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Diminished Value Insurance Claims for Real Property – An Impossible Measure of Damages?
The Georgia Supreme Court weighed in on the applicability of its ruling in State Farm Mut. Auto. Ins. Co. v. Mabry, wherein it ruled that diminution of value was a recoverable component of a loss in first party insurance physical damage claims for automobiles, to Royal Capital Development, LLC v. Maryland Cas. Co., a case that is currently pending in the 11th Circuit of Appeals. In response to the 11th Circuit’s certified question regarding the applicability of Mabry to Royal Capital, the Georgia Supreme Court answers that its ruling in Mabry does indeed apply to the facts considered in Royal Capital. The Royal Capital case involves a commercial real estate property insurance policy and a claim by the policyholder for diminished value of the insured property.
Earlier Guidance From the Georgia Department of Insurance
Prior to the Supreme Court’s ruling in Royal Capital, the Georgia Insurance Department issued Directive 10-EX-1, dated April 21, 2010, which announced the Department’s position that the ruling in Mabry applied to claims made under commercial insurance policies covering real estate. This Directive ultimately had little impact on the adjustment of property claims, however, and it was withdrawn nine months later by Directive 11-EX-1, dated January 10, 2011. The ruling of the Supreme Court is another matter altogether.
The Supreme Court’s answer to the 11th Circuit’s certified question does not restrict the application of Mabry only to commercial property insurance claims, rather the Supreme Court indicated that “Mabry is not limited by the type of property insured, and speaks generally to the measure of damages an insurer is obligated to pay” for an insured loss. Thus, it appears that diminished value is a valid component of any property insurance claim. The difficulty in measuring diminished value cannot be overstated, as it is inherently subjective and even the Department has had trouble articulating an objective standard for the diminished value concept announced in Mabry over 10 years ago. See, Directive 08-PC-2.
Challenges and Possible Solutions
The challenges to insurers are substantial, indeed. Diminished value claims are almost always speculative because the actual measure of the damage, i.e., the sale of the property, which in theory establishes the existence and amount of diminished value of previously damaged property, has not occurred. In the context of automobiles, establishing a rational basis to measure diminished value is less of an issue because there is a fairly vibrant secondary auto purchase and sale market and many companies aggregate and catalog auto sales data; i.e,. Kelly Blue Book, N.A.D.A. and the like. For real property, this is not the case. For starters, the real property market remains volatile and all real property has suffered substantial devaluation post-2008. In addition, real property is unique, whereas the vast majority of automobiles are substantially the same or identical. The bottom line is that for real property, diminished value as a component of damages may prove too subjective and speculative for any meaningful regulatory guidance to be formulated, short of a mechanical, and perhaps somewhat arbitrary, rule, which should be avoided.
To deal with the Supreme Court’s expansion of the Mabry ruling, insurers should consider amending or refilling insurance policy forms to include exclusions from coverage for diminished value claims. Alternatively, the property industry as a whole could seek legislative remedies or petition the Department to promulgate a regulation that provides standards for the determination of the amount of diminished value loss claims. Care should be taken in the development of any regulatory guidance to avoid mechanical rules which increase the risk of the creation of a convenient class of persons upon which the plaintiff’s bar can base a class action.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors:
Brian T. Casey | T: 404-870-4638 | firstname.lastname@example.org
Trey L. Sivley | T: 404-870-4657 | email@example.com