When an automobile is damaged in an accident and then repaired, the resale value may be less than a comparable automobile that has not been damaged. In other words, the damage results in a reduction or “diminution” in the resale value of the automobile. An insured’s claim for this reduction in value may be made against a third party that negligently caused the damage to the insured’s automobile, or it may arise from a first-party claim against the insured’s own physical damage coverage. The term “diminished value” can be confusing. There are three types of diminished value:
- Immediate Diminished Value: This is the loss of value which results immediately after an accident before any repairs are made. It is the difference in market value immediately before and after an accident caused by a negligent tortfeasor.
- Inherent Diminished Value: Also known as “residual diminished value,” this refers to the loss of value of an automobile that remains after it is completely and professionally repaired. It is the loss of value that results from the simple fact that the vehicle has been in an accident. This type of diminished value is also known as “stigma damage.” Given two identical vehicles on a car lot, the one never damaged is preferable to the one that has been damaged and repaired.
- Repair-Related Diminished Value: This refers to the additional loss of value to a vehicle that results from incomplete or poorly performed repairs. It could include simple cosmetic damages which remain after repair or major mechanical or structural deficiencies.
The most common and widely used form of diminished value is inherent diminution-in-value; and there are two types of inherent diminution-in-value (IDV) claims, both of which are important when dealing with liability claims, first-party claims, and third-party subrogation actions:
- First-Party Claims: These are claims made by the vehicle owner/policyholder against his or her own insurance company to recover the difference in the value of the vehicle before the collision and value of the vehicle after the damage caused by collision had been repaired. This type of claim is usually governed by contract law and the terms of the insurance policy. When a vehicle is damaged, a policyholder generally expects to be “made whole” by its first-party property insurer, but an insurer is legally responsible only to pay according to the terms of the policy.
- Third-Party Claims: These are claims made by the owner of a vehicle against a third-party tortfeasor (person other than the insured and insurer) for negligently causing damage to the owner’s vehicle. This type of claim is governed by tort law.
For years, Massachusetts has held that neither first-party nor third-party IDV claims were allowable. Courts in the Commonwealth have held fast to the usual standards of contract interpretation and have held that “[n]o ‘objectively reasonable insured, reading the relevant policy language’ would conclude that the [standard Massachusetts automobile policy] terms include compensation for diminution in market value or for anything else beyond restoration of the vehicle’s pre-collision physical condition.” Given v. Commerce Ins. Co., 796 N.E.2d 1275 (Mass. 2003).
On the same day that Given was decided, Massachusetts’ highest court decided the case of Roth v. Amica Mutual Insurance Company, 796 N.E.2d 1281 (Mass. 2003). Roth followed Given, but noted that:
In an appropriate case, a plaintiff may successfully claim damages based on an insurer’s specification of [use of] a substandard non-OEM part, or successfully demonstrate that the insurer’s duty to repair or replace can only be satisfied by the designation of a particular OEM part to repair the specific damage to that vehicle. There are parts of some vehicles where unique dimensions or specifications of the part are such that only a replacement part from the original manufacturer will suffice to restore the vehicle to its proper functioning condition.
Roth ruled that IDV is not covered as a first-party claim under the standard Massachusetts automobile policy. Given contradicted this ruling by stating that IDV was “inherent” in physical damage claims. As a result, Deputy Commissioner and General Counsel Daniel R. Judson of the Massachusetts Division of Insurance issued a May 2002 advisory opinion that stated that the Division’s position was that the standard automobile insurance policy does not provide coverage “for so-called ‘inherent diminished value,’ nor has the Division ever intended the language to provide such coverage.” Judson added that there are no statutes or regulations requiring insurers to pay claims for diminished value, or rates to include a premium charge for diminished value.
Such was the state of the law in Massachusetts regarding IDV claims, until October 19, 2021, when the Supreme Judicial Court decided McGilloway v. Safety Insurance Company, 2021 WL 4853503 (Mass. 2021). Massachusetts’ highest court issued a decision in a case that had been filed by a number of vehicle owners who each owned automobiles that had been involved in a collision with an automobile owned or operated by a party insured by either Safety Insurance Company or Commerce Insurance Company. These insurers paid to repair the plaintiffs’ automobiles to their pre-collision condition but declined to compensate the plaintiffs for alleged IDV damages to the vehicles. The plaintiffs claimed that under part 4 of the standard Massachusetts automobile liability insurance policy, 2008 edition (standard policy), an automobile insurer must pay a claim for the IDV of a car that has been damaged and subsequently repaired. Part 4 reads as follows:
Under this Part, we will pay damages to someone else whose auto or other property is damaged in an accident. The damages we will pay are the amounts that person is legally entitled to collect for property damage through a court judgment or settlement. We will pay only if you or a household member is legally responsible for the accident. We will also pay if someone else using your auto with your consent is legally responsible for the accident. Damages include any applicable sales tax and the costs resulting from the loss of use of the damaged property.
The plaintiffs argued that they were entitled to collect IDV damages from the insurers under the underlined policy language above as third-party claimants. Conversely, the defendants argued (and the trial court agreed) that because Massachusetts tort law does not permit IDV recovery, the plaintiffs should not be able to make a third-party insurance claim for same. The defendants also contend that even if IDV damages are recoverable, such damages are not covered under the standard policy because Massachusetts regulations governing the claims made pursuant to the standard policy are silent as to how insurers should treat IDV damages.
The court agreed with the plaintiffs. It ruled, for the first time, that part 4 of the standard automobile liability insurance policy requires liability carriers to pay claims for IDV to vehicles that are damaged and subsequently repaired, provided that the claimant establishes both (1) that his or her vehicle suffered IDV, and (2) the amount of IDV damages owed to him or her.
This new position on third-party IDV claims follows on the heels of a federal judge who had recently predicted that Massachusetts Courts would reach the opposite conclusion. Martins v. Vermont Mutual Ins. Co., 2019 WL 3818293 (D. Mass. 2019) (unpublished). Martins was a class action suit filed against Vermont Mutual Insurance Company (VMIC), claiming that VMIC improperly failed to pay damages for “inherent diminution in value” of the plaintiff’s automobile after accidents caused by VMIC’s insureds. That federal judge predicted that, Massachusetts state courts would interpret the same Part 4 standard auto policy language to hold that an insurer is not required to pay a third-party claim for “inherent diminished value” of vehicle that was damaged and subsequently repaired and ruled accordingly.
The new rule on third-party IDV claims in Massachusetts not only presents new subrogation opportunities, but it also magically makes the smaller collision subrogation claims a little easier to settle. If a third-party liability carrier denies a small automobile property subrogation claim because it knows that filing suit will be expensive, you can now defeat this scorched earth liability claim tactic by advising that if they do not pay the subrogation property damage, you will have no choice but to get the insured involved along with his or her IDV claim. Suddenly, paying the smaller collision claim might be the smart choice.
The following are examples of states which 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.
For questions about the handling of subrogation claims in New England and northeastern U.S., contact Catherine Dowie at firstname.lastname@example.org. Beginning January 1, 2022, Catherine Dowie will be overseeing the newest Matthiesen, Wickert & Lehrer, S.C. branch office in Boston, Massachusetts.