The Georgia Supreme Court recently faced the question of whether an insured could be compensated by its insurer for both the cost of repair and the diminution in value of damaged real property. The issue was one of first impression in Georgia, and the court’s decision to allow recovery of both measures of damages is a unique and important decision for insurers and insureds.
Damages for injury to both real and personal property are typically measured according to one of two theories: either the property owner can recover the cost of replacement, repair, or restoration; or the property owner can recover the diminution in value. Rarely have courts allowed an injured party to recover damages for both the cost of repair and the loss of value. These principles apply to recovery under an insurance policy but the insurer is required “to restore the insured to the same position as before the event only to the extent required by the policy terms.” Allgood v. Meridian Security Ins. Co., 836 N.E.2d 243 (Ind. 2005). The insurance policy controls the obligations but will be read in light of the principles for measuring damages.
In Royal Capital Development, LLC v. Maryland Casualty Company, 2012 Ga. LEXIS 501, the insured owned a building that was physically damaged because of construction activity on an adjacent property. The insurer acknowledged that damage to the property was covered by the policy, but a dispute arose as to the proper measure of damages. The policy provided that the insurer had the option to cover either “the cost of repairing the building” or the “loss of value” to the property. In this case, the insurer compensated the insured for the cost to repair the building but refused to further provide for the diminution in value resulting from the stigma of the physical damage.
It has long been the law in Georgia that under an automobile policy, “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.” The insured, in the case of State Farm Mutual Auto. Ins. Co. v. Mabry, 556 S.E.2d 114 (Ga. 2001), argued that this same principle should also extend to real property. The insurer responded that the rule does not appropriately translate to real property because cars are much more likely to suffer a loss in value after damage and repairs than real property. The insurer further argued that the plain language of the contract gave it the option to pay either the cost of repair or the lost value, but it was not obligated to pay both.
In Royal Capital, the court recognized that “a plaintiff is entitled to only one recovery and satisfaction of damages” and that “different means of measuring damages are not to be so applied as to give double damages for the same thing,” but concluded that where the repair does not fully restore the property to its pre-damaged value, an insured may also be compensated for diminution in value.
The Georgia Supreme Court is not alone in its opinion. The Washington Supreme Court has similarly held that where damage to real property is permanent, a plaintiff is entitled to recover not only for the costs of restoration and repair, but also for the property’s diminished value, according to the case of Mayer v. Sto Industries, Inc., 132 P.3d 115 (Wash. 2006). But this is not the majority view.
Courts are split on whether an insured can recover for both the cost of repair and the loss of value in the context of automobile insurance. Many courts do not allow an insured to recovery under both theories of damages. In Allgood, The Indiana Supreme Court determined, “The policy provides that the insurer may choose to pay either the actual cash value of the vehicle or the amount necessary to repair, not some combination of the two.”
In American Manufacturers Mutual Ins. Co. v. Schaefer, 124 S.W.3d 154 (Tex. 2003), The Supreme Court of Texas came to the same conclusion and noted that if an insurer was obligated to pay both, “The insurer’s obligation to compensate the loss would be cumulative—repair or replace and pay diminished value…”
And in the case of Driscoll v. State Farm Mutual Auto. Ins. Co., 227 F.Supp.2d 696 (E.D. Mich. 1002), a federal court in Michigan held that “These are alternatives and do not include the addition of an obligation to pay for diminished value to the car. Reading into the cost of repair a requirement to also pay for diminished value would render the limitation provision meaningless, as the insurer would essentially always pay for the value of the car.” These interpretations adhere to the traditional rules for calculating damages and are also consistent with a plain reading of the policy language.
Other courts, however, have been more liberal in their analyses and have ruled in favor of an insured arguing for recovery of both measures of damages. See e.g., Edwards v. Maryland Motor Car Ins. Co., 197 N.Y.S. 460 (N.Y. Sup. Ct. 1922); Coleman v. Levkoff, 122 S.E. 875 (S.C. 1923); Senter v. Tennessee Farmers Mutual Ins. Co., 702 S.W.2d 175 (Tenn. Ct. App. 1985); Moeller v. Farmers Ins. Co. of Wash., 229 P.3d 857 (Wash. Ct. App. 2010).
But while courts are split on allowing recovery for both cost of repair and loss in value under automobile policies, rarely have courts allowed recovery for both in the context real property.
The application of these rules ultimately depends on the specific language of each insurance policy. Most courts have relied heavily on the policy language and interpreted the policy in light of the traditional rules for damages, which favor damages calculations in terms of cost of repair as opposed to the much more speculative diminution in value. These courts are wary of allowing for double recovery. Here, however, the court was persuaded more by its desire to make the injured party whole. Accordingly, insurers in Georgia may now be responsible for both the full cost of repair and diminution in value.
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