Insurance - Bradley S. Wolff, Stephen L. Cotter, and Stephen M. Schatz

• Jurisdiction: Georgia,United States
• Publication year: 2002
• Citation: Vol. 54 No. 1

Insuranceby Bradley S. Wolff^* Stephen L. Cotter^** and

Stephen M. Schatz^***

I. Introduction

This survey year was a good year for Georgia insureds. The supreme court's unqualified affirmance of State Farm Mutual Automobile Insurance Co. v. Mabry¹ meant diminished value litigation in Georgia and spelled nine-digit losses for insurers, losses avoided in every contiguous state. Apparently, responding to the supreme court's plea, the General Assembly waived sovereign immunity on a uniform, limited, and compulsory basis for local governments beginning in 2005. Insureds benefitted from a broad variety of coverage-finding opinions; though, substantial disagreement on and among various panels of the court of appeals resulted in several incongruous results. until the waters become more settled by full court or final appellate court decisions, insurers may wish to err even more on the side of caution when declining coverage.

II. Automobile Insurance

Although the volume of cases decided during this survey period was less than in the recent past, the impact of the major decisions this year was tremendous. Chief among the cases in importance was the supreme court's decision in Mabry² Mabry and other significant developments during the survey period are discussed below.

A. Diminished Value Litigation—Georgian Style

In Mabry the Supreme Court of Georgia held that an automobile insurance policy that promises to pay the insured for "the loss" caused by damage to the insured vehicle obligates the insurer to either restore the vehicle to its pre-loss value as well as its pre-loss condition or, in the alternative, to compensate the insured for any residual loss of value remaining after repairs are made to the vehicle.³ Mabry was brought by two State Farm policyholders who sought damages and injunctive relief for the company's failure to pay them "inherent diminished value"⁴ arising from damage to their vehicles. The complaint, filed in the Superior Court of Muscogee County, sought the following:

1. Certification of two classes of plaintiffs—one class consisting of all former and current Georgia State Farm insureds who had made first-party physical damage claims within the six years preceding the filing of the lawsuit (the "Breach of Contract Class") and a second class consisting of all present insureds of State Farm in Georgia (the "Equitable Relief Class");

2. A declaratory judgment that State Farm's Georgia automobile insurance policies provide coverage for diminution in value to the insureds' vehicles and impose upon State Farm an obligation to assess each first-party physical damage loss for the presence of diminution in value;

3. An injunction requiring State Farm to advise its policyholders of the coverage for diminution in value, to assess in each first-party claim for physical damage whether the vehicle has suffered a

diminution in value, and to pay such damages or deny the presence of diminution in value; and 4. Money damages for the diminution-in-value losses sustained by State Farm's Georgia insureds during the six-year limitations period.⁵ @@@

State Farm's Georgia automobile insurance policies that contain comprehensive coverage, collision coverage, or both for the insured vehicle provide that the company will "pay for loss to your car."⁶ The policies also contain provisions (1) limiting the coverage to the lower of the actual cash value of the vehicle or the cost of repair or replacement and (2) providing that State Farm has the right to settle claims for physical damage by paying up to the actual cash value of the vehicle or paying "to repair or replace the property or part with like kind and quality."⁷ State Farm contended that there was no cognizable loss sustained by inherent diminished value; it could only be liable to its insureds for diminution in value when repairs are unable to restore the vehicle to its pre-loss condition in appearance or function; and if any loss of value occurred, it could not be determined until a vehicle was sold.⁸ In addition, State Farm denied that it had any duty to affirmatively assess vehicles for losses not claimed by the policyholder, and thus, the company could not be required to advise its insureds of diminution in value and pay for such loss unless the insured claimed a loss in value after repairs were completed.⁹

The trial court granted plaintiffs interlocutory relief in two separate orders. First, the court entered an order certifying the two classes of claimants. Then, in December 2000, the court entered an order declaring that State Farm's Georgia automobile insurance policies must provide coverage for first-party diminution in value, that State Farm was enjoined to evaluate its first-party physical damage claims to determine whether there is any diminution in value, and that State Farm either pay its insureds for this loss or deny its presence.¹⁰ The order also required State Farm to develop "an appropriate methodology and procedure" and to "collect, catalog, and maintain any information necessary to make a determination of diminution in value."¹¹

State Farm appealed both trial court orders to the supreme court, and the court affirmed.¹² After the court resolved the procedural issues concerning class certification and whether a declaratory judgment was appropriate, the court turned to the case's central issues. The court framed the question for declaratory judgment as:

Whether the fact of physical damage resulting from an event covered by the policy reduces the value of a vehicle, even if repairs return it to pre-loss condition in terms of appearance and function; if so, whether the policies issued by State Farm obligate it to compensate its policyholders for that loss of value, or permit it to discharge its responsibility under the policy by making repairs that return the vehicle to pre-loss condition in terms of appearance and function; and if State Farm is obligated to pay its policyholders for diminution in value, whether it is required to assess that element of loss along with the elements of physical damage when a policyholder makes a general claim of loss.¹³ @@@

Addressing the first question, whether diminution in value occurs even when repairs are properly made, the court found the existence of a question of fact.¹⁴ Based upon State Farm's own documents and witnesses, the supreme court held that the trial court's finding of a potential for diminution in value in every physical damage loss was not clearly erroneous.¹⁵ The trial court's finding was thus affirmed.¹⁶

Next, the court held that whether or not State Farm was contractually obligated to pay first-party diminution in value losses to its policyholders was a question of contract construction and, therefore, a question of law.¹⁷ On this issue, the court reviewed seventy-five years of case law from the court of appeals and concluded that Georgia law requires insurers to restore damaged property to its pre-loss value, not just its pre-loss condition, if the policy undertakes to pay the insured for the loss, and that the option to repair can only fully discharge the insurer's obligation when the property is restored to both its pre-loss condition and value.¹⁸ Justifying its rationale, the supreme court asserted:

The foregoing review of Georgia case law establishes clearly that value, not condition, is the baseline for the measure of damages in a claim under an automobile insurance policy in which the insurer undertakes

to pay for the insured's loss from a covered event, and that a limitation of liability provision affording the insurer an option to repair serves only to abate, not eliminate, the insurer's liability for the difference between pre-loss value and post-loss value.¹⁹ @@@

Thus, if the insured can only be made whole by the payment of diminution of value in addition to repairs, the court held that such payment is required under State Farm's policies.²⁰

Whether State Farm is required to assess each physical damage loss for potential diminution in value, even without a specific claim for such loss by the policyholder, the supreme court again held that a question of contract interpretation, and thus a question of law, was presented.²¹ The court found that State Farm's policy imposed upon the insured certain specific obligations, including the obligations to report the fact of the loss, to protect the property, to show the insurer the damage, and to present certain records, receipts, and invoices.²² However, the court held that nothing in the policy required the insured to assert a right of recovery for each item of damage or loss sustained.²³ Therefore, "it stands to reason that the policy does not require a separate claim for diminution in value."²⁴

Finally, the court affirmed the trial court's imposition of an injunction requiring State Farm to develop a methodology for assessing diminutionin-value claims and requiring State Farm to "collect, catalog, and maintain" the information necessary to assess such claims.²⁵ The court held that allowing State Farm to develop its own methodology was the "least oppressive means" to accomplish the necessary task, and compiling the information was also necessary as State Farm did not have the information necessary to evaluate diminution-in-value claims.²⁶

Following the supreme court's decision, the parties then faced the daunting task of evaluating the diminution-in-value claims of State Farm's policyholders. Several methods were considered, including proposed third-party vendors' proprietary formulas for individually assessing the difference in value between a damaged and repaired vehicle and an undamaged vehicle. Eventually, the parties reached a settlement agreement, which required State Farm to utilize the so-called"17(c)" or "Insurance Commissioner's" formula²⁷ and evaluate each physical damage loss claim falling within the class period. State Farm assembled a "cat" (catastrophe) team and assigned it responsibility for individually reviewing...