March 23, 2009
Written By Attorneys: Craig A. Cohen and G. Franklin McKnight IV
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.
In a move contrary to court decisions in many states holding that inherent diminished value to a motor vehicle is not a covered loss under typical first-party automobile policies, North Carolina lawmakers have introduced legislation that, if passed, would mandate such coverage. Inherent diminished value is generally defined as a decrease in value occurring after vehicle damage has been properly repaired. The majority of states that have addressed this issue have held that post-repair diminution in value is not owed under standard contractual language limiting the insurer's liability to the cost of repair or replacement. The courts in these states require the restoration of vehicles to their former condition, but do not provide coverage arising solely from a market "stigma" applied to vehicles that have been involved in an accident, when such vehicles have been properly repaired.
Under North Carolina Senate Bill 660, introduced on March 18, 2009, insurers in the state would be required to provide coverage for diminished value under their motor vehicle liability policies. In the event that the insurer and policyholder cannot agree on the amount of diminished value owed, the bill provides for a standard appraisal procedure where each party selects a motor vehicle damage appraiser licensed by the Department of Insurance and then those appraisers select an umpire. In the event that the appraisers cannot agree on an umpire, either party can petition a magistrate to do so. The appraisers must then evaluate the vehicle's diminished value. If the appraisers fail to agree, they must submit their differences to the umpire who will provide a report determining the amount of diminished value. Each party must pay for his or her own appraiser, and the expenses of the appraisal and umpire must be shared equally.
If passed, the bill would place North Carolina law in the minority with respect to how diminished value is handled under first-party automobile policy provisions and align the state with the Georgia Supreme Court's opinion in State Farm Mutual Automobile Insurance Company v. Mabry, 556 S.E.2d 114 (Ga. 2001). In Mabry, the Court found that both utility and value are lost when physical damage occurs and that such elements are covered under first-party automobile policy provisions, regardless of whether the vehicle in question is properly repaired.
The approach undertaken in Georgia, and now under consideration in North Carolina, is not beneficial to insurance companies, who would be required to take on the costs of adjusting and appraising this uncertain and hypothetical damage under first-party coverages that manifests itself only after a vehicle is sold. Similarly, the bill would impose a hardship on policyholders, who would likely see this cost reflected in higher insurance premiums. NLdH will continue to monitor developments concerning this important proposed legislation.
