Diminished Value Not Covered by Standard Auto Policy, State High Court Rules

The Massachusetts standard auto policy does not require an insurer to pay inherent diminished value (IDV) to a claimant whose vehicle is damaged by one of its insureds.

The Massachusetts Supreme Court in a 6-0 ruling has upheld dismissal of a proposed class action brought against Commerce Insurance Co. on behalf of claimants denied payments to cover the diminished fair market value of their vehicles after collisions and repairs.

The high court first found that the plaintiffs bringing the suit did not have standing to do so— they must first obtain judgments against the Commerce insureds.

But the court went further. The justices decided, as a “matter of discretion,” that public policy would benefit from clarifying whether the 2016 standard policy provides coverage for IDV damages to a third-party claimant’s vehicles.

The high court’s clear answer is that the 2016 standard policy does not provide coverage for IDV damages, unlike the earlier 2008 version of the policy. The language in the 2016 standard policy explicitly excludes any “decreased value or intangible loss” from coverage. No other laws or rulings require that IDV must be paid under the 2016 policy. And the state insurance commissioner did not exceed his authority in approving that 2016 policy with the IDV exclusion.

Lead Plaintiffs

The plaintiffs, Jeffrey Cubberley and Philip Seaver, sued Commerce in 2019 seeking a judgment declaring that Commerce was obligated to cover IDV damages and compensation for Commerce’s alleged breach of contract for refusing to pay them these damages. The proceedings were stayed, pending the outcome of a similar case (McGilloway v. Safety Ins. Co., 488 Mass. 610 (2021) in which the court eventually held that IDV damages were recoverable under the 2008 edition of the standard policy.

In the plaintiffs’ cases, Commerce had acknowledged liability for the damage caused by its insureds and processed the claims accordingly. However, while Commerce covered the full cost of repairs to restore the vehicles to their pre-collision condition, it refused to compensate the plaintiffs for any alleged IDV. As a result, each plaintiff claimed his vehicle “is now worth less in the resale market than a comparable vehicle that has not suffered such damage from a collision.”

A lower court granted Commerce’s motion to dismiss the complaint, citing the plain language of the policy. That judge did not address whether the plaintiffs had standing to bring their class action.

On the standing question, the high court found that the plaintiffs did not have standing to sue Commerce over the diminished value because they had never actually obtained final judgments against Commerce’s insureds. Rather than obtaining final judgments against the insureds as required by law, the plaintiffs directly sued Commerce, alleging breach of contract.

“In simpler terms, a third-party claimant must first secure a final judgment against the insured party before suing the insurer for an alleged failure to pay damages under the policy,” the court explained.

Beyond Standing

Even though they had dismissed the case, the Supreme Court justices decided to address whether the 2016 standard policy provides coverage for IDV damages to a third-party claimant’s vehicle as the plaintiffs had insisted.

In the opinion written by Justice Serge Georges, Jr., the justices pointed out that the 2016 standard policy has language clearly stating that the insurer will not pay “any decreased value or intangible loss claimed to result from the property damage unless otherwise required by law.”

Additionally, the policy limits third-party coverage to “damage or destruction of tangible property,” and, the court noted, damage to tangible property does not include IDV.

Thus, on its face, the 2016 standard policy excludes such claims “unless otherwise required by law.”

The plaintiffs argued that IDV coverage was “otherwise required” because another statute says automobile insurers must cover “all sums” and “all sums” includes IDV damages. They also contended that the insurance commissioner exceeded his authority in approving the IDV exclusion.

However, the court noted, the same statute also defines property damage liability insurance as “including conditions, exclusions, and limitations, as the commissioner of insurance may approve.” Because the commissioner exercised this authority when he approved the exclusion in the 2016 standard policy, the court found the law does not “otherwise require” Commerce to cover the plaintiffs’ third-party IDV claims.

“Indeed, the statute explicitly allows the commissioner to approve exclusions and permits insureds to bear personal responsibility for amounts exceeding policy limits,” the court stated.

The plaintiffs also maintained that the 2021 McGilloway decision concerning the 2008 standard policy provided support for their argument that IDV should be covered. However, the high court said the McGilloway decision does not provide an independent legal basis requiring insurers to cover third-party IDV claims under the 2016 standard policy. The language of the 2008 standard policy required a different outcome from the one reached in the current case, the court found.