Written by Attorneys Robert T. Horst, Craig A. Cohen and Mark H. Rosenberg

Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

The Louisiana Court of Appeal for the Fifth Circuit has dealt a severe blow to third-party diminished value class actions in Defraites v. State Farm Mut. Ins. Co., --- So. 2d ---, No. 03-1081, 2004 WL 128996 (La. Ct. App. 5 Cir. Jan. 27, 2004). The Court held that individualized issues inherent to the determination of diminished value claims made such claims improper for class certification. After a detailed analysis, the Court also held that “there are too many individualized variables which come into play in a claim for diminished value in an automobile accident to make the action appropriate for certification of a class.” Id.

Defraites concerned allegations that the defendant insurer was obligated to pay third party “inherent” (non-repair related) diminished value claims simply because the subject vehicle was damaged in an accident. The plaintiff also sought payment for these claims of behalf of himself and a class, and penalties under a Louisiana insurance statute for the failure to promptly pay the claims, even when no claim for diminished value was raised by a class member.

In analyzing whether certification of the class was proper, the Court emphasized the fact that under Louisiana law, a party may recover damages from a tortfeasor for the diminished value to an automobile only if “proof of such diminished value is made.” Id. at *6 (citing Giles v. Lafayette, Inc. v. State Farm Mut. Auto. Ins. Co., 467 So.2d 1309, 1310-11 (La. App. 3 Cir. 1985)). Therefore, the Court held that “[a]ny plaintiff seeking to recover diminution in value must individually allege and prove that tort.” Id. Specifically, the Court held that the adjudication of the class members’ diminished value claims required analysis of the following factors: (1) “whether the [defendant’s] insured was at fault in the accident,” (2) “whether a diminution in value occurred,” (3) “whether [the defendant insurer] violated its statutory obligation to initiate loss adjustment and offer settlement,” and (4) “whether the claimant is entitled to penalties and a quantification of the amount of penalty.” Id. at *7.

Defraites demonstrates that regardless of the coverage provision under which a diminished value class action is brought, the individualized issues central to any determination of diminished value create a formidable obstacle to class certification. In so doing, Defraites suggests that the recent movement of plaintiff’s attorneys toward diminished value class actions brought under third party and/or uninsured motorist policies will have little likelihood of success. Of course, Defraites also demonstrates the inherent problems of certifying first-party diminished value classes in the small minority of jurisdictions that continue to recognize such claims. By providing important precedential support to the common-sense arguments against the certification of diminished value classes, Defraites may prove to be one of the final “nails in the coffin” for these actions.