In a controversial decision, the Supreme Court of Washington recently determined that an automobile policy obligated an insurer to compensate an insured for the diminished value of a repaired car, post-accident. The court also approved class certification for the lawsuit against the auto insurer. The case is Moeller v. Farmers Ins. Co. of Wash., No. 84500-0, 2011 Wash. LEXIS 957 (Dec. 22, 2011).
David Moeller's 1996 Honda Civic CRX was damaged in a collision. His insurer, Farmers Insurance Co. of Washington ("Farmers"), elected to repair the car and then paid for the cost of repairs less Moeller's $500 deductible. Moeller then sued Farmers alleging breach of contract for failure to reimburse him for diminished value of the vehicle after repairs were complete. Moeller sought to certify his suit as a class action against Farmers, which was approved by the court below.
The Farmers policy covered "loss to your Insured car caused by collision," with loss defined as "direct and accidental loss of or damage to your Insured car, including its equipment." The policy also stated that the limits of liability for loss "shall not exceed … the amount which it would cost to repair or replace damaged or stolen property with other of like kind and quality, or with new property less an adjustment for physical deterioration and/or depreciation." Finally, the policy also stipulated that "we may pay the loss in money or repair or replace damaged or stolen property."
Moeller argued that the policy was ambiguous with respect to whether diminished value was covered. Farmers argued that the policy clearly obligated it to either repair a vehicle or pay the insured money for the loss, but not both.
The court agreed with Moeller, finding that the policy language was ambiguous and, therefore, that the policy had to be interpreted strictly in favor of coverage. The court followed Georgia (State Farm v. Mabry) and West Virginia (Ellis v. King), which have addressed the issue and determined that a post-accident and post-repair diminution in value loss is covered by similar auto policy language because a reasonable insured would expect such coverage in order to be made whole after an accident. The court explained that an insurer is required not merely to restore a vehicle to usable condition but also to pay for any lost value after repairs are complete. A strong, lengthy dissent countered the majority, saying that the decision created a new contractual obligation not embodied in the Farmers policy.
The decision should have wide-ranging impact in the insurance industry due to the frequency of covered auto losses.
This article was first published on IRMI.com and is reproduced with permission. Copyright 2012, International Risk Management Institute, Inc.