March 19, 2010
Written By Attorneys: G. Franklin McKnight IV and Jason M. Kurtz
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 long-awaited opinion concerning an insurer's obligation to pay policyholders for the diminished market value of their vehicles under first-party collision coverage provisions, the Washington State Court of Appeals held that such diminished value damages were owed. The case, Moeller v. Farmers Ins. Co. of Washington, --- P.3d ---, 2010 WL 927989 (Wash. Ct. App. March 16, 2010), which was filed back in 1999, has a considerable history, with the Pierce County Superior Court granting class certification of the matter, but subsequently dismissing it in 2003. The Court of Appeals reversed the decision, finding that Farmers' policy language provided coverage for diminished value and that the matter was amenable to class action treatment under Washington law.
The crux of plaintiff's argument in Moeller was that Farmer's failed to restore his vehicle to its "pre-loss condition through payment of the difference in the value between the vehicle's pre-loss value and its value after it was damaged, properly repaired and returned." In clarifying the definition of "diminished value," the court held that a vehicle suffers diminished value when it sustains physical damage in an accident, but due to the nature of certain irreparable physical damage (the Court used the example of weakened metal) it cannot be fully restored to its pre-loss value. Interestingly, the Court differentiated between what it referred to as "stigma" damages, which it defined as the intangible taint due to a vehicle's having been involved in an accident, and diminished value, or un-repairable damage.
After reviewing the relevant policy language, the court opined that the policy's definition of "loss" as a "direct and accidental loss of or damage to your Insured car ... "includes losses proximately caused by the initial harm. Thus, the court explained that "[a] collision begins a chain of events that sometimes results in a tangible, physical injury that cannot be fully repaired. Absent an intervening cause, diminished value is a loss proximately caused by the collision and thus is covered."
The court also held that the limits of liability clause in the Farmers policy did not preclude recovery for diminished value. The policy's limits of liability clause provided that Farmers' liability for loss would not exceed "[t]he amount which it would cost to repair or replace damaged ... property with other of like kind and quality, or with new property less an adjustment for physical deterioration and/or depreciation." The court reasoned that after repair or replacement with like kind and quality, the vehicle's "capacity and value post-loss should be similar to its capacity and value pre-loss."
The court, in two footnotes, narrowed the decision's applicability specifically to the policy at issue. It did not address the larger issue of whether any insured may recover diminished value. The court focused on the difference in Farmers policy language with other language limiting liability to the "lesser" of the vehicle's actual cash value or the cost of repair or replacement. Whereas other courts have found no coverage for diminished value based on such "lesser of" language, the Moeller Court found cases interpreting similar policy language of limited value because of the different terms.
With respect to class certification, the Court found that the certification requirements under Washington law were met. The Court found that the fact that class members shared the same insurance policy, potentially suffered damage, and were allegedly harmed by Farmers' course of conduct was sufficient to establish that common issues predominated. The Court further found that because each claim had a de minimis value, individuals would be unlikely to pursue separate actions. The Court noted that even if individual issues posed management problems for the trial court, this alone did not preclude certification.
The Moeller decision places Washington in a minority of states with respect to how diminished value is handled under certain first-party automobile policy provisions. This approach is not beneficial to insurance companies who may be required to take on the costs of adjusting and appraising this hypothetical damage. Similarly, the decision could impose a hardship on policyholders who would likely see this cost reflected in higher insurance premiums. However, based on the fact that many insurers may now have diminished value exclusions in their Washington policies, the decision may have little impact beyond this litigation. NLdH will continue to monitor developments concerning this important issue.
