Repairers should take note of several key points in the case of State Farm Mutual Automobile Insurance Co. v. Mabry in Georgia last year. ASA representatives are reviewing this case and additional materials addressing diminished value to determine the best policies for collision repairers.

In the case of State Farm Mutual Automobile Insurance Co. v. Mabry, the Supreme Court of Georgia ruled late last year that “the fact of physical damage resulting from an event covered by the policy can reduce the value of a vehicle, even if repairs return it to pre-loss condition in terms of appearance and function; the policies issued by State Farm obligate it to compensate its policyholders for that loss of value, notwithstanding repairs that return the vehicle to pre-loss condition in terms of appearance and function, if the repairs do not return the vehicle to its pre-loss value; and State Farm is obligated to that element of loss along with the elements of physical damage when a policyholder makes a general claim of loss.”

The insurance commissioner responded with the following new directive to insurers in Georgia:

“You are hereby directed to review this case and adjust claims accordingly, including assessment and payment of diminution of value relative to physical damage. Policyholders should be reimbursed consistent with the court's holdings and applicable language contained in the relevant policies issued by your company.”

Repairers should take note of the following key points in the case:

• State Farm contended the case infringed on the expertise of the insurance commissioner, that the insurance commissioner has exclusive jurisdiction over these issues, and the courts should defer to the commissioner. The court did not agree.
• The basic conflict in the case concerns the scope of State Farm's contractual promise to compensate its policyholders for their losses. The physical damage coverage in its policies provides that State Farm will “pay for loss to your car,” minus any deductible. The policy contains a provision limiting State Farm's liability to the lower of the actual cash value of the vehicle or the cost of repair or replacement, and a provision giving State Farm the right to settle a loss by paying up to the actual cash value of the car or paying “to repair or replace the property or part with like kind and quality.”

The plaintiff asserted that in almost every case, a vehicle that has been damaged in a covered event will suffer some diminution in value, regardless of the efficacy of the repairs undertaken, and that State Farm is liable to the policyholder for the amount of that diminution of value.

State Farm asserts that “questions of value arise only when the vehicle is assessed as a total loss or when repairs cannot return the vehicle to its pre-loss condition in terms of appearance and function. When the vehicle has been properly repaired, there is no objectively discernable diminution in value, and if there is such a loss, it would not be realized until the vehicle is sold.” State Farm also denied any “duty to assess vehicles for diminution of value unless the insured specifically makes a claim, separate from the original claim of loss, that the vehicle has lost value even though the physical damage to it was repaired.”

Questions for the Court:

a. Whether the fact of physical damage resulting from an event covered by the policy reduces the value of a vehicle, even if repairs return it to pre-loss condition in terms of appearance and function?

b. Whether the policies issued by State Farm obligate it to compensate its policyholders for that loss of value or permit it to discharge its responsibility under the policy by making repairs that return the vehicle to pre-loss condition in terms of appearance and function?

c. Is State Farm obligated to pay its policyholders for diminution of value?

d. Is State Farm required to assess that element of loss along with the elements of physical damage when a policyholder makes a general claim of loss?

The court held that there is a potential for a diminution of value loss in every event of loss and that diminution of value can occur even when a vehicle is repaired properly.

The court held that liability limitations affording the insurer an option to repair does not eliminate the insurer's liability for the difference between pre-loss value and post-loss value.

The court held that the “insurance policy,” drafted by the insurer, promises to pay for the insured's loss; what is lost when physical damage occurs is both utility and value; therefore, the insurer's obligation to pay for the loss includes paying for any lost value.

Finally, the policy does not include a requirement for a separate claim for diminution of value.

The last highlight has to do with insurers having a structure for determining diminished value. The court ordered State Farm to develop an “appropriate methodology” for making such evaluations; to collect, catalog and maintain any information necessary to determine the amount of any diminution in value; and to report to the court the manner in which it was complying with the injunction. Requiring the development of an appropriate methodology was necessary since the undisputed evidence shows State Farm had no such methodology in use.

The Automotive Service Association's leaders are reviewing the case and other supporting materials to determine the best policy for collision repairers relative to diminished value.

Bob Redding is the Automotive Service Association's Washington, D.C., representative. He is a member of several federal and state advisory committees involved in the automotive industry. For more information about the legislative activities of ASA, visit www.TakingTheHill.com.

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