The Georgia Supreme Court recently held that diminution in value of real property is potentially covered under a property insurance policy in addition to the cost of repairs.  See Royal Capital Development LLC v. Maryland Casualty Company, No. S12Q0209, 2012 Ga. LEXIS 501 (Ga. May 29, 2012).  This type of diminution in value potentially could result if a property is worth less because of “stigma” because it has suffered a loss.  It seems somewhat counterintuitive that such a loss would be sustained because in many instances a property that has been repaired with newer, more modern materials is going to be worth more to a buyer.  Most buyers of homes or office buildings would rather have a property that was recently renovated than one that was last updated 10 or 20 or more years ago.  But there may be some concern, in some instances, that a property that was damaged and repaired might have some underlying problem that might reemerge later, and in some instances that might result in a decrease in market value.  Most courts, however, have not recognized this as a recoverable loss under property insurance policies.

In Royal Capital, the Georgia Supreme Court answered a certified question from the Eleventh Circuit.  The court extended its prior decision in State Farm Mut. Auto. Ins. Co. v. Mabry, 274 Ga. 498 (2001), which held that diminution in value was covered under an auto insurance policy, to the realm of property insurance.  (Some courts in other jurisdictions have rejected the recoverability of diminution in value damages in the context of auto insurance, but State Farm did not ask the court to consider overruling Mabry.)  In Royal Capital, the court held that “our ruling in Mabry is not limited by the type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay.”  The court further explained that “under Georgia law, cost of repair and diminution in value can be alternative, although often interchangeable, measures of damages with respect to real property.”  The court, however, appeared not to answer the ultimate question of whether the policy at issue covered diminution in value, explaining that “whether damages for diminution of value are recoverable under Royal Capital’s contract depends on the specific language of the contract itself and can be resolved through application of the general rules of contract construction.”  It appears that the application of the Georgia Supreme Court’s decision to the policy language will be left for the federal courts to resolve.

The Mabry decision led to the filing of a series of class actions against auto insurers in Georgia (as well as other states) regarding coverage for diminution in value.  For example, see my blog post from January 2012 about a Washington Supreme Court decision in an auto insurance diminution in value class action.  It is possible that Royal Capital may spawn some similar class action filings against homeowners’ insurance companies.  Now is the time for insurers to focus on how best to apply the decision in Royal Capital and how to do so in a manner that seeks to protect against potential class action exposure. 

 Royal Capital raises a number of issues that insurers may need to answer, such as: 

  • How does the Royal Capital decision apply to our company’s policy language? 
  • Should our policy language be changed in any respect?
  • If Royal Capital applies to my company’s policies, how can an adjuster determine whether there will be diminution in value of a property after repairs are completed?  What factors should be considered in making that determination?  When can (or must) that determination be made?
  • How can the extent of any diminution in value be calculated? Under what circumstances should guidance of a real estate appraiser be sought in determining whether there is diminution in value or calculating the amount thereof?
  • If the policy provides for payment on an ACV basis until repairs are completed, does the potential for diminution in value need to be considered at the actual cash value (ACV) stage of the adjustment process?  If so, how can that be done?  Should it be treated differently at the replacement cost value (RCV) stage?
  • Are there any other jurisdictions in which the courts have found coverage for diminution in value under property policies?  Should any new procedures adopted in Georgia also apply to any other jurisdictions?

In addressing these kinds of questions, it is important to think about how best to avoid class action exposure.  I discussed strategies for reducing class action exposure in my November 21, 2011 blog post.  Strategies to reduce class action exposure often involve avoiding the use of strict, bright-line rules for front-line claim professionals and handling each claim separately, on its merits, with discretion.  This can be somewhat counterintuitive because company management wants to ensure they are treating their customers fairly and treating similarly-situated customers in a similar fashion.  Front-line claim professionals also sometimes like bright-line rules because they think it makes it easier for them to do their jobs or avoid criticism from their managers.  But treating all insureds who fit into a particular category in the exactly same way is precisely what plaintiffs’ lawyers are going to pounce on when they are trying to certify a class action, because that makes it easier for them to argue that the court can decide all of the proposed class members’ claims in one trial.  When company policy requires decisions to be made in a more nuanced and case-by-case manner, without bright line rules, it is much harder for classes to be certified.  This can also potentially achieve a greater degree of fairness for a company’s customers because each claim is considered separately on its merits and factors can be considered that might not be thought of in developing “rules.”  It’s the same kind of debate that has occurred over sentencing guidelines in criminal cases, with some legislators promoting the use of hard-and-fast rules so that people who commit the “same” crime receive the same sentence.  Many judges do not like these rules because they feel they result in unduly harsh sentences for some defendants who do not warrant such harsh punishment, and they feel that individual case-by-case sentencing is preferable.

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Photo of Wystan Ackerman Wystan Ackerman

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you…

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you have something to say.  For those looking for my detailed law firm bio, click here.  If you want a more light-hearted and hopefully more interesting summary, read on:

People often ask about my unusual first name, Wystan.  It’s pronounced WISS-ten.  It’s not Winston.  There is no “n” in the middle.  It comes from my father’s favorite poet, W.H. (Wystan Hugh) Auden.  I’ve grown to like the fact that because my name is unusual people tend to remember it better, even if they don’t pronounce it right (and there is no need for anyone to use my last name because I’m always the only Wystan).

I grew up in Deep River, Connecticut, a small town on the west side of the Connecticut River in the south central part of the state.  I’ve always had strong interests in history, politics and baseball.  My heroes growing up were Abraham Lincoln and Wade Boggs (at that time the third baseman for the Boston Red Sox).  I think it was my early fascination with Lincoln that drove me to practice law.  I went to high school at The Williams School in New London, Connecticut, where I edited the school newspaper, played baseball, and was primarily responsible for the installation of a flag pole near the school entrance (it seemed like every other school had one but until my class raised the money and bought one at my urging, Williams had no flag pole).  As a high school senior, my interest in history and politics led me to score high enough on a test of those subjects to be chosen as one of Connecticut’s two delegates to the U.S. Senate Youth Program, which further solidified my interest in law and government.  One of my mentors at Williams was of the view that there were far too many lawyers and I should find something more useful to do, but if I really had to be a lawyer there was always room for one more.  I eventually decided to be that “one more.”  I went on to Bowdoin College, where I wrote for the Bowdoin Orient and majored in government, but took a lot of math classes because I found college math interesting and challenging.  I then went to Columbia Law School, where I was lucky enough to be selected as one of the minions who spent their time fastidiously cite-checking and Blue booking hundred-plus-page articles in the Columbia Law Review.  I also interned in the chambers of then-Judge Sonia Sotomayor when she was a relatively new judge on the Second Circuit, my only connection to someone who now has one-ninth of the last word on what constitutes the law of our land.  I graduated from Columbia in 2001, then worked at Skadden Arps in Boston before returning to Connecticut and joining Robinson+Cole, one of the largest Connecticut-based law firms.  At the end of 2008, I was elected a partner at Robinson+Cole.

I’ve worked on class actions since the start of my career at Skadden.  Being in the insurance capital of Hartford, we have a national insurance litigation practice and I was fortunate to have the opportunity to work on some prominent class actions arising from the 2004 hurricanes in Florida and later Hurricane Katrina, including cases involving the applicability of the flood exclusion, statutes known as valued policy laws, and various other issues.  My interest and experience in class actions gradually led me to focus on that area.

In Connecticut courts I’ve defended various kinds of class actions that go beyond insurance, including cases involving products liability, securities, financial services and consumer contracts.

My insurance class action practice usually takes me outside of Connecticut.  I’ve had the pleasure of working on cases in various federal and state courts and collaborating with great lawyers across the country.  While class actions are an increasingly large part of my practice, I don’t do exclusively class action work.  The rest of my practice involves litigating insurance coverage cases, often at the appellate level.  That also frequently takes me outside of Connecticut.  A highlight of my career thus far was working on Standard Fire Ins. Co. v. Knowles, the U.S. Supreme Court’s first Class Action Fairness Act case.  I was Counsel of Record for Standard Fire on the cert petition, and had the pleasure of working with Ted Boutrous on the merits briefing and oral argument.

I started this blog because writing is one of my favorite things to do and I enjoy following developments in class action law, writing about them and engaging in discussion with others who have an in interest in this area.  It’s a welcome break from day-to-day practice, keeps me current, broadens my network and results in some new business.

When I’m not at my desk or flying around the country trying to save insurance companies from the plaintiffs’ bar, or attending a conference on class actions or insurance litigation (for more on those, see the Seminars/Programs page of this blog), I often can be found playing or reading with my young daughter, helping my wife with her real estate and mortgage businesses, reading a book about history or politics, or watching the Boston Red Sox (I managed to find bleacher seats for Game 2 of the 2004 World Series when Curt Schilling pitched with the bloody sock).  When the weather is good I also love to take the ferry to Block Island, Rhode Island and ride a bike or walk the trails there. If you go, I highly recommend the Clay Head Trail.