The Supreme Court of Georgia recently held that a property insurer potentially was required to compensate an insured for both the cost of building repair, as well as for the diminution of value of the property resulting from the damage, even after repairs were completed. This diminution in value potentially could result, for example, from “stigma” that a building that has suffered a loss and been repaired might suffer in some circumstances.
In Royal Capital Development v. Maryland Casualty Co., 659 F.3d 1050 (11th Cir. 2011)1, the plaintiff’s building sustained damage caused by construction activity on an adjacent property. The plaintiff submitted a claim to its property insurer, Maryland Casualty Co., seeking both the costs of repair and the post-repair diminution in value resulting from the damage. The insurer paid $1,132,072 to compensate the plaintiff for the estimated costs of repair to the building. However, the insurer refused to compensate the plaintiff for the alleged diminution in value of the property.
After the United States District Court for the Northern District of Georgia granted summary judgment in favor of the insurer, the plaintiff appealed to the U.S. Court of Appeals for the Eleventh Circuit. The Eleventh Circuit then certified to the Supreme Court of Georgia the following unsettled question of Georgia law:
For an insurance contract providing coverage for “direct physical loss of or damage to” a building that allows the insurer the option of paying either “the costs of repairing the building” or “the loss of value,” if the insurer elects to repair the building, must it also compensate the insured for the diminution in value of the property resulting from stigma due to its having been physically damaged?
The question arose out of the plaintiff’s effort to extend the Supreme Court of Georgia’s ruling in State Farm Mutual Auto Ins. Co. v. Mabry, 274 Ga. 498 (2001)1, which involved auto insurance, to the realm of property insurance. In Mabry, the court held that, on a claim for physical damage to an automobile, under the terms of the policy at issue, the insurer was required to pay for any diminution of value of the repaired vehicle, because value, not condition, was the measure of damage under the auto insurance policy at issue.
In Royal Capital, the Supreme Court of Georgia 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.” See Docket No. S12Q0209, 2012 Ga. LEXIS 501 (Ga. May 29, 2012). The court explained that Georgia precedent establishes that the “cost of repair and diminution of value can be alternative, although often interchangeable, measures of damages with respect to real property.” The court further concluded that Georgia contract interpretation rules provide that where an “insurance policy, drafted by the insurer, promises to pay for the insured’s loss; what is lost when physical damage occurs is both utility and value; therefore, the insurer’s obligation to pay for the loss includes paying for any lost value.”
While the court found that the Mabry rule potentially applicable to property insurance contracts as an abstract matter, it is important to note that the court did not decide the ultimate issue, i.e., whether Royal Capital was actually entitled to diminution of value damages under the specific policy language in its policy. The court explained 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.” The court appeared to leave the specific application of its guidance to the case at hand for the Eleventh Circuit and/or federal district court to resolve.
Property insurers will be faced with a number of questions in applying the Royal Capital decision to their everyday adjusting practices in Georgia. For example:
- 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?
- How can 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?
- Does the potential for diminution in value need to be considered at the actual cash value stage of the adjustment process? If so, how can that be done?
Insurers writing property coverage in Georgia will be faced with attempting to answer these questions and others. The Mabry decision also led to numerous putative class actions against auto insurance companies asserting claims for diminution in value. It is possible that Royal Capital may lead to class action filings against homeowners’ insurers in Georgia. In making any changes to their adjustment practices following this decision, insurers may wish to consider taking steps to minimize potential class action exposure (for more on insurance class actions, see Robinson & Cole’s Insurance Class Action Insider blog.
1 Reproduced by Robinson & Cole LLP with the permission of LexisNexis. Copyright 2001 and 2012 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. No copyright is claimed as to any portion of the original work prepared by a government officer or employee as part of that person’s official duties.