The California Appellate Court recently ruled that an insurer’s obligation to repair damaged property only required that the repair substantially restore the property to its pre-loss condition and did not also require the insurer pay for a loss of value. To require otherwise, the court reasoned, would obligate the insurer to insure the property’s diminution in value and would extinguish the insurer’s policy right to only pay for the repair of property.
In Baldwin v. AAA Northern California, Nevada & Utah Ins. Exchange, 1 Cal. App. 4th 545 (2016), the insured was the owner of a pick-up truck that was damaged in an accident. AAA insured the truck and covered the loss. The vehicle was virtually new at the time of the accident. The insurance policy stated that AAA, “may pay the loss in money or repair . . . the damaged . . . property.” AAA opted to pay to repair the vehicle at a cost of $8,196. The vehicle’s resale value, however, declined by $17,100 after it was repaired. The insured argued that since the repair could not restore the vehicle to its pre-loss value, the vehicle could not be repaired and AAA, therefore, was required to pay him the vehicle’s diminution from the pre-loss value. The insured’s position was consistent with a minority of jurisdictions that have held if an attempted repair does not result in the complete restoration of a vehicle’s pre-loss condition, the vehicle is not repaired, and the resulting diminution of value of the vehicle was a loss the insurer was liable for under the insurance policy. See Gonzales v. Farmers Ins. Co. of Oregon, 345 Or. 382, 196 P.3d 1 (2008); State Farm Mut. Auto. Ins. Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (2001).
The Appellate Court rejected the insured’s argument and the minority position. The court acknowledged that the insurance policy allowed AAA to choose to either repair the property or to pay for the vehicle’s value. However, the insured and minority position eliminated this option. Implicit in the court’s decision was a recognition that a damaged vehicle’s resale value is never fully restored to its pre-loss value after an accident and the ensuing repairs. As a result, any time an insurer opts to exercise its right under a policy to repair a vehicle, it would be virtually impossible for the insurer to meet the standard of bringing the property’s post-loss value back to its pre-accident value. Thus, the insurer would always be forced to also pay for the vehicle’s diminution from the pre-loss value. Such a holding would fundamentally change the policy to strictly provide coverage for damaged property’s diminution in value. Requiring an insurer to pay to return the vehicle to its pre-loss condition would essentially rewrite the policy to eliminate the provision allowing an insurer’s election to repair.
Accordingly, the court held that an insurer’s option to pay for repair only required the insurer to pay to substantially return the vehicle to its pre-loss condition. This follows the holdings of the majority of jurisdictions that do not require that the insurer also pay for the diminution in value when it pays to repair the damaged property’s physical condition. See O’Brien v. Progressive Northern Ins. Co., 785 A.2d 281 (Del. 2001); Camden v. State Farm Mut. Auto. Ins. Co., 66 S.W.3d 78 (Mo. App. 2001); Smith v. Superior Ins. Co., 802 So. 2d 424 (Fla. Ct. App. 2d 2001); Townsend v. State Farm Mut. Auto. Ins. Co., 793 So. 2d 473 (La. App. Cir. 2001); Hall v. Acadia Ins. Co., 801 A.2d 993 (Me. 2002); Bailey v. Progressive County Mut. Ins. Co., 78 S.W.3d 708 (Tex. App. 2002); Schulmeyer v. State Farm Fire and Cas. Co., 353 S.C. 491 (2003); Given v. Commerce Ins. Co., 440 Mass. 207 (2003).
By: Jonathan Gross, jgross@moundcotton.com, a managing partner at Mound Cotton Wollan & Greengrass, LLP’s San Francisco Bay Area office and Victor Jacobellis, vjacobellis@moundcotton.com, Mound Cotton Wollan & Greengrass, LLP special counsel. Jonathan and Victor specialize in insurance coverage matters and insurance bad faith defense.