Washington Case Could Add Diminished Value to Auto Policy Coverage

A recent Washington Supreme Court decision in a diminished value case against Farmers Insurance could lead to an increase in automobile insurance coverage disputes in that state.

The problem is that the court allowed for diminished value but offered no guidelines for how to identify or measure it, according to Dana A. Ferestien, a Seattle-based insurance defense attorney with the Williams Kastner law firm.

“Moeller [Moeller v. Farmers] could significantly impact Washington drivers,” said Ferestien. “The Supreme Court found coverage for diminished value following post-accident repairs, but it did not provide any framework for determining whether such diminished value actually exists and, if so, how to measure that loss.”

In May 1999, David Moeller filed suit on behalf of himself and other Farmers’ Washington state policyholders, asserting a breach of contract claim. They alleged that Farmers failed to restore his vehicle to its “pre-loss condition through payment of the difference in value between the vehicle’s pre-loss value and its value after it was damaged, properly repaired and returned.”

Moeller’s 1996 Honda Civic CRX was damaged in a collision in November 1998. Moeller’s auto insurance policy with Farmers stated the limits of liability as “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.”

Farmers opted to repair the vehicle after receiving authorization from Moeller. At the time, Moeller did not request an appraisal. Farmers paid the repair cost less the $500 collision deductible.

Following a hearing in September 2002, the trial court granted his motion for class certification. But Farmers successfully argued Moeller’s diminished value claim was precluded by the language contained within the insurance policy and the insurer’s motion for summary judgment was granted several months later. Moeller appealed the decision and Farmers cross-appealed the class certification. The Court of Appeals reversed the trial court’s summary judgment decision in favor of Farmers and affirmed the class certification.

As a result of the Court of Appeals actions, Farmers filed a petition with the Washington Supreme Court for review. The Supreme Court noted that courts have been split on the issue of what it means to pay for the loss of a vehicle. While the Court of Appeals found the policy language unambiguous in terms of providing coverage for diminished value, the Supreme Court found the language was ambiguous, and as such it found in favor of the insured and affirmed the class certification.

In its analysis, the Court of Appeals found that while repairs were made Farmers did not pay for the diminished value of the weakened metal. Farmers maintained that a damaged vehicle is either a total loss or it is repairable and as such, coverage is limited to one or the other. The state’s high court chose to embrace the minority view that the insurance consumer would read the policy as returning him or her to a pre-accident position. The phrase “like kind and quality” was viewed as ambiguous, though Farmers contended the phrase related to the parts used during repair the court found otherwise.

While both courts found the policy covered diminished value, neither court gave an explanation on how to measure it, a problem for insurers, according to Ferestien. “The uncertainty created by Moeller might also result in insurers totaling many more vehicles in order to avoid the prospect of both repairing a vehicle and paying for claimed post-accident diminished value,” he told Claims Journal.

The decision could also lead to an increase in claim file expense on auto insurance claims that in turn could lead to higher premiums for policyholders.

“Insurers may impose immediate premium increases to account for the uncertainty created by the Moeller decision,” Ferestien said.

Whereas auto property damage claims are often viewed as having a short tail from file opening to closing, there could be increased time spent examining the loss.

“More generally, we may see a greater effort by insurers to find coverage based upon an insurance consumer’s reasonable expectations of what should be covered by a policy,” Ferestien said.

“As the dissent pointed out, Washington courts have not previously allowed insurance consumers’ expectations to override policy language. But the Moeller majority appears to have placed considerable significance on the insureds’ reasonable expectation that they will be compensated for both repairs and any post-accident diminished value. Going forward, insureds’ may focus on this aspect of the majority opinion in insurance disputes involving automobile policies or other types of coverage, as a means to trump policy language that would seem to eliminate coverage.”

The case is David Moeller v. Farmers Insurance Company of Washington and Farmers Insurance Exchange, No. 84500-0