Diminishing Value: The Trend Against Coverage under Personal Automobile Policies

Last year—2003—was the year for multiple state high court decisions that held the personal automobile insurer is not required to pay for diminished value of a fully and adequately repaired vehicle. The South Carolina, Massachusetts, and Texas supreme courts all ruled that there is no coverage under the comprehensive or collision coverage in the personal automobile policy for any diminution in market value where there is no dispute that the vehicle was adequately restored to its pre-accident level of performance, appearance, and function. These decisions preclude the possibility of coverage for the value of the stigma associated with an automobile that has been wrecked.¹

South Carolina Supreme Court

On March 24, 2003, the South Carolina Supreme Court ruled in Schulmeyer v State Farm Fire & Cas., 579 SE2d 132 (SC 2003). Schulmeyer sustained damages to his automobile as the result of an accident. The State Farm adjustor estimated the loss at $3,268.02, and State Farm paid the amount of the loss less the deductible. There is no dispute that the vehicle was fully and properly repaired. However, Schulmeyer argued that State Farm failed to compensate him for an additional $1,000 in "diminished value" to the vehicle, which occurred as a result of the accident.

The State Farm contract at issue provided:

The limit of our liability for loss to property or any part of it is the lower of:

1. the actual cash value; or
2. the cost of repair or replacement

Actual cash value is determined by the market value, age and condition at the time the loss occurred. Any deductible amount that applies is then subtracted.

The State Farm policy defined the terms "cost of repair or replacement" as:

1. the cost of repair or replacement agreed upon by you and us;
2. a competitive bid approved by us; or
3. an estimate written based upon the prevailing competitive price ... [which] means prices charged by a majority of the repair market in the area where the car is to be repaired ...

Additionally, the State Farm policy explicitly reserved the insurer's right to indemnify the insured "for the loss in money or may repair or replace the automobile or such part thereof, as aforesaid." The court applied basic rules of contract construction and looked to the common meaning of the terms "repair" and "replace." The court reasoned:

• Generally, "repair" means "[t]o mend, remedy, restore, renovate ... [t]o restore to a sound or good state after decay, injury, dilapidation, or partial destruction." Black's Law Dictionary 1298 (6th ed., 1990); see also Webster's II New College Dictionary 939 (1995) ("repair" means "[t]o restore to sound condition after damage or injury ..."); Merriam-Webster's Collegiate Dictionary 991 (10th ed., 1999) ("repair" means "to restore by replacing a part or putting together what is torn or broken").

• In the context of an insurance contract the word "replace" means the insurer will "restore [the insured's vehicle] to a former place or position," or "take the place of ... as a substitute or successor." See Siegle v Progressive Consumers Ins., 819 S2d 732, 736 (Fla 2002); see also Merriam-Webster's Collegiate Dictionary 992 (10th ed., 1999). [Id. at 498.]

The South Carolina Supreme Court concluded there is no concept of value in the ordinary meaning of the words "repair" and "replace," adopting the majority's view. The court reasoned that the policy, read as a whole, defines repair or replacement as restoring the vehicle to pre-accident mechanical function and condition and not as restoring value. The court therefore concluded that if it were to read value into the repair clause, it would arbitrarily read out of the policy the insurer's right to determine whether to repair the vehicle or to pay for its loss. Essentially, the court reasoned, that by reading in a value element, the insurer would always pay for the value of the car. Id.

Massachusetts Supreme Court

Then, on October 7, 2003, the Massachusetts Supreme Judicial Court ruled exactly the same on the same issue in Given v Commerce Ins., 796 NE2d 1275 (Mass 2003). Commerce issued Given a standard Massachusetts automobile insurance policy. Part seven of the standard policy provides in pertinent part that:

• We [the insurer] will pay for any direct and accidental damage to your [the insured's] auto caused by a collision.... We will pay for each loss up to the actual cash value of the auto or any of its parts at the time of the collision. If the repair of a damaged part will impair the operational safety of the auto, we will replace the part.

Paragraph eleven of the general provisions and exclusions section of the standard policy provides for appraisals of vehicles following a collision, payment of repair costs either to the insured or directly to a repair shop, and reinspection following repair. The insured may elect not to have the vehicle repaired, in which case the insurer "will determine the amount of decrease in the actual cash value of [the insured's] auto and pay [the insured] that amount less [the] deductible." Paragraph eleven then specifies the following cap on payments for collision damage: "In any event, we will never pay more than what it would cost to repair or replace the damaged property."

Given presented a claim to Commerce, and Commerce paid $5,287 to have her vehicle repaired after an accident. Given made an additional claim for $1,414.70 as a result of the alleged inherent diminished value of her vehicle.

At issue was whether "inherent diminished value" is included within the term "direct and accidental damage to [an] auto caused by a collision," as that is the "damage" compensable under part seven of the standard policy. The court interpreted the words of the policy in light of their plain meaning and according to the reasonable expectations of the insured. The court held that under the express terms of the standard policy, Given was entitled to compensation either for diminution in value caused by the collision (if she chose not to repair her vehicle) or for the cost of repair (if she chose to have repairs performed). The court held that Given was not entitled to both under the policy. The court held that the express limitation set forth in paragraph eleven of the general provisions and exclusions eliminated any question of ambiguity: "In any event, we [the insurer] will never pay more than what it would cost to repair or replace the damaged property."

Having paid for the full cost of repairing the vehicle, the court held Commerce was not obligated to pay anything more under any theory. In other words, according to the court, the policy expressly excluded payment of any amount higher than repair or replacement costs, and thus expressly excluded compensation for inherent diminished value when the insurer has already paid for the repair or replacement of all damaged parts of the vehicle. Id. at 1279.

The court then turned to the plain meaning of the terms "repair" and "replace" and held that no reasonable insured could conclude that those terms include "compensation for diminution in market value or for anything else beyond restoration of the vehicle's precollision physical condition." Id. at 1280.

The Massachusetts court then scoured the statutes regulating automobile insurance coverage and found nothing referencing coverage for inherent diminished value. The court held that the absence of such reference makes apparent that the Commissioner of Insurance does not interpret the standard policy's collision coverage to encompass compensation for inherent diminished value in addition to compensation for the cost of repairs. Id. at 1281 citing Colby v Metropolitan Prop. & Cas. Ins., 652 NE2d 128 (Mass 1995) ("[commissioner] decides what the terms of a standard policy will be ... and the commissioner's interpretation of the relevant statutes, although not controlling, is entitled to deference").

Texas Supreme Court

On October 17, 2003, the Texas Supreme Court handed down its decision in American Manufacturers Mutual Ins. v Schaefer, 124 SW3d 154 (Tex 2003). In this highly anticipated case, the Texas Supreme Court considered whether the Texas standard personal auto policy obligates an insurer to compensate a policyholder for a vehicle's diminished market value when the vehicle has been damaged, but adequately repaired. The supreme court held that a personal auto policy does not require the insurer to pay for the diminished value of a fully and adequately repaired vehicle, abrogating State & County Mut. Fire Ins. v Macias, 83 SW3d 304;²Bailey v Progressive County Mut. Ins., 78 SW3d 708;³Smith v American Fire & Cas., 242 SW2d 448; and disapproving Fid. & Cas. Co. of NY v Underwood, 791 SW2d 635; Northwestern Natl. Ins. v Cope, 448 SW2d 717; Queen Ins. Co. of Amer. v Dominguez, 426 SW2d 286; Agric. Workers Mut. Auto. Ins. v Dawson, 424 SW2d 643; American Standard Cty. Mut. Ins. v Barbee, 262 SW2d 122.

Schaeffer was involved in an auto accident in October 1995. His insurer, American Manufacturers Mutual Insurance Company (AMM), inspected the vehicle and elected to repair it. Thereafter, Schaeffer did not dispute the quality or adequacy of the repairs, but he asserted that, under the terms of his personal auto policy, AMM should compensate him for $2,600 in decreased market value resulting from market perceptions that a damaged and subsequently repaired vehicle is worth less than a vehicle that was never damaged. When AMM refused to do so, Schaeffer filed a lawsuit against AMM and other insurers offering policies with the same standard language, asserting AMM's refusal to compensate him for the diminished value violated the Texas Insurance Code and breached the insurance contract.

Before the class was certified, Schaeffer filed a motion for partial summary judgment asserting AMM was liable for his vehicle's diminished value as a matter of law. AMM responded with a cross-motion for partial summary judgment on the same issue. The trial court granted AMM's motion and denied Schaeffer's.

Schaeffer appealed, and the court of appeals reversed the trial court's summary judgment in favor of AMM, holding Schaeffer could seek diminished-value damages under the policy and that a jury should determine whether the repairs did or could restore the vehicle to "substantially the same condition and value" it had before the accident. In doing so, the court of appeals⁴ joined two other courts of appeals in declining to follow a previous decision by the Fourteenth Court of Appeals at Houston, in Carlton v Trinity Universal Ins., 32 SW3d 454 (Tex App—Houston [14th Dist] 2000, pet. denied), which held that the same policy language did not obligate an insurer to pay diminished-value damages for a vehicle that was adequately repaired. The supreme court further noted that courts in other states are split on this issue as well.

Upon review before the supreme court, Schaeffer argued that a vehicle's diminished market value is a "direct or accidental loss" that AMM is required to compensate under the policy's insuring agreement. Schaeffer further argued that construing the policy otherwise frustrates its underlying purpose to fully indemnify the insured, and that, based on authority from Texas and other jurisdictions, the policy language requiring AMM to pay the amount necessary "to replace or repair" with "other like kind and quality" contemplates the payment of diminished value. Finally, Schaeffer contended that AMM's obligation to compensate for the diminished value was further supported by the policy's failure to expressly exclude diminished value from coverage under its "Exclusions" section.

Conversely, while AMM did not dispute that the term "loss" could encompass diminished value, it argued that the insuring language must be construed in light of the "Limit of Liability" section which limits the insurer's liability to the lesser of the vehicle's actual cash value or the amount needed to replace or repair it. AMM also cited authority from both Texas and other jurisdictions to support its argument, and further requested the supreme court consider the Texas Department of Insurance's interpretation of the policy language as not obligating an insurer to pay for a fully repaired vehicle's diminished value.

Importantly, the supreme court agreed with AMM's assertions that the policy's plain language, when read in context, is unambiguous and does not require payment of diminished market value when a vehicle has been fully and adequately repaired. The supreme court stated:

• The concept of "repair" with regard to a vehicle connotes something tangible, like removing dents or fixing parts. [ ]. We do not believe that the ordinary or generally accepted meaning of the word "repair" connotes compensating for the market's perception that a damaged but fully and adequately repaired vehicle has an intrinsic value less than that of a never-damaged car. To expand the ordinary meaning of "repair" to include an intangible, diminished-value element would be "ignoring the policy['s] language or giving the contract['s] text a meaning never intended." [Schaeffer, 124 SW3 at 158-59 (citations omitted).]

The court also focused on reading the policy as a whole and giving effect to each provision, further instructing:

• Interpreting the policy's "repair or replace" language to include diminished value, as Schaefer urges, would render other provisions of the policy meaningless. The policy provides that the insured is entitled to "the lesser of" actual cash value or the amount necessary to repair or replace the vehicle. To incorporate diminished value into the "repair or replace" provision would render the "lesser of" language meaningless. The insurer's obligation to compensate the loss would be cumulative—repair or replace and pay diminished value—in effect insuring the vehicle's "actual cash value" in every instance and undermining the insurer's right under the policy to choose a course of action. [Id. at 159 (emphasis in original).]

Finally, in reaching its conclusion, the Texas Supreme Court acknowledged that diminished value claims have taken many forms, including when repairs are incomplete or faulty or when the insurer elects to repair the vehicle when declaring a total loss is the better option. Importantly, the court noted, the facts in Schaeffer presented neither scenario. Instead, the insurer elected to repair the damaged vehicle and Schaeffer did not contend those repairs were faulty, incomplete or inadequate. The court opined that if Schaeffer did assert such claims, the insurer might be liable for breaching its obligations under the terms of the policy, but Schaeffer would still only be entitled to those remedies outlined in the policy, which did not include compensation for a fully repaired vehicle's diminished market value.

The court further acknowledged that Schaeffer's repaired vehicle may sell for less money than would a similar vehicle that was never damaged, and that awarding Schaeffer diminished value in addition to the repair would go further to make him whole, but "the court may neither rewrite the parties' contract nor add to its language." Schaefer, 124 SW3d at 162. Accordingly, the supreme court reversed the judgment of the court of appeals and rendered judgment in favor of the insurer, concluding that the standard Texas personal auto policy does not obligate insurers to compensate insureds for diminished value when their vehicles are fully and adequately repaired.

¹Despite this recent trend from the high courts, there remains a split of authority on whether the personal auto policy insures the diminished value of an automobile after adequate repairs have been made. The majority view holds that diminution in value is not covered based on the rationale the terms "repair" and "replace" are not ambiguous when viewed in light of the entire contract. The courts apply the commonly used definition of those words to limit recovery. See, e.g., Manguno v. Prudential Prop. & Cas. Ins., 276 F3d 720 (5th Cir 2002); Driscoll v State Farm Mut. Auto. Ins., 227 F Supp 2d 696 (ED Mich 2002); Pritchett v State Farm, 834 S2d 785 (Ala Civ App 2002); Johnson v State Farm Mut. Auto. Ins., 157 Ariz 1, 754 P2d 330 (1988); Ray v Farmers Ins. Exch., 200 Cal App 3d 1411, 246 Cal Rptr 593 (1988); O'Brien v Progressive N. Ins., 785 A2d 281 (Del 2001); Siegle v Progressive Consumers Ins., 788 S2d 355 (Fla App 2001); General Accident Fire & Life Assur. v Judd, 400 SW2d 685 (Ky 1966); Campbell v Markel Amer. Ins., 822 S2d 617 (La App 2001); Townsend v State Farm Mut. Auto. Ins., 793 S2d 473 (La App 2001); Hall v Acadia Ins., 801 A2d 993 (Me 2002); Lupo v Shelter Mut. Ins., 70 SW3d 16 (Mo App 2002, transfer denied); Camden v State Farm Mut. Auto. Ins., 66 SW3d 78 (Mo App 2001, transfer denied); Spellman v Sentry Ins., 66 SW3d 74 (Mo App 2001, transfer denied); Bickel v Nationwide Mut. Ins., 143 SE2d 903 (Va 1965).

Then there are those minority of cases that support recovery for diminution in value. See MFA Ins. v Citizens Natl. Bank of Hope, 545 SW2d 70 (Ark 1977); Hyden v Farmers Ins. Exch., 20 P3d 1222 (Colo App 2000); State Farm Mut. Auto. Ins. v Mabry, 556 SE2d 114 (Ga 2001); Venable v Import Volkswagen, 519 P2d 667 (Kan 1974); Potomac Ins. v Wilkinson, 57 S2d 158 (Miss 1952); Barton v Farmers Ins. Exch., 255 SW2d 451 (Mo App 1953); Eby v Foremost Ins., 374 P2d 857 (Mont 1962); National Farmers Union P&C Watson, 298 P2d 762 (Okla 1956); Dunmire Motor v Oregon Mut. Fire Ins., 114 P2d 1005 (Or 1941); Pierce v American Fid. Fire Ins., 83 SE2d 493 (NC 1954); Senter v Tennessee Farmers Mut. Ins., 702 SW2d 175 (Tenn App 1985) overruled by Black v State Farm Mut. Auto. Ins., 101 SW3d 427 (Tenn App 2002) cert. denied No. E2002-0206-SC-R11-CV (Tenn March 17, 2003).

The minority view espoused by the Georgia Supreme Court in State Farm Mut. Auto. Ins. v Mabry, 556 SE2d 114 (Ga 2001), allows recovery for diminution in value. The Georgia court based its decision on the public policy understanding implicitly imported into each Georgia insurance contract that loss due to physical damages encompasses both utility and value. As such, an insurer is obligated under Georgia law to pay the cost of repairs and diminution in value. This public policy exception is not applicable in Massachusetts, South Carolina, and Texas, where instead, the courts are required to give effect to the plain meaning of the words in an unambiguous contract.

²See State & County Mut. Fire Ins. v Macias, __ SW3d __, 2004 WL 326706 (Tex 2004) (per curiam) (reversing and rendering, without hearing oral argument, based on supreme court's holding in Schaeffer regarding diminished market value).

³See Progressive County Mut. Ins. v Bailey, __ SW3d __, 2004 WL 326707 (Tex 2004) (per curiam) (reversing and remanding, without hearing oral argument, based on supreme court's holding in Schaeffer regarding diminished market value).

⁴See State & County Mut. Fire Ins. v Macias, 83 SW3d 304 (Tex App—Corpus Christi 2002, pet. filed); Bailey v Progressive County Mut. Ins., 78 SW3d 708 (Tex App—Dallas 2002, pet. filed).

Dana Harbin is an attorney in the Dallas office of Cooper & Scully, P.C. where she specializes in insurance coverage and bad faith involving all types of insurance policies, both first and third party. Ms. Harbin earned her BA degree from the University of Texas in Arlington and her JD degree from the University of Texas at Austin. She can be reached at