A recent 5th Circuit Court of Appeals decision interpreting Mississippi insurance law has ruled that an automobile insurance carrier can exclude diminished value claims from its underinsured motorist coverage. In Watkins v. Allstate Property & Casualty Insurance Company, Kimberly Jones (insured by Safeway Insurance Company) negligently crashed into a vehicle driven by Kenan Watkins (insured by Allstate), resulting in physical damage to Watkins’ vehicle. Safeway paid Watkins $24,314.25 of its $30,000 property limits for the repair costs to his vehicle. However, Watkins’s vehicle also allegedly sustained $13,545 in diminished value as a result of the collision. Safeway tendered the remaining $685.75 of its limits toward Watkins’ diminished value claim, but Watkins’ filed an underinsured motorist claim with his own carrier, Allstate.
Allstate denied Watkins’ diminished value claim, relying upon a provision in its policy that excludes “any decrease in the property’s value, however measured, resulting from the loss and/or repair or replacement.” Watkins then filed a class action suit against Allstate in Mississippi federal court, arguing that Allstate’s diminished value exclusions violate the Mississippi Uninsured Motorist Statute (which also covers “underinsured” vehicles) by “impermissibly denying insurance coverage that is required by law.” Allstate filed a Rule 12(b)(6) Motion to dismiss the case.
The court first ruled that Watkins failed to plausibly allege that Jones’ vehicle qualified as an “uninsured motorist vehicle.” To determine whether a vehicle qualifies as uninsured, the court needed to compare the limits of bodily injury liability of that vehicle with the limits applicable to the injured person under his uninsured motorist coverage. Because Watkins failed to provide the limits of bodily injury liability under Jones’ policy and the limits of his uninsured motorist coverage, the district court concluded that Watkins failed to plausibly allege that Jones’ vehicle was an “uninsured motor vehicle.”
The more significant ruling, however, came when the district court held that Allstate’s diminished value exclusion in its uninsured/underinsured motorist coverage was valid under Mississippi law—which requires insurance companies to provide limits of liability “no less than $25,000 for bodily injury or death to one person, $50,000 for bodily injury or death to two or more people, and $25,000 for injury or destruction of property.” The court observed that Mississippi Code Ann. § 83-11-101(2) requires that car insurance policies “pay the insured all sums which he shall be legally entitled to recover as damages for property damage,” and specifically incorporates the limits of the Mississippi Motor Vehicle Safety Responsibility Law. Once the minimum limits of liability are met, insurance companies are statutorily authorized to exclude or limit coverage “as long as the exclusions and limitations language has been filed with and approved by the Commissioner of Insurance.” Miss. Code Ann § 63-15-43(2)(a). The district court reasoned that while insurance companies are required to provide coverage “for injury to or destruction of property,” this requirement does not include coverage for diminished value. Thus, the district court concluded that Allstate’s diminished value exclusion was valid under Mississippi law. Watkins appealed to the U.S. Court of Appeals for the 5th Circuit.
The 5th Circuit affirmed the federal trial court’s decision, not only because the complaint failed to allege that Watkins’ vehicle was an “underinsured motor vehicle” under Mississippi law, but also because Allstate’s diminished value damages exclusion did not implicate, and therefore did not run afoul of, the state’s $25,000 minimum requirement. The court noted there is no legislative or judicial pronouncement that insurers must provide for payment of diminished value in all issued automobile policies. Thus, Allstate’s diminished value exclusion did not violate public policy. In other words, there is no such thing as an “underinsured” vehicle when it comes to diminished value property damage, so long as the underinsured motorist had the minimum required UIM limits.
The decision is a curious one because a diminished value claim certainly qualifies as property damage. It is “damage” to the value of a vehicle. “Diminished value” is the residual loss of market value of the damaged vehicle after repairs have been completed. They are also known as “stigma damages.” Yet, the court pronounced that Watkins failed to point to a “pronouncement, either legislative or judicial, requiring that diminished value be a part of all automobile insurance policies.” It said that only “an affirmative expression of an overriding public policy by the legislature or judiciary” prompts this Court to rule that an insurance policy’s plain meaning does not control. Centennial Ins. Co. v. Ryder Truck Rental, Inc., 149 F.3d 378 (5th Cir. 1998). Because neither the Mississippi legislature nor the judiciary have pronounced that insurers must provide for payment of diminished value in all issued automobile policies, the Allstate diminished value exclusion is valid.
The ruling seemingly creates a stark bifurcation between property damage representing crumpled quarter panels and windshields and property damage representing the residual loss of value to a repaired vehicle. The truth is, however, that except in a very few states, the language in the collision section of the standard auto insurance policy clearly excludes coverage for diminished value when the policyholder is at fault in a crash. First-party coverage for diminished value claims can be and routinely is excluded. When it comes to third-party liability coverage, however, things are a little less clear. There is very little law on this issue. It is our experience that many liability carriers routinely pay on such stigma damages because there is no exclusion for them. This will vary from state to state, as each state evolved its own law of damages over time. In California, for example, “property damage” is typically defined as “physical damage to tangible property, including destruction or loss of its use.” Courts interpreting California law have held that “stigma” claims are not covered under this definition. Copelan v. Infinity Ins. Co., 728 F. App’x 724 (9th Cir. 2018) (holding no third-party liability coverage for stigma damages); Hennessy v. Infinity Ins. Co., 358 F. Supp. 3d 1074 (C.D. Cal. 2019) (same). These cases note, however, that if the vehicle sustains physical damage such that the vehicle cannot be repaired to its pre-loss condition, the policy may provide coverage for diminished value damages.
The following states allow recovery for diminution in value of a damaged vehicle in a third-party claim:
- Arizona: Farmers Ins. Co. v. R.B.L. Investment, Inc., 675 P.2d 1381 (Ariz. 1983);
- Colorado: Trujillo v. Wilson, 189 P.2d 147 (Colo. 1948); Airborne v. Denver Air Center, 832 P.2d 1086 (Colo. App. 1992);
- Florida: McHale v. Farm Bureau Mut. Ins. Co., 409 So.2d 238 (Fla. 1982);
- Georgia: Perma Ad Ideas v. Mayville, 282 S.E.2d 128 (Ga. 1981);
- Illinois: Trailmobile Division v. Higgs, 297 N.E.2d 598 (Ill. 1973);
- Indiana: Wiese-GMC v. Wells, 626 N.E.2d 595 (Ind. 1993);
- Iowa: Halferty v. Hawkeye Dodge, 158 N.W.2d 750 (Iowa 1968);
- Kansas: Broadie v. Randall, 216 P. 1103 (Kan. 1923);
- Louisiana: Orillac v. Solomon, 765 So.2d 1185 (La. 2000);
- Maryland: Fred Frederick v. Krause, 277 A.2d 464 (Md. 1971);
- New Mexico: Hubbard v. Albuquerque, 958 P.2d 111 (N.M. 1998);
- New York: Rosenfield v. Choberka, 529 N.Y.S.2d 455 (N.Y. 1988);
- Oregon: EAM Advertising Agency v. Helies, 954 P.2d 812 (Or. App. 1998);
- South Carolina: Newman v. Brown, 90 S.E.2d 649 (S.C. 1955); and
- Virginia: Averett v. Shircliff, 237 S.E.2d 92 (Va. 1977).
It should be remembered that diminution in value of a vehicle after repairs have been conducted can be difficult to prove and, in some states, the burden is quite high. EAM Advertising Agency v. Helies, supra. In some cases, it may be necessary to actually sell it in its damaged condition in order to establish its post-crash market value or, at a minimum, engage an expert appraiser to provide a detailed report.
Subrogation professionals must be on the forefront of diminished value claim knowledge because a diminished value threat can often assist in settling third-party property subrogation cases. The collision history industry has become fully enveloped within the world of subrogation. For a completely chart on the law regarding first-party and third-party diminished value claims, see HERE.
For questions regarding the subrogation of auto property subrogation cases, please contact Ashton Kirsch at akirsch@mwl-law.com.
