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.