Court opinions differ on diminished value.

When an insured vehicle is damaged and repaired, its market value may not return to the pre-damage level. Insurers are responsible for reimbursing the owner for the difference in Georgia, but not in the vast majority of states. In some states, diminished value is an issue.

Indiana is the scene of the latest battle, where plaintiff Christina M. Allgood won her court case April 8, 2004, before the Indiana Court of Appeals. Allgood had filed a class-action lawsuit against Meridian Security Insurance Co., claiming breach of contract and seeking damages for failure to pay the full cost of the diminution in value of her vehicle. She also sought injunctive relief in the form of a declaration that such restoration of value is owed under Meridian's policy. A trial court judge ruled against Allgood and granted Meridian a motion to dismiss. Late last year, the state Supreme Court agreed to review the appellate decision.

Diminished value is a "creature of common law" fought state by state, said Robert J. Hurns, counsel for the Property Casualty Insurers Association of America. Only Alabama refers to it in its statutes. In Georgia, which Hurns calls "the unfettered feeding trough for recovering diminished value," the insurance department has issued a regulation on how to calculate diminished value. Case law there goes back to 1927, he said.

Forty-three states allow insurers to exclude coverage of diminished value through language in their policy forms. Those that don't allow exclusions are Georgia, Hawaii, Kansas, Louisiana, Mawland, Massachusetts and North Carolina, said Hurns. Eighteen states do not have any case law on the subject. In a bulletin, the association said Indiana had no case law, so the appellate court looked at decisions in other jurisdictions.

The Allgood case hinged on whether the term "repair" in Meridian's contract language means physical restoration to the function and appearance before damage or whether it means to include restoration of the vehicle's market value. The dissenting judge wrote that the majority's decision would require diminished-value restoration in any case, thus removing the insurer's alternative courses of action stated in the limit of liability part of the policy. Meridian identifies those courses as repairing damage, replacing with equivalent kind and quality, or paying actual cash value, whichever is least.

Neither Hums nor Scott Harrison, a former deputy superintendent of insurance in New York, expects any ripple effect from Indiana across other states. "With all due respect to the Indiana appellate court, it doesn't have a reputation as being a bellwether court in the nation," said Harrison, principal of the Harrison Law Office in Washington, D.C. "If upheld by the Supreme Court, it would be a bad decision for the industry in Indiana." He added that it would likely energize the PCI and other industry groups to work with legislators in an effort to clarify what coverage is included.

Harrison said that regardless of how the Indiana Supreme Court rules, insurers would still have the option to seek approval from regulators to change policy language. "Where there is ambiguous language, the courts usually interpret it in favor of the party not responsible for writing the contract," he said. Insurers have become much more careful in the past 15 to 20 years about contract language due to litigation over environmental and product-disclosure coverages, he said. "They are now much more inclined to use exclusions to specify what risks the policy does not cover," he added.

Hurns said that 2004 court decisions in Texas, Illinois and Louisiana went against diminished-value plaintiffs. In Hassler vs. USAA, the Texas Court of Appeals ruled on Jan. 29 that coverage for first-party diminished-value claims does not exist under Texas standard auto policies. In Sims vs. Allstate, a St. Clair, Ill., jury on April 29 held that a class of 387,000 Allstate policyholders in 29 states are not entitled to first-party coverage. And in Defraites vs. State Farm, a Louisiana court ruled on Jan. 27 that diminished-value claims are not suitable for class-action certification because there are too many variables among individual cases.