Not All Insurance Contracts Promise To Make Insureds Whole After Losses

Another editor pointed out that unless there is actual physical damage to the property resulting from a covered cause of loss, the insurer owes no duty to replace an undamaged portion of a roof or siding.

While most agreed that when it comes to your own home, you would want the entire roof replaced so that it matched, some still argued thats not what the policy states. The dispute remains "under consideration," and we welcome comments on how readers handle the matching quandary.

Courts are facing the same clash of opinions in cases involving diminution in value. While insureds clamor to be compensated for the lost value to their damaged property, courts turn to the wording of the policies to determine what exactly, if anything, was lost.

For instance, in a case decided last month in South Carolina, the Supreme Court held that diminished value of tangible property was not property damage under a CGL policy in Auto-Owners Ins. Co. v. Carl Brazell Builders Inc.

In that case, a residential subdivision was built on a site once used by the U.S. Department of Defense for training aerial bombers during World War II, leaving potentially hazardous materials on the property. The claimants alleged that development continued on the subdivision and lots were sold although the potentially hazardous materials were known to the developers.

The contractors and homeowners sued the insurers, Auto-Owners and Owners, claiming that the loss of value in the property due to the presence of hazardous materials should be covered under the contractors CGL policies. The insurers, though, maintained that the policies precluded coverage for the claims.

In the standard Insurance Services Office (ISO) CGL form, "property damage" is defined as "physical injury to tangible property." "Physical" was added to modify "injury" in the 1973 CGL revision to prevent coverage for intangible injuries.

The court recognized that its duty was to "give policy language its plain, ordinary and popular meaning." Applying the intent of the 1973 revision, it found no ambiguity in the CGL policies and was bound to adhere to the definition of "property damage" used in the policies. The court concluded that the claimants did not allege any physical injury that fell within the policys definition. The diminished value of the property was solely an economic damage, which was not insured by the CGL policy.

The homeowners claimed a loss of value that would become tangible only at the time of selling the property. Neither the potential for loss nor the claim that lacked the requisite physical injury to the property triggers coverage.

The diminution in value issue is probably most often discussed in relation to auto policies. An insured has an accident, and though the vehicle is repaired, it is universally understood that its value has decreased because it was wrecked.

The insured argues that the only way to be made whole is to receive payment for the difference between the market value of the vehicle pre-accident and post-repair. However, the policy rarely provides for that type of reimbursement.

Another recent case illustrates how most courts have ruled on diminished value. In American Manufacturers Mutual Ins. Co. v. Schaefer, the Supreme Court of Texas said that the Texas Standard Personal Auto Policy did not obligate an insurer to compensate an insured for diminished market value to a vehicle that was damaged but adequately repaired.

When Gary Schaefer was involved in an auto accident, his insurer, American Manufacturers, opted to repair itan option allowed in the policy. Though Mr. Schaffer agreed that the vehicle was adequately repaired, he sought recovery for the decreased value of the car "due to market perceptions that a damaged and subsequently repaired vehicle is worth less than one that has never been damaged."

Mr. Schaefer, like some of the FC&S editors, argued that the underlying purpose of the policy was "to fully indemnify the insured." American Manufacturers countered that the insuring language limited its liability to the lesser of the actual cash value of the vehicle or what it would cost to repair or replace it.

In this instance, the policy provided coverage for "direct and accidental loss to your covered auto." The word "physical" did not appear here, but the court concluded that the policys limit of liability section ruled.

One notable jurisdiction, Georgia, holds the opposite opinion that insurers are liable for paying for diminished value under auto policies. The reasoning, as dictated by the Supreme Court of Georgia in State Farm Mutual Auto Ins. Co. v. Mabry, is that the physical damage coverage portion of auto policies requires that the insured be made whole. The court said that "what is lost when physical damage occurs is both utility and value; therefore, the insurers obligation to pay for the loss includes paying for any lost value."

Most insureds would prefer to apply the textbook definition of indemnity to their losses. They expect no less than to be made whole. In reality, thats not always what their contracts promise.

Susan Massmann is a staff writer for the FC&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The FC&S editors welcome comment and questions and may be reached by fax at 859-692-2293 or via e-mail at FCS@NUCO.COM.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.