Well.. this suggestion is completely visual, but won't affect performance in any way and would make the damage a bit more realistic without changing much. It doesn't mean it's the top priority of the game, it's just a suggestion.

DDS textures already accept transparency, and the cars already have transparent layers over them (reflections), so, the idea is:
Put a new transparent layer over the reflections with a "car damage" texture. This texture would not appear when the car isn't damaged, but would gradually fade in according to how much car gets damaged (or even better, the game would detect which part is damaged and only these parts would start showing the apropriate part of the damage texture, just like FlatOut).

This texture would be over the reflections texture because it would automatically reduce the reflection of damaged areas and remove completely the reflection on badly damaged areas.

In my opinion, this would have very little to no impact on FPS.

What do you think?

I work in 3D business, but not as a programmer, so my knowledge here is only remote. Anyway, since nobody replied yet, and since I am 99% sure you are missing some fundament info here, I will try:

I think that it is never done like you described it, all 3D engines, even some really creative ones (in optimising or faking real effects), render reflection in last pass. The way you can affect it is either bump or normal mapping, when you distort the reflection (waving water), or reflection/specular masking, which I think is directX feature. Mask is additional, grayscale texture, which defines the intensity of reflections (white = full reflection, black = no ref). The very same map then can be used to add any dirt texture over the car paint.

Visual damage, such as scratches and dent, which is what you have probably meant (no new models/faces/moving of vertices), use to have very questionable impact IMHO, exactly because the game mostly ignores the kind of crash or damage or kind of object you just hit, and so after sliding along the concrete wall you see the same damage as after side hit from another car. See latest NFS series...


But I like the idea in general, I think that we all would love to see a damage in this way. I just never got NFS when they said that when you got your car scratched, damaged and stickytaped all around it, you are the man. LOL? I believe that you are a loser in that case.