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March 21, 2001

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report:  Insurance Bad Faith, Vol. 14, #22, p. 25 (March 21, 2001). © Copyright Butler 2001.

We have seen, in recent years, a spate of actions for bad faith, and class actions, on the issue of so-called diminished value. These suits claim payment by the insurance company of the actual cash value of a property loss – or the cost to repair a loss – does not make the insured whole. This is because of some intangible quality in the property that cannot be restored by repair. Before the loss it was pristine or original. Afterward it is corrupted or compromised. It is worth less in the market.

This notion has been applied most often to automobile damage and it is easy to see why. Cars, trucks and vans are a kind of self expression, like clothing. Our means of conveyance tells who we are (or want others to think we are) and what we are about. The vehicle we occupy is part of us in a way that, say, our air conditioner is not. Thus it may be, in the mind of the owner, a car is worth less after a wreck even though it has been repaired as good as new.

In any event, the plaintiff’s problem with diminished value claims is – they are not covered by automobile insurance for physical damage. Standard policy language, such as the ISO form PP 00 01 06 98, provides:

We will pay for direct and accidental loss to your covered auto. . . including [its] equipment, minus any applicable deductible

. . .

Our limit of liability for loss will be the lesser of the:

  1. Actual cash value of the. . . damaged property; or
  2. Amount necessary to repair or replace the property with other property of like kind and quality.

There are at least two reasons this coverage does not include diminished value. First, the limit of liability clause rules it out. In Carlton v. Trinity Universal Ins. Co., 32 S.W.3d 454 (Tex. App. 2000), the Court of Appeals of Texas considered the effect of this clause on a claim for diminished value. There the insured’s car had been stolen. It was recovered with damage and about 3500 more miles on the odometer.

The insurance company paid for repairs but denied the claim for “inherent diminished value,” which the insured defined as the difference between the pre-loss value of the car, and its value after being repaired. The insured filed suit and the trial court entered a summary judgment in favor of the insurance company. The Court of Appeals analyzed the issue as follows:

In common usage, ‘repair’ means ‘to restore by replacing a part or putting together what is torn or broken’ or, stated slightly differently, ‘to bring back to good or usable condition.’ There is no concept of ‘value’ in the ordinary meaning of the word. Ascribing to the words ‘repair or replace’ an obligation to compensate the insured for things which, by their very nature, cannot be ‘repaired’ or ‘replaced’ would violate the most fundamental rules of contract construction. If there is a single guiding principle that governs our interpretation of the insuring agreement, it is to give effect to the parties’ intent as expressed in the plain language of the written policy. [citation omitted] Therefore, we must conclude that the limit of liability provision means what it says.

32 S.W.2d at 464—5 (footnotes omitted). Accordingly, the Court held

that where an insurer has fully, completely, and adequately ‘repaired or replaced the property with other of like kind and quality,’ any reduction in market value of the vehicle due to factors that are not subject to repair or replacement cannot be deemed a component part of the cost of repair or replacement. Under the ‘repair or replace’ provision of the policy’s limit of liability, the insurer’s liability is capped at the cost of returning the damaged vehicle to substantially the same physical, operating, and mechanical condition as existed immediately before the loss. This obligation does not include liability for any inherent diminished value caused by conditions or defects that are not subject to repair or replacement, such as a stigma on resale resulting from ‘market psychology’ that a vehicle that has been damaged and repaired is worth less than a similar one that has never been damaged. While the insured may well suffer this type of damage as a result of a direct or accidental loss, the plain language of the policy clearly and unambiguously limits the insurer’s liability to ‘the amount necessary to repair or replace the property with other of like kind and quality.’ If the market value of the vehicle, after full, adequate, and complete repair or replacement, is diminished as a result of factors that are not subject to ‘repair’ or ‘replacement,’ the insurer has no obligation to pay the diminution in value. No other reasonable interpretation can be given to the parties’ express agreement that the insurer’s liability is capped at the amount necessary to ‘repair or replace.’

32 S.W.2d at 465. A more cogent discussion hardly seems possible. The opinion in Carlton ought to be persuasive in any court.

The second reason the physical damage part does not give coverage is because diminished value is not a direct loss. The insurance company in the Carlton case did not raise this issue, but it could have. Couch tells us:

The term ‘direct,’ in a comprehensive provision obligating the insurer to pay for any direct or accidental loss of or damage to the insured automobile, refers to causal relationship, and is to be interpreted as limited to the harm resulting from an immediate or proximate cause as distinguished from a remote cause.

Coach on Insurance 3d §  156.21 (1998). And, as one court put it: “The word ‘direct,’ as used in the definition of ‘loss,’ commonly refers to the proximity of the damages sustained by the insured and not to the manner in which the loss occurred.” Overton v. Progressive Insurance Co., 585 So. 2d 445, 448 (Fla. 4th Ct. App. 1991).

Diminished value is not caused by accident proximately. It is an intangible loss, traceable to, but remote from, the accident. It is like the “loss of use” of a car during repairs, which is not a direct loss. Travelers Indemnity Co. v. Parkman, 300 So. 2d 284 (Fla. 4th DCA 1974). Certainly intangible losses, such as loss of use and diminished value would not occur “but for” an accident. However, they are not immediately or proximately caused by the accident, and are not covered by the physical damage part.

Of course there are cases to the contrary. See e.g., Delledonne v. State Farm Mut. Auto Ins. Co., 621 A.2d 350 (Del. Super. Ct. 1992); MFA Ins. Co. v. Citizens Nat’l Bank of Hope, 545 S.W.2d 70 (Ark. 1977). But most are distinguishable because they involved loss that could not be, or was not, repaired fully. See e.g., Carlton v. Trinity Universal Ins. Co., 32 S.W.3d 454, n.11 and 12 at 462. Accordingly, it appears the better view is that there is no coverage for diminished value under the property damage part of an automobile insurance policy. This ought to be an unfruitful tree for plaintiff lawyers in bad faith actions.