care to any greater degree than the amount that they had loaned you.

While it may sound like the appraisal is an excellent tool to help protect you, the buyer, there are several problems with how the appraisal process works that I want to alert you to:

1. The appraiser works for the bank, not you. I find it rather funny that you don’t see appraisers assigning a home value that is ever higher than the sale price. This is a flaw that assumes the market price (the price that you the buyer have agreed to pay to purchase the home) is always the correct price.

It therefore ignores the fact that sometimes people pay too much or sellers charge too little for the property. It assumes the market is ALWAYS correct in the price of a property and that every transaction is at arms-length. If the sellers are not very sophisticated and the buyers realize that the property has a greater value than is being sold for, the sale price does not truly reflect what the appraised value should be.

Why is this problem important to you as a buyer? If the bank requires you to put down say 10% or 20% in order to qualify for the loan… and let’s say the contract sale price states $100,000 - you would need either $10,000 or $20,000 for a downpayment. Let’s stick with the 10% for simplicity sake. If the property’s true value is believed to be $125,000 and you have a contract to purchase it at $100,000 then you already have $25,000 of equity the day that the sale of the property changes hands (closes). $25,000 is 20% equity in a $125,000 property, but the bank is requiring you to tie up an additional $20,000 of your own money as a downpayment. If you meet the equity requirement you shouldn’t be forced to tie up additional money as equity in the property.

2. The appraiser knows the contract sale price and terms before doing the appraisal. This builds off of the previous problem… in # 1 above we saw that the appraisal typically does not come in higher than the sale price, but rather right at the sale price. You will NEVER be able to convince me that the appraiser is being objective in his or her reporting of the property value if the contract sale price and terms are known in advance of doing the appraisal.

To truly be objective, the appraiser should not be told the contract terms and price and be left to find comparable properties and recent sales as well as calculating other methods of value such as the income approach for rental/income producing properties and construction replacement costs for buildings that are being used for other purposes than they were orginally constructed.

3. The appraisal is only the opinion of ONE person. If I went out to buy a car, or to buy insurance, or even to buy groceries… I am going to look around and shop around. For a car, I am going to visit multiple dealerships, use multiple car valuation sources (like NADA, Kelly Blue Book, Edmonds, etc) and same is true for insurance… I am going to get multiple opinions before I make the purchase. With an appraisal you are getting ONE person’s estimate of the property’s value. To be truly objective you should take # 2 above, the appraiser not knowing the sale price and terms… and add to it, by having more than one appraiser calculate a value and then compare the two (or more) appraisers’ reports and how they came up with their values.

I know this may seem like I am taking a small portion of the home buying process, but people rely on these appraisals to keep them from being taken advantage of and from getting in over their heads. This is far more common place in refinances, where it’s just you and the bank… no seller involved. The bank has every incentive to use an appraiser that is more likely to inflate the value in a refinancing situation so that they can make you a bigger loan during the refinancing process… a bigger loan that might translate into you never being able to sell the house or property and recoup your loan amount.

Yahoo! Finance recently posted an article about this very topic and I thought it was appropriate to end this blog post with a link to the article. I think as loan interest rates go up and therefore adjustable rate mortgages (referred to as ARMs or ARM loans) become more expensive, you will see more people going into foreclosure on their home loans and this issue will be receiving more attention in the media and by state legislatures and Congress. The Yahoo! Finance article is entitled Appraiser Coercion Fuels Mortgage Fraud.

When you go to buy a property you need a certain level of trust with your Realtor, your lender, and you need to feel comfortable that you are getting a good value for your money. If you don’t feel comfortable, by all means walk away from the deal before you get locked into a contract… or hire your own independent appraiser before you agree to a price or any other contract terms. A typical appraisal won’t cost you more than $200 to $400 and when you are thinking of spending hundreds of thousands of dollars, that $200 independent appraisal could very easily save you far more in the future.

As always, I welcome your comments and feedback…

Odds are pretty good that you’ve been in an automobile accident, even if it was just a small fender bender, or that you probably will be in one at some point in your life if you drive or ride in a car on a regular basis (as most of us do).

When an accident occurs we rely on our auto insurance, or the insurance of the at-fault party if it’s not us, to make us whole again. This is quite simply to say that we rely on our insurance company to step in and make sure things get fixed properly so life continues just as it had before the accident occurred, or as close to normal as possible!

Auto insurance is a great tool for spreading the risk of financial loss due to an accident over several vehicles and drivers. But auto insurance has failed to make people whole in one respect that is getting more and more attention with the rise of the Internet and programs that let you track a vehicle’s history - such as CarFax reports.

When an insurance company agrees to repair your vehicle after an accident and pay your medical bills, etc. they fail to take into account that your repaired vehicle is no longer worth as much as it was before your auto accident. Yes, your 2002 Ford Explorer with 32,000 miles was in great shape before the accident - I mean, let’s face it, if this is 2007 and your car is a 2002, 32000 miles is well below the normal amount of 12,000 to 16,000 miles per year that most cars have on them. If your car had never been in an accident it would probably fetch a premium over similar year’s vehicles of the same model or comparable vehicles. But now that your vehicle has been in an accident, there is suddenly a paper trail attached to it that says this vehicle has been wrecked and repaired. Try taking the vehicle in to a dealership to trade it in on a new car. They will run a CarFax report most likely, and they will offer you less citing the accident. Why would they offer you less given the fact that your car has been repaired? Well, any savvy buyer who walks into the dealership to look at your used car will want to see a CarFax report as well, and other people won’t know about the quality of the repair job or what a great history the car has otherwise.

What we’re discussing here is referred to as diminished value. Quite simply, a vehicle can’t be worth the same amount after an accident as it was before because if your car was sitting in a used car lot next to an identical one that had never been in a wreck, your car would sell for less than the other one. Now, you don’t often see used car lots full of all the same type of car. But with the rise of the Internet, people are able to search a large radius to find a specific type, model, color, year, etc. of car that they want.

The law varies from state to state with regard to how insurance companies settle claims on diminished value. In Ohio, where I currently live, the insurance company is not required by law to pay you for the dimished value of your vehicle after an accident. We’re speaking only of partial losses by the way, if your car is totaled you have every right to try to negotiate with the insurance company to get the fair market value of your car before the accident. But in an accident where the car is repaired and returned to you, you still suffer a loss that you are not compensated for… the difference between your vehicle’s value BEFORE and AFTER the accident is your loss.

Now, we’ll probably never see states pass legislation requiring insurance companies to pay their insureds this diminished value because not everyone carries comprehensive and collision coverages (often referred to as comp & collision) on their policies. In fact, with insurance being a contract between you, the insured, and the insurance company, if they do not offer you the coverage you cannot force them to provide it. The only coverage they will be forced to offer you if you meet their criteria is the state minimum liability requirements to drive in your state.

Although it would be nearly impossible to REQUIRE insurance companies to offer diminished value coverage to their own policyholders, which would be similar to GAP coverage you can already buy to cover the difference between what you owe and what the vehicle is worth, perhaps the states can get their acts together and require the insurance companies to offer diminished value payments to third party claimants. These third parties do not have insurance coverage through the company that is paying them so they are not bound by a specific insurance policy’s covenants - rather, they should seek payment for as much of their loss as possible.

As I mentioned before, the law varies from state to state with regard to diminished value. And because there is nothing going through a legislature (that i know of anyway) it is up to the courts to decide whether diminished value has merit in settling an insurance/auto accident claim, at least it’s up to the court until the legislature gives us a framework or body of law to draw upon in this topic.

Here are some links to some interesting articles and companies that hope to prosper from diminished value claims:

Article from Bankrate.com giving a broad overview of the topic

I-Can This is a company that handles diminished value appraisals on behalf of claimants following an auto accident. This company also offers a nice review of the topic, with their own slant of course.

Sims vs. Allstate case. This case regarding diminished value follows similar court rulings in several states including Ohio, Mississippi, Delaware, Arizona, Texas and so on. This case was considered a setback to getting diminished value recognized by the various states.

Here’s a good article that counters the above Sims vs Allstate case. This article is from the AutoMuse website. This case is Allgood vs Meridian (insurance company). In a court decision that occurred a day before the decision was rendered in the Sims vs Allstate case, an Indiana court ruled that diminished value is of significance. This is a good read after the above article about Sims vs Allstate. The author of this article does a good job expressing concern over noting where a claim occurred and which state’s body of law is applied to the case in question.

Here’s an excellent link showing body of case law on a state by state basis for this topic. Kudos to Barry Zalma in compiling this information all in one place for everyone of us to easily search and review.

Editorial from the Akron (Ohio) Beacon Journal newspaper regarding auto insurance and hitting in parts on diminished value.

As always, your feedback is welcome…

Call me a skeptic. As much as I want to believe that the free market economy is efficient, evidence continually presents itself to say just the contrary. Don’t get me wrong, I’m not a socialist by any means and I don’t feel oppressed. Nor do I feel like there is some kind of conspiracy against the middle class or those working in poverty. In fact, maybe I am too naive in thinking just the opposite - that you can still get ahead in America by working hard and continually trying to improve your skill set through additional education.

So, you ask, what evidence am I referring to that the free market system isn’t efficient? Let’s look at high profile jobs in sports and their respective pay. Recently there was an article in the USA Today newspaper (November 16, 2006, page A15) about the dramatic increase in the number of college football coaches who make more than $1 million per year in salary. The article of course pointed out how this number was dramatically higher than last year or years past and increasing each year. It went on to describe how these coaches make more money than the very presidents of the universities where they work. Imagine… making more money than the CEO of your company!

My question is this: if economics holds true, that in the free market the wage paid will be determined on the supply and demand of labor, why is there such a dramatic rise in college football coaching salaries?! I mean, there is certainly no shortage of qualified candidates who would kill to coach a college football team. In fact, I bet most high school coaches, college assistant coaches, even NFL level assistant coaches would salivate at the very thought of getting the head coaching job of any given college. I’m sure if you were the president of the University of Texas in Austin you could put an ad in the newspaper with something to the effect “Wanted: Head Football Coach” and without writing one more word you would be flooded with resumes, emails, and phone calls. The reason is that this is such a high profile job that there are qualified candidates that will apply regardless of the amount the university is willing to pay.

So why does a university like Iowa pay its coach $4 million plus perks? Think of all the qualified candidates that would be willing to work for half that amount! And half is still a hefty seven figure salary! You could take half of what Iowa pays its football coach and then take 10% of THAT! Yes, I still think you would be able to find a well-qualified coach for a $200,000 salary.

If the college brings every qualified candidate into a room and says, “one of you will be hired today but the job will go to the lowest bidder”, the college could essentially pit each candidate against one another and the college would get a qualified candidate for the lowest nominal cost to the institution.

If you’re nodding your head saying “yeah, this makes sense”, then you just applied the concept of a silent auction to the labor market. Similar to websites like lendingtree.com or such where consumers go out and name the product or service they are looking for and vendors pitch them what they have to offer and their terms, i.e. price. In the silent auction, the bid gets driven up as buyers often over bid/over pay to ensure that their bid will win. In our particular case, the bid is driven down to determine the lowest salary that a candidate is willing to accept in return for the coaching responsibility.

So, as someone who cringes when colleges announce tuition increases, this sounds like a great way to drive down the cost of higher education, right?! Oh, wait. There’s a major problem with doing this. If we can do this with a coach’s salary, couldn’t we do this with your job as well? I mean, if you work as an accountant and you were looking for a job with a Big 3 accounting firm, you would probably be willing to work for a little less than if Joe Schmoe CPA firm called and wanted to hire you. Why? Because the growth opportunity and the name recognition of the bigger firms carry some value, much like Coca Cola has brand name recognition compared to a store brand cola.

Or take it down yet another step. If you work as a minimum wage farm worker there are some illegal migrant/immigrant unskilled laborers that are willing to work for less than you.

So therein lies the economic question. What is the fair price of labor? Why are we willing to pay someone an exorbitant amount to work a high profile, highly sought after job that someone would do for much less? Conversely, why do we pay someone so little for a job that no one wants to do (to the point that some people will sneak into the country illegally and do for much less)? Similarly, why do we implement laws to establish minimum wages to prevent basic, unskilled jobs from losing their economic value to society?

As always, your thoughts are welcome and encouraged…