Stigma damages: property damage and the fear of risk.

• Author: Muldowney, Timothy J.

Courts are struggling with the public policy considerations of where to draw the line between just compensation and cost to society

Today, more than ever before, concerns about risk abound. Whether it be the risk posed by an abandoned landfill, an inactive industrial site or a farm with a leaking underground storage tank, people fear that environmental risk - health problems or financially devastating legal liability for cleanup or repair - will be overwhelming. Not surprisingly, concern about environmental contamination can affect public perception of the value of property.

An environmental stigma results from perception of uncertainty and risk. It may be relatively easy to quantify the cost to remedy a simple contamination problem, such as a leaking underground storage tank. However, as the complexity of the contamination increases, the level of uncertainty and perceived risk rises.(1)

Stigma, of course, can be associated with matters other than environmental contamination. It has been claimed to affect the value of buildings that have had structural damage or defects or that have been infested by termites. Here, too, negative public reaction to risk and worry about future problems is often the basis for the claim of the stigma and accompanying damages. Claimants assert that prospective purchasers will not take the chance that the stigma-causing problem might recur or that repair or remediation might not have been a complete solution.

In short, where stigma is claimed to exist, property owners often seek recovery for market value losses in addition to whatever repair costs might be involved. The damages they seek are commonly labeled "stigma damages."

Nature of Stigma Damages

1. What Is Stigma?

   Stigma can result from a multitude of factors, including a simple fear of the unknown.(2) People fear what they do not understand and feel they cannot adequately control. Real estate purchasers are no different. The level of fear and severity of concern increases according to the complexity of the stigma-inducing problem. Even if a contaminated property has been restored to the extent that present technology allows and indemnity is offered to protect against future problems, sometimes the property still might not attract purchasers.(3)

   Stigma, however, is not entirely irrational. Because it is premised on public uncertainty and lack of complete knowledge, purchasers may have legitimate concerns for property value. For rational reasons, they may choose to avoid properties where the potential for future problems exists. They may even ignore scientific assessments of the nature of a problem - say, an environmental clean-up assessment - or protection, such as a seller's warranty or agreement to indemnify.

   Yet, when the stigma-inducing activity has not physically affected a claimant's property, but rather has touched only surrounding property, it seems less rational for a purchaser to suppose that an environmental consultant's clean bill of health given to the surrounding property may be incorrect, leaving open the possibility of a future contamination spill-over. Claimants nonetheless seek compensation for stigma-related market value loss because of a neighbor's contamination.

2. Stigma-Related Damage Claims

   While claims for stigma-based damages have been asserted for such conditions as termite damage, structural defects and the installation of high-voltage power lines, stigma damage claims are on the rise in toxic tort and environmental contamination lawsuits.(4) They arise in two distinct factual situations. The first occurs when environmental contamination has not directly affected a plaintiff s property or substantially interfered with use of the property, but nevertheless the public fears the property is contaminated. The second situation involves environmental contamination that has affected a plaintiff s property, requiring the defendant to pay reparation costs, but the plaintiff claims that the value of the property will be permanently diminished by a remaining stigma. The distinctions between these situations and the judicial responses to them are developed below.

   In considering stigma damages claim, courts must face the traditional rules of property damage that are, to some extent, in conflict with assertions of stigma damages. The rules of property damages in many jurisdictions allow recovery for either the diminution in value of the damaged property or the cost of its repair.(5) In many cases, courts grant recovery for the decreased market value of property only after determining that the damages are of a "permanent" nature. Where the harm has been temporary or can be remediated, courts have favored repair costs as the proper measure of damages.(6)

   With stigma claims, however, courts are asked to allow damages for diminution in value in addition to the cost of repair. Although some courts have allowed recovery for market value loss in this instance, their reasons for ignoring traditional damage rules have not always been entirely clear.(7)

   Factual Basis for

   Stigma Damages Claims

   Stigma damages claims are made in a number of different contexts. Two distinct factual categories can best summarize them.

   The first category (Category I) involves claims based on a theory of incomplete repair.(8) For example, plaintiffs suffering from structural defects or termite damage to their homes often claim that the traditional remedy of repair costs will not compensate them adequately. Prospective purchasers will fear that the property, although repaired, may still have potential problems. So, the claim is that purchasers will be willing to pay less than the market value would be were the property unaffected by stigma. Cases involving environmental contamination physically affecting a plaintiff's property also fall in this category. In these cases, claims for repair costs as well as compensation for decreased market value often are asserted.

   The second category (Category II) encompasses claims in which property value allegedly has been reduced by neighboring environmental contamination or other nuisance-like behavior. Unlike Category I, the contamination in these cases does not physically affect the property. The claim instead is one for "general marketplace stigma." The theory of these claims is that the image of the property is tainted and will suffer from a general marketplace stigma, although the property has not been and might never be directly touched by the problem. The decreased market value, according to these claimants, calls for compensation.

   These categories help to distinguish situations in which stigma damages are or are not allowed. In general, courts have not granted stigma damages in Category II cases, where a plaintiff could not prove that the defendant's actions physically affected the property, although there is at least one case, discussed later, in which recovery was allowed.(9) In Category I cases, however, where the defendant's acts have affected a plaintiff's property, courts have allowed stigma damage claims.

   Legal Basis for Stigma

   Damages Claims

   Stigma damages claims have received a boost from heightened disclosure requirements on the sale of real property. Real estate sellers no longer can rely completely on the doctrine of caveat emptor when they consider what facts to disclose in a transaction. In addition, real estate disclosure statutes are becoming increasingly prevalent. Both these trends tend to support the argument that sellers will be forced to disclose adverse information to prospective purchasers. That disclosure, in turn, may allow more plaintiffs to seek stigma damages stemming from the possibility of a market value loss in addition to the cost of repair.

1. Doctrine of Caveat Emptor

   Traditionally, the doctrine of caveat emptor has served to protect sellers from a buyer's damage claim. While caveat emptor may still be alive in some contexts, it has lost ground when sellers have made affirmative misrepresentations or fraudulently concealed important information.(10) The Wisconsin Court of Appeals, for example, held in Green Spring Farms v. Spring Green Farms(11) that the doctrine of caveat emptor no longer excuses real estate sellers from fully disclosing to potential purchasers the existence of conditions that may be material to the purchase decision and that the purchaser is in a poor position to discover.

   Green Spring involved the 1985 sale of a dairy farm. At the time of sale, the owners knew that an outbreak of salmonella had occurred in their calves in 1982. Between 1982 and 1985, there were no further outbreaks, and the sellers did not disclose the 1982 outbreak to the purchasers because they thought the problem had been solved. In 1987, the new owners experienced a similar salmonella outbreak in their livestock, and they claimed both intentional and negligent misrepresentations and failure to disclose the contamination.

   The court concluded that the traditional common law rule had changed, and now conditions deemed "material" to the decision to purchase must be disclosed. A fact is material, the court stated, if "a reasonable purchaser would attach importance to its existence or nonexistence in determining the choice of action in the transaction in question." The court left the determination of materiality to the jury.

   A New Jersey appellate court followed the trend by not applying caveat emptor in Strawn v. Canuso,(12) holding that sellers of new homes had a duty to disclose to potential buyers the existence of a nearby closed landfill that likely contained illegally stored hazardous waste. The closed landfill was near the edge of a residential development, and the buyers were unaware of it. The sellers, however, knew about it, yet they advertised the development as a tranquil location in the midst of a forest. Application of caveat emptor in the case would work an injustice, the court declared.

   Citing Section 551 of the Restatement (Second) of Torts,(13) the Strawn...