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SUPREME COURT CLARIFIES DIMINUTION OF VALUE CASES
By Kevin McGilllicuddy - Parker & Associates

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SCHAEFER v. AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY, 47 Tex. Sup. Ct. J. 40 (October 17, 2003) (2003 WL 22417186)

FACTS – Gary Schaefer purchased a standard automobile insurance policy from American Manufacturers Mutual Insurance Company (AMM). That policy provides that AMM will pay for “direct and accidental loss to your covered auto….” The policy also contains a limitation of liability provision that provides in part, that the limit of liability is the lesser of the:
1. Actual cash value of the stolen or damaged property; or
2. Amount necessary to repair or replace the property with other of like kind and quality; or
3. Amount stated in the declarations of this policy.
The “payment of Loss” section of the policy also states, “We may pay for loss in money or repair or replace the damaged or stolen property”

In October of 1995, Schaefer’s vehicle was involved in an accident and an AMM adjuster inspected the vehicle. AMM elected to repair the vehicle. Schaefer did not dispute the quality or adequacy of the repairs, but maintained that the vehicle’s value decreased by $2,600 due to market perceptions that a damaged and subsequently repaired vehicle is worth less than one that has never been damaged.

CASE HISTORY – Schaefer sued AMM and several other carriers in a class action, arguing that AMM’s refusal to compensate him for the vehicle’s diminished value violated the Texas Insurance Code and breached the insurance contract. Before any class was certified, however, Schaefer filed a motion for partial summary judgment arguing that AMM was liable for his vehicle’s diminished value as a matter of law. AMM filed a cross-motion for summary judgment on the same issue, which was granted by the trial court. The court of appeals reversed the trial court’s summary judgment in AMM’s favor and held that Schaefer could see diminished value damages under the policy, and that the jury should determine whether the repairs did or could restore the vehicle to “substantially the same condition and value it had prior to the accident.

In a series of cases, three courts of appeals had recently issued opinions that disagreed on whether a carrier owes its insured for the diminished value of autos repaired under the Texas Standard Personal Auto Policy. In Carlton v. Trinity Universal Insurance Company, 32 S.W.3d 454 (Tex.App.—Houston [14th Dist.] 2000, writ denied), the court held that the carrier's limit of liability to its insured is “the lesser of the: (1) Actual cash value of the stolen or damaged property; (2) Amount necessary to repair or replace the property with other of like kind and quality; or (3) Amount stated in the Declaration of this policy.” In the cases discussed here, the insureds made no complaint about the quality of the repairs to their vehicles or whether their vehicles had been restored to their pre-damaged physical conditions. Rather, each claimed that their vehicles sustained an inherent diminished market value because of the damage to their vehicles, and each asked to be compensated by their carriers for this loss in market value, in addition to having their vehicles fully repaired. In Carlton, the court of appeals held that the carrier had no duty to pay its insured for diminished market value in addition to the cost of repairs. The same court followed this rule in the case of Smither v. Progressive County Mutual Insurance Company, 76 S.W.3d 719, (Tex.App.—Houston [14th Dist.] 2002, petition denied), holding that the "repair or replace" language in the Texas Personal Auto Policy requires the carrier only to pay the amount necessary to restore the damaged vehicle to substantially the same physical, operating, and mechanical condition as existed immediately before the loss. Additional payment for diminished value was held not to be required by the policy language. In two more cases, the Dallas and Beaumont courts of appeals disagreed, holding that in addition to paying to restore the insured vehicle to its pre-loss physical condition, the carrier is responsible to its insured for diminution of value to the vehicle. Bailey v. Progressive County Mutual Insurance Company, 78 S.W.3d 708 (Tex.App.—Dallas 2002, no writ); Schaefer v. American Manufacturers Mutual Insurance Company, 65 S.W.3d 806 (Tex.App.—Beaumont 2002, reversed and rendered at 47 Tex. Sup. Ct. J. 40 (October 17, 2003)). In Bailey, the court of appeals reasoned that to "repair or replace the property with other of like kind or quality" means the carrier must restore the vehicle to its pre-loss condition, including consideration for its pre-loss value. If the vehicle cannot be restored to its pre-loss value in addition to being fully repaired in the physical sense, the carrier owes its insured for that loss of value. The Bailey court also holds that it is not bound by a Texas Department of Insurance bulletin interpreting the contract language as Progressive would have it. The court of appeals in Schaeffer specifically held that the issue of whether a vehicle has been repaired to substantially the same condition and value it had before the damage occurred is a question of fact that must be decided by a jury rather than by the court, rejecting the reasoning in Carlton. Because of these directly conflicting decisions at the court of appeals level, the Texas Supreme Court accepted the carrier’s petition for review in Schaeffer.

HOLDING – The Texas Supreme Court reversed the judgment of the court of appeals and held that the policy in question does not obligate AMM to compensate Schaefer for his fully repaired vehicle’s diminished market value. The Court addressed Schaefer’s argument that the diminished value of his vehicle was a “direct or accidental loss” that AMM is required to compensate under the policy’s language requiring AMM “to repair or replace” with “other of like kind and “quality. Schaefer also argued that the policy did not expressly exclude diminished value from coverage in the “Exclusions” section. AMM countered that while the term “loss” could encompass diminished value, the “Limit of Liability” section limits the carrier’s liability to the lesser of the vehicle’s actual cash value or the amount necessary to repair or replace it. AMM argued that “repair or replace” does not contemplate any concept of “value.” The Supreme Court agreed that the policy’s language is unambiguous and does not require payment for diminished value when the vehicle has been fully and adequately repaired. The ACV or “repair or replace” language in the “Limit of Liability” section does not extend to payment for diminution of value. Rather, the plain meaning of AMM’s obligation was “to restore the vehicle, either through repair or replacement, to the same physical and operating condition it was in before the damage occurred.” In addition, to require payment for diminished value would render meaningless the policy provision for payment of “the lesser of” ACV or the amount necessary to repair or replace the vehicle. The “Payment of Loss” provision would also be meaningless if the carrier had the responsibility to repair and also pay money for diminished value. The Court also writes that the absence of any reference to diminution of value in the Exclusion section does not confer coverage that does not exist under other policy provisions. Here, there was also no breach of the policy provisions resulting from faulty repairs. If the contract had been breached in that fashion, then the insurer might be liable for breach of contract, but Schaefer would still only be entitled to the remedies outlined in the policy, which do not provide for a fully repaired vehicle’s diminished market value.

SIGNIFICANCE – Keep in mind that these cases only address an insurer's duty to its insured under the Texas Standard Auto Policy. These cases do not address what damages should be paid to a third party, and there is somewhat stronger authority that a third party may be compensated for diminution in value of property in addition to the cost of repairs. In fact, in Schaeffer, the Texas Supreme Court states that a diminished value measure of damages “may apply when the insurer’s obligation is based on the policy’s liability coverage, which is described in a different section of the policy and is designed to protect the insured’s obligation to pay for injury to a third party that the insured’s tortuous conduct causes” In a Texas Department of Insurance Commissioner’s Bulletin, No. B0027-00 (April 6, 2002), the TDI also took the position that “An insurer also may be obligated to pay a third party claimant for any loss of market value of the claimant’s automobile, regardless of the completeness of the repair, in a liability claim that the third party claimant may have against a policyholder.”


Submitted by:

J.T. Parker & Associates, L.L.C.

1341 W. Mockingbird Ln., Suite 300W

Dallas, TX 75247

214.631.1000

214.631.3700 Fax

www.parkerclaims.com

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