Diminution of value, often called loss-on-value (LOV) or loss-of-value (LOV), is a deceptively simple concept with complex real-world application. At its core, LOV represents how much an item’s value decreases because of damage and subsequent repair. It is expressed as:
LOV = Value before damage – Value after repair
A key principle every appraiser must keep in mind: Loss-on-value does NOT equal the cost of repair. The repair cost may influence an insurer’s decision-making, but it has no direct relationship to the market’s reaction to a repaired item. LOV is entirely market-based. It reflects how buyers respond to a piece that has been damaged and then restored.
Repairs First, LOV Second
LOV cannot be reliably determined until repairs are completed. The quality of the repair heavily influences the market’s perception:
• High-quality repairs → lower or no LOV
• Poor or visible repairs → higher LOV
With many forms of depreciable personal property, a professional repair can completely eliminate LOV. In some situations, such as refinishing a lightly worn furniture surface, repair may even result in betterment, leaving the item in better condition than before the loss.
Approaches to Determining LOV
Because no universal formula exists, appraisers typically follow these steps:
1. Determine value prior to the loss, based on fair market value (FMV) or replacement value (RV), depending on the client’s needs or policy terms. (NOTE: ISA takes the stance that LOV is typically derived from replacement value).
2. Determine value after repair, using comparable examples of similarly repaired items.
o If no comparables exist, gather market participant input (dealers, gallerists, retailers).
3. Calculate:
LOV = Value before damage – Value after repair
LOV may be expressed as a dollar figure or a percentage depending on the audience or policy language.
Factors That Influence LOV
Appraisers should consider:
• Pre-existing conditions (was the item already damaged?)
• Type and severity of damage (a minor scratch is not the same as a replaced element)
• Location of damage and subsequent repair (Is the damage and repair along the perimeter, at a corner, or in the center of the work? Is it in the background of a portrait or across the subject’s eye?)
• Quality of repair (Who completed the repair? What are their qualifications? Was it done to current standards? Is it noticeable?)
• Supply, rarity, and market expectations
• Whether the work is antique or contemporary (antique buyers may expect some restoration while contemporary art collectors may demand pristine condition)
• Whether the work is an original or a multiple (are there similar unrepaired items available in the marketplace?)
Generally, contemporary art suffers greater LOV because buyers expect pristine condition, while antiques allow for some restoration.