Since 2001, Georgia has required automobile insurers to not only repair the damage that a covered vehicle sustains, but also to compensate the owner for the loss in value that the car suffers as a result of its involvement in an accident. The logic behind this requirement is that a car that has been in an accident, even if it has been expertly repaired, is worth less than an identical car that has remained accident free. To make the owner whole, a carrier must pay for the repair and compensate the owner for the loss in value that is generated by the “stigma” of the repair. Until now, the application of this rule and its logic has been confined to automobile insurance. The rule has now been dramatically expanded. In Royal Capital Development LLC, v. Maryland Casualty Company, the Georgia Supreme Court ruled that a diminution in value analysis must be conducted for damage sustained to any type of property to ensure that the property owner is fully compensated for the loss.
This decision has been extolled in the Atlanta Journal Constitution as “a big deal for homeowners” because of its potential to result in larger recoveries for homeowners in the event that they suffer a covered loss. In reality, while it may result in increased compensation for some, it appears to be an unnecessary expansion of coverage that will complicate the adjustment process. It could also spur a wave of class action suits for policy holders that have allegedly been deprived of this additional consideration in the adjustment of their previous claims, as happened when the original automobile only rule was established in 2001. Ultimately, the expansion of this theory into the realm of property coverage may result in higher premiums for consumers due to increase claims expense and settlement payments, likely not the “deal” they hope for.
The decision in Royal Capital is a product of litigation between the owner of an 8 story commercial building in Buckhead and their insurance carrier for damages sustained by the building caused by vibrations emanating from a nearby construction project. The policy issued to Royal Capital provided coverage for “direct physical loss or damage to” the building, and in the event of such loss it allowed the carrier to pay “either ‘the cost of repairing the building’ or ‘the loss of value.’” The carrier acknowledged that the building had suffered actual damage and paid the owner over $1 million for the estimated costs of repair. The owner was not satisfied with this payment and argued that in addition to the cost of the required repairs, it was entitled to receive compensation for the diminution in value that the building allegedly suffered as a result of the damage and resulting repair. The Court agreed and held that its 2001 decision in State Farm Mut. Auto. Ins. Co. v. Mabry, which required payment for diminution in value, “is not limited by the type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay.” As a result, carriers must now consider diminution in value in every property damage claim and fairly compensate the claimant for any additional loss that is suffered.
Unlike damage to an automobile, it would seem that damage to real property, if properly repaired, should not cause a diminution in value. In fact, in many instances, such repair might increase the value of the property. Consider, for example, a 20-year-old roof on a home that suffers hail damage and requires a roof replacement. In that situation, the property owner has received a new roof and increased the value of his home as a result of the covered loss. Although the vast majority of non-auto claims are likely to generate similar results, savvy claimants and attorneys are likely to suggest that even the most basic covered repair diminishes the property’s value. It could be argued that any repair that is performed out of necessity following a covered occurrence, rather than as the result of routine property maintenance, carries with it a “stigma of repair” brought about by the urgency of the repair and/or the need to correct damage that otherwise would not have been sustained (e.g. a roof leak that causes wet carpet, damaged drywall and the potential for mold).
The potential for such arguments will now make even the most basic covered claim a more difficult exercise, and carriers should evaluate how property claims are adjusted in light of the Royal Capital decision. This should include taking steps to evaluate the potential for diminution in value for all property damage claims. This may require the use of an appraiser to substantiate that the repair has not negatively affected the value of the home. Carriers may also consider requesting claimants to specifically acknowledge that settlement payments satisfy any claims that they may have for the diminished value of their property. It would also be advisable to consider altering policy language to specifically exclude coverage for post-repair diminution in value. The ability to limit exposure for such claims seems to be contemplated by the Court in the Royal Capital decision.
Given the above analysis, it is not hard to imagine that several plaintiffs attorneys are likely at work attempting to draft class action lawsuits to recover for the alleged underpayment of claims that have been made by property insurers for the past several years due to their failure to consider diminution in value as an element of loss. At this stage, the industry can do no more than wait for these suits and defend them on all grounds available. Since real property is unique and property damage claims require a case by case analysis, it is possible that attempts to assert class actions can be thwarted due to their failure to satisfy the commonality and typicality requirements necessary for a certified class. In any event, property insurers should brace themselves for a fight.