How to Determine The Quantum of a Loss
Since insurance was invented in ancient Sumeria, when insurance policies were written on clay tablets, there have been disputes between the insured and the insurer. Since tort law first came into existence before the writing of the Old Testament there have been disputes between the tortfeasor and the victim as to the extent of the damages recoverable.
Insurers and their insureds continue to struggle with establishing a fair method to properly compensate the person insured for the property lost or damaged as a result of a peril insured against. Insurance, by definition, is a contract where one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The key item of dispute is to determine how much is needed to indemnify the person insured.
The concept of indemnity requires that the person indemnified receives sufficient funds to put him or her back in the financial place he or she was in moments before the loss. The U.S. Supreme Court, in 1915, said: “Indemnity means an obligation to make good a loss…”
On its face, calculating indemnity seems to be a simple task. Since few jurisdictions agree completely on the method to properly compute damages or to properly indemnify the persons insured by an insurance policy courts have considered diminution in value of property damaged and repaired in an accident are justified as one method of reaching true indemnity.
Common sense indicates that the measure of damages should be that amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury or the amount promised by an insurance policy. The proper measure is often difficult to determine and no single measure fits every type of damage. The measure of damages, true indemnity, seldom fit into a hard rule of thumb. Every possible means of providing complete indemnity can be, and is, considered when dealing with tort damages, contract damages, and the proper amounts of payment required by a contract of insurance.
The courts of the various states and federal jurisdictions do not use identical rules to calculate the proper measure of damages. To understand the issue and to apply the proper remedy requires an understanding of how each state applies, what it believes to be, the proper measure of damages for tort, for contract breaches and for insurance claims situations. Each court should seek to reach the result of true indemnity. However, the diversity of opinion is the rule rather than the exception.
Automobile insurance policies usually promise to pay the insured, when an automobile is damaged by collision or some other insured cause, the costs to repair the vehicle or if unrepairable, the actual cash value of the vehicle. Most policies say nothing about the difference in value of a vehicle that is repaired after an accident than its value before the accident. Because the policies are silent and only promise repair or actual cash value, insurers believed it was unnecessary to even mention in the policy the difference in value before the accident and the value after repairs are completed.
No promise was made to pay for more than actual cash value or the cost of repair, whichever is less. The issue was with regard to damage to automobiles and loss in value after repairs were completed was ignored until the 2001 decision of the Georgia Supreme Court in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) (“Mabry”). Mabry raised serious concern among insurers because it required payment of sums greater than that for which a premium was collected. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired.
Insurers believed the Mabry decision was a judicial rewriting of the wording of the policy. Lawyers for policyholders found it to be a means of giving true indemnity to their clients as well as an invitation to file multiple, profitable lawsuits against insurers. Mabry’s success in Georgia generated suits across the country seeking recovery for diminution of value from insurers and third-party-defendants. The attempt to convince other states to follow Georgia had limited success.
Since Mabry virtually all of the courts finding no coverage for diminution of value have done so because the word “repair” has a plain meaning that does not encompass payment for the diminished market value after the repair is completed. Rather, the plain meaning of repair contemplates physical restoration. Many insurers, to avoid argument, now add to their policy’s wording, endorsements or definitions, that establish that the insurer does not intend to, nor will it, pay for diminution of value after the automobile was repaired while others have simply increased premium to cover the additional payments.
When property of any kind is damaged and repaired the resale value of the property can easily be diminished because of the stigma carried by the repaired vehicle or property. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired more than other types of property. The resale value of an automobile most likely will be less for one repaired after an accident than that for a comparable automobile that has not been damaged and repaired. This is not true, however, of all types of property. A 50-year-old house that is damaged by fire and rebuilt, new for old, will usually be more valuable than it was before the fire. To date no insured has sought to return to the insurer the increase in value since the policy promised to pay the amounts needed to repair replacing new for old.
The fact of the accident and damage in most situations, even if repaired perfectly, results in a reduction — or “diminution”— in the resale value of the automobile causes those insured to claim they have not received what they were promised by the policy, true indemnity. Insurers counter that they never promised to provide a vehicle of the same value after an accident than the value it had before the accident. The insurer only promised to repair the vehicle using material of like kind and quality.
When real property is repaired replacing old material with new the resale value of the real property is often increased. No court I have been able to find has suggested that the insurer is entitled to a reduction in its payment for repair because the insured profits from the repair of a structure and is not, therefore, truly indemnified because the insurer promised to replace old with new and to even bring an old building up to modern codes at no cost to the person insured.
When the property is insured, the insured’s claim for this reduction in value may be made against a third party that negligently caused the damage to the insured’s automobile or it may arise from a first-party claim against the insured’s own physical damage coverage. The key to recovery of the diminution in value depends on the particular state where the damage occurs, the wording of the insurance policy involved, mandates by regulation from state insurance departments, statutes enacted by state legislatures and the holding of the various courts.
Although there appears to be nothing in insurance policy wording that even appears to contractually cover any reduction in market value of an automobile, some courts, like the Supreme Court of Georgia, require that the insurer pay more than the cost of repair to achieve total indemnification. All policies of insurance that insure property up to its actual cash value allow the insurer to deduct for “betterment” or depreciation. The burden of proof is on the insurer to demonstrate deduction of such depreciation or betterment is appropriate to indemnify the insured as a result of the insured casualty.
In physical damage claims, the policy would allow the carrier to deduct for an “improvement” in value (i.e., betterment) due to repairs with newer parts, but states nothing about compensating the insured for a reduction in value due to the same accident.
For example, Texas court cases have found that legal liability for third-party damages include diminution of value. However, no single measure of damages can serve in every case to adequately compensate an injured party. For the award of damages to be fair, recognizing that diminution of value is not always an accurate method of providing true indemnity, an award of restoration damages, according to some courts, must be available to compensate a plaintiff fully for damages to property when diminution in value fails to provide an adequate remedy.
The general rule in tort cases where one party causes damage to the property of another the measure of damages is not the cost of repair of the property but, rather, the standard measure is the difference between the value of the property before and after the injury, or the diminution in value unless the cost of repairing the injury and restoring the premises to their original condition amounts to less than the diminution in value of the property, and then the cost of repair is the proper measure of damages.
If the cost of restoration will exceed such diminution in value, then the diminution in value of the property is the proper measure. That rule seems to be in flux and most courts seem to be moving toward a more flexible rule where the measure of damages is considered the amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury regardless of the method used to calculate those damages.
Some states apply the rules strictly, some apply the general rule of fairness, others apply the rule in one way when dealing with tort damages, another when dealing with contract damages and a third when dealing with insurance claims.
Diminution in value for insurance claims seems to be limited to automobile insurance claims and in Georgia and a few other states. A class action is pending in Georgia attempting to extend the diminution of value case law to all kinds of property.
This article was adapted from my book, “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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