Mr. Pacheco sued Oregon Mutual, seeking payment of the excluded damages for "diminished value and loss of use," among other things.

He then moved for partial summary judgment, requesting a determination that, "while the plain language of the policy excludes those damages from the benefits recoverable, said exclusion is void as contrary to public policy." In support of his motion, Mr. Pacheco offered a declaration from a third party indicating that the accident had reduced the value of his Audi by $7,950.

The trial court granted the motion as to the diminished value exclusion but ruled that there was no basis to void the exclusion for loss of use damages.

The dispute reached the Washington court of appeals.

The Appellate Court's Decision

The appellate court held that the exclusion for diminished value violated Washington's UIM law, but that the exclusion for loss of use did not violate that law or public policy.

In its decision, the appellate court explained that an insured may recover UIM benefits under the UIM law only if (1) the insured was legally entitled to recover damages; (2) those damages would be recovered from owners or operators of underinsured motor vehicles, hit-and-run motor vehicles, and phantom vehicles; and (3) the damages were because of bodily injury, death, or property damage, resulting from the accident.

It added that the law defined property damage "narrowly, as 'physical damage to the insured motor vehicle.'" In other words, the appellate court explained, although physical damage to the insured motor vehicle must be covered, other property damages, including consequential damages, were not required to be covered by the UIM policy.

The appellate court then ruled that the diminished value exclusion conflicted with the express language of the UIM statute because the diminished value of a vehicle from physical injury was "property damage as defined in the UIM statute." The appellate court reasoned that a vehicle suffered "diminished value" when it sustained physical damage in an accident, but due to the nature of the damage, it could not be fully restored to its pre-loss condition. "Weakened metal" that could not be repaired was one such example, the appellate court added.

Accordingly, the appellate court held, an express policy exclusion for coverage for diminished value of the damaged vehicle was contrary to the UIM statutory language.

The appellate court reached a different result regarding the policy's loss of use exclusion. It observed that loss of use might flow from physical damage to a vehicle, but it said that it was "not physical damage to the vehicle." Therefore, the appellate court concluded, loss of use was not property damage as defined in the UIM law, and because it was not required by the statute, it did not violate the express language of the statute to exclude it.

The case is Pacheco v. Oregon Mutual Ins. Co., No. 77525-1-I (Wash. Ct. App. Aug. 19, 2019). Attorneys involved include: For Petitioner: Paul Michael Veillon, Galileo Law, PLLC, Seattle, WA; Stephen Michael Hansen, Law Offices of Stephen M Hansen PS, Tacoma, WA; Scott Nealey, San Francisco, CA. For Respondent: Jennifer Page Dinning, R. Lind Stapley, Soha & Lang, P.S., Seattle, WA.