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Since 2001 the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) there has been serious concern in the insurance industry about how a court could change the wording of an insurance policy agreed to by the insurer and the insured.
Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property that has been repaired Zalma on Diminution In Value Damages – 2013 was created to assist insurance professionals to answer the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions. It was designed to allow the reader to find the answer in the appropriate jurisdiction when asked what is the proper measure of damage:
• Is it cost of repair? • Is it the difference between fair market value before and fair market value after it is damaged? • Is it the cost of repair plus stigma damages? • Is it the cost of repair plus the difference between fair market value before and fair market value after it is damaged? • Is it something in the middle? • Is it none of the above? • Is it all of the above?
The answer to the questions depends on the state where the claim is presented and, when insurance is involved, the wording of the policy.
The subject of diminution of value damages when applied to insurance claims caused serious concern to the insurance industry because insurers believed their policies were clear and were only required to pay to the insured what was promised: the cost of repair using material of like kind and quality. It also caused concern to appraisers, adjusters, lawyers and every person who were called upon to deal with claims of property damage and the limitations of a policy of insurance.
Insurance policies, by definition, promise to indemnify the person(s) insured against certain specified risks of accidental loss that is either contingent or unknown at the time the policy is acquired. The methodology used to establish the appropriate amount to indemnify the injured party for damage to his or her property seems different in each decision. When called upon to determine which measure of damages is to be used tends to be different from state to state and from U.S. District Court of Appeal to District Court of Appeal. Determining the amount of indemnity recoverable – whether cost of repair, diminution in value or some combination of both – also varies from jurisdiction to jurisdiction.
Zalma on Diminution In Value Damages – 2013 provides an analysis of the decisions of the appellate courts of the fifty states of the United States, the District of Columbia, Guam, Puerto Rico, the 12 Federal Circuit Courts of Appeal and the U.S. Supreme Court. Zalma on Diminution of Value Damages – 2013 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and deals with the issue of establishing the amount of loss to property in each jurisdiction that has written on the issue.
The E-book covers in detail how each of the jurisdictions who have been asked to do so determine recovery of insurance proceeds for damage to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, whether insured or not, to determine how to calculate what they must pay to those whose property is damaged by their actions.
Insurance and Diminution of Value Claims
Since insurance was invented in ancient Sumeria when insurance policies were written on clay tablets there have been disputes between the insured and the insurer. Since tort law first came into existence before the writing of the Old Testament there have been disputes between the tortfeasor and the victim as to the extent of the damages recoverable. Insurers and their insureds continue to struggle with establishing a fair method to properly compensate the person insured for the property lost or damaged as a result of a peril insured against. Insurance, by definition, is a contract where one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The key item of dispute is to determine how much is needed to indemnify the person insured.
The concept of indemnity requires that the person indemnified receives sufficient funds to put him or her back in the financial place he or she was in moments before the loss. The U.S. Supreme Court, in 1915, said: “Indemnity means an obligation to make good a loss…” On its face, calculating indemnity seems to be a simple task. As the cases in Zalma on Diminution of Value Damages – 2013 are reviewed, the reader will understand that the task is not as simple as it seems. The reader, after reviewing the cases, will be in a position to understand why diminution in value is a concept that has given litigants, insurers and courts serious concerns and has generated what seems to be a constant deluge of litigation. Since few jurisdictions agree completely on the method to properly compute damages or to properly indemnify the persons insured by an insurance policy courts have considered diminution in value of property damaged in an accident and repaired justify as one method of reaching true indemnity.
Common sense indicates that the measure of damages should be that amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury or the amount promised by an insurance policy. The proper measure is often difficult to determine and no single measure fits every type of damage. The measure of damages, true indemnity, seldom fit into a hard rule of thumb. Every possible means of providing complete indemnity can be, and is, considered when dealing with tort damages, contract damages, and the proper amounts of payment required by a contract of insurance.
The courts of the various states and federal jurisdictions do not use identical rules to calculate the proper measure of damages. To understand the issue and to apply the proper remedy requires an understanding of how each state applies, what it believes to be, the proper measure of damages for tort, for contract breaches and for insurance claims situations. Each court should reach the result of true indemnity. However, the diversity of opinion is the rule rather than the exception and that is the reason Zalma on Diminution of Value Damages – 2013 was created.
Automobile insurance policies usually promise to pay the insured, when an automobile is damaged by collision or some other insured cause, the costs to repair the vehicle or if unrepairable, the actual cash value of the vehicle. Most policies say nothing about the difference in value of a vehicle that is repaired after an accident. Because the policies are silent and only promise repair or actual cash value, insurers believed it was unnecessary to even mention in the policy the difference in value before the accident and the value after repairs are completed.
No promise was made to pay for more than actual cash value or the cost of repair, whichever is less. The issue was with regard to damage to automobiles and loss in value after repairs were completed was ignored until the 2001 decision of the Georgia Supreme Court in State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) (“Mabry”). Mabry raised serious concern among insurers because it required payment of sums greater than that for which a premium was collected. It awarded the insured both the cost to repair and the diminution in value of the car after it was repaired.
Insurers believed the Mabry decision was a judicial rewriting of the wording of the policy. Lawyers for policyholders found it to be a means of giving true indemnity to their clients as well as an invitation to file multiple, profitable lawsuits against insurers. Mabry’s success in Georgia generated suits across the country seeking recovery for diminution of value from insurers and third-party-defendants. The attempt to convince other states to follow Georgia had limited success.
Since Mabry virtually all of the courts finding no coverage for diminution of value have done so because the word “repair” has a plain meaning that does not encompass payment for the diminished market value after the repair is completed. Rather, the plain meaning of repair contemplates physical restoration. Many insurers, to avoid argument, now add to their policy’s wording, endorsements or definitions, that establish that the insurer does not intend to, nor will it, pay for diminution of value after the automobile was repaired while others have simply increased premium to cover the additional payments.
When property of any kind is damaged and repaired the resale value of the property can easily be diminished because of the stigma carried by the repaired vehicle or property. An automobile is likely to suffer this type of diminution in value after it is damaged in an accident and repaired more than other types of property. The resale value of an automobile most likely will be less for one repaired after an accident than that for a comparable automobile that has not been damaged and repaired. This is not true, however, of all types of property. A 50-year-old house that is damaged by fire and rebuilt, new for old, will usually be more valuable than it was before the fire.
The fact of the accident and damage, even if repaired perfectly, results in a reduction — or “diminution”— in the resale value of the automobile causes those insured to claim they have not received what they were promised by the policy, true indemnity. Insurers counter that they never promised to provide a vehicle of the same value after an accident than the value it had before the accident. The insurer only promised to repair the vehicle using material of like kind and quality.
When real property is repaired replacing old material with new the resale value of the real property is often increased. No court I have been able to find has suggested that the insurer is entitled to a reduction in its payment for repair because the insured profits from the repair of a structure and is not, therefore, truly indemnified because the insurer promised to replace old with new and to even bring an old building up to modern codes at no cost to the person insured.
When the property is insured, the 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 key to recovery of the diminution in value depends on the particular state where the damage occurs, the wording of the insurance policy involved, mandates by regulation from state insurance departments, statutes enacted by state legislatures and the holding of the various courts.
Although there appears to be nothing in insurance policy wording that even appears to contractually cover any reduction in market value of an automobile some courts, like the Supreme Court of Georgia, require that the insurer pay more than the cost of repair to achieve total indemnification. Most policies of insurance that insure property up to its actual cash value allow the insurer to deduct for “betterment” or depreciation. The burden of proof is on the insurer to demonstrate such depreciation or betterment is appropriate to indemnify the insured with money the value lost as a result of the insured casualty.
In physical damage claims, the policy would allow the carrier to deduct for an “improvement” in value (i.e., betterment) due to repairs with newer parts, but states nothing about compensating the insured for a reduction in value due to the same accident. Third-party claims (claims against an insured person for damages done to the property of some third person) for “diminution of value,” on the other hand, have generally been found by the courts to be covered by auto insurance since the measure of damage in tort claims (which the insurer promises to pay) is the difference in value of the property before the loss and the value of the property after the loss.
For example, Texas court cases have found that legal liability for third-party damages include diminution of value. However, no single measure of damages can serve in every case to adequately compensate an injured party. For the award of damages to be fair, recognizing that diminution of value is not always an accurate method of providing true indemnity, an award of restoration damages, according to some courts, must be available to compensate a plaintiff fully for damages to property when diminution in value fails to provide an adequate remedy.
The general rule in tort cases where one party causes damage to the property of another the measure of damages is not the cost of repair of the property but, rather, the standard measure is the difference between the value of the property before and after the injury, or the diminution in value, unless the cost of repairing the injury and restoring the premises to their original condition amounts to less than the diminution in value of the property, and then the cost of repair is the proper measure of damages.
If the cost of restoration will exceed such diminution in value, then the diminution in value of the property is the proper measure. That rule seems to be in flux and most courts seem to be moving toward a more flexible rule where the measure of damages is considered the amount necessary to compensate the injured party for the damages proximately caused by the conduct of the person causing injury regardless of the method used to calculate those damages.
Some states apply the rules strictly, some apply the general rule of fairness, others apply the rule in one way when dealing with tort damages, another when dealing with contract damages and a third when dealing with insurance claims.
The Insurance Services Office (“ISO”) has issued an endorsement, to avoid the diminution of value issue, that reads:
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.
COVERAGE FOR DAMAGE TO YOUR AUTO EXCLUSION ENDORSEMENT
With respect to the coverage provided by this endorsement, the provisions of the policy apply unless modified by the endorsement.
I. Definitions
The following definition is added:
“Diminution in value” means the actual or perceived loss in market or resale value which results from a direct and accidental loss.
II. Part D – Coverage For Damage To Your Auto The following exclusion is added:
We will not pay for:
Loss to “your covered auto” or any “non-owned auto” due to “diminution in value”.
This endorsement must be attached to the Change Endorsement when issued after the policy is written. [Personal Auto form PP 13 01 12 99]
The E-book is available at
© 2014 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Mr. Zalma recently published the e-books, “MOM and the Taipei Fraud;” “Zalma on Insurance Fraud – 2013”, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Diminution in Value Damages – 2013,”“Zalma on Insurance,” “Heads I Win, Tails You Lose,” “Arson for Profit” and others that are available at
Specialty Technical Publishers recently published Mr. Zalma’s new E-Book, “Getting the Whole Truth” which is available at
Specialty Technical Publishers publishes Mr. Zalma’s book, “Insurance Claims: A Comprehensive Guide” where you can get additional details on this subject by purchasing the book in print or digital format at
Mr. Zalma’s reports on web based television programing,or at the bottom of the home page of his at
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