Insurance Law Client Alert: Appeals Court Finds No Public Policy Requirement that Auto Insurers Pay Diminution in Value for Collision Claims

In Carson v. Mercury Insurance Company (No. G045795, filed 9/24/12, ord. pub. 10/23/12), the court of appeal held that an insurer providing collision coverage could not be sued for breach of contract or bad faith where the insured contended that her auto had not been repaired to its showroom condition.

The insured was involved in a collision with her Honda, and her insurer prepared an estimate that was approximately 30% of the car’s actual cash value. Exercising her right to choose, the insured took the car to her own body shop, which prepared a similar estimate. But the body shop then discovered additional damage during the course of repairs, pushing the cost to 75% of the car’s actual cash value.

The insurer nonetheless elected to have the car repaired and paid the full amount, less deductible. However, the insured was never satisfied with the repairs, and ultimately sued for breach of contract and bad faith. She alleged that the damage to her vehicle “was so substantial and major that the vehicle was unrepairable to its preaccident condition with respect to safety, reliability, mechanics and performance, and was in a condition which, for economical and practical reasons, reasonably required the vehicle to be ‘totaled.’ The vehicle was by any logical financial consideration a ‘total loss,’ meaning that the costs of repair, plus the post-accident and pre-repair salvage value of the vehicle, and the loss of value of the vehicle, even if repaired, would be greater than the total value of the vehicle after the vehicle was repaired.”

The collision coverage in the insurance policy gave the insurer the sole right to repair, replace or pay for the vehicle. Further, the policy excluded diminution in value for any repaired vehicle. The policy also authorized the use of non-original parts, and allowed a deduction for depreciation.

The court found that nothing in the policy obligated the insurer to declare the car a total loss, but the term generally means that the cost of repair exceeds the actual cash value, which was not the case. The court also rejected the insured’s contention that the vehicle had to be repaired to “factory” or “showroom” condition, pointing out that the insurance policy specifically authorized use of non-original parts. Further, the court held that the insurer’s obligation to “repair” simply meant returning the car to its “preaccident safe, mechanical, and cosmetic condition.” And the appropriate standard for determining proper vehicle repair is by comparison to industry standards.

The case ultimately came down to expert testimony, but the insured’s experts lacked sufficient qualifications. Nonetheless, she argued that even a layperson could tell that the car was beyond repair, because it had a unibody and photographs showed the car being cut up and reassembled. However, the insurer offered unrebutted expert testimony that the car could have been repaired to “preaccident safe condition” applying the “manufacturer’s repair specifications.” And because the insured had selected the body shop, the court held that the insurer was not responsible for guaranteeing that the car was properly repaired to such standards. The court said that the insured’s dispute, if any, was with the body shop.

Finally, the court rejected arguments that the insurer’s failure to take into account depreciation in deciding a total loss violated public policy, and that the insurer had violated the “made whole” rule by subrogating against the at-fault driver when she was not being compensated for the vehicle’s loss in resale value.

As to the “made whole” rule, the court pointed out that the insured had signed a full release of all claims as part of her bodily injury settlement with the other driver’s insurer, effectively agreeing that she had been made whole by the other driver, which lifted any limitation on the insurer’s subrogation rights.

Regarding the policy’s limitation on coverage for depreciation in the vehicle’s post-repair value, the court said that an insurer has a right to limit the risks it assumes, including an exclusion in the policy for diminution in value. In a footnote, the court said that any public policy mandate that insurers pay for “stigma damages” is best left to the Legislature or the insurance commissioner.

This document is intended to provide you with general information about insurance law developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

October 24, 2012