Supreme Court Rules Auto Policies Cover Vehicles’ Post-Repair Losses of Value

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The Supreme Judicial Court (SJC) has issued a widely anticipated decision in the case of Jarrett McGilloway et al. v. Safety Insurance Company and the Commerce Insurance Company. The decision initiates a sea change in the property damage recoverable under the standard Massachusetts automobile policy not only for the two carriers involved in the lawsuit but for all Massachusetts auto insurers. The SJC ruled that the standard Massachusetts auto policy’s property damage coverage allows a third-party claimant to recover consequential damages for any inherent diminished value (“IDV”) to their automobiles from an insured who caused the loss.

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IDV claims seek the consequential damages existing after repairing the vehicle

In a 2003 case, the SJC described IDV claims as claims for the difference between the market value of an automobile immediately before the accident and its market value post-collision fully repaired “premised on the theory that some stigma attaches to the vehicle from its involvement in a prior collision, such that its market value is diminished despite the fact that the vehicle has been restored to its pre-collision physical condition.”

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The decision on no IDV for first-party claims did not apply to third-party property damage claims

In that 2003 ruling, Given v. Commerce Ins. Co., the SJC found that under Parts 7, 8, and 9 (collision, limited collision, and comprehensive) of the standard Massachusetts automobile insurance policy, there was no coverage for IDV claims. The SJC based its decision on the standard policy’s insuring agreements and a policy provision applicable to those coverages that restricted insurers from “pay[ing] more than what it would cost to repair or replace the damaged property.”

However, the Given decision did not decide whether the standard auto policy’s property damage part, Part 4, provided coverage for third-party property damage claims alleging IDV damages beyond the cost of the damaged vehicle’s repairs.

Under Part 4 of the standard policy, indemnity payments are not limited to the cost of the damaged auto’s repairs since the insuring agreement is based on what a property damage claimant may recover under a tort law negligence judgment. The insuring agreement states that the insurer will:

Pay damages to someone else whose auto or other property is damaged in an accident. The damages we will pay are the amounts that person is legally entitled to collect for property damage through a court judgment or settlement

Based on the damages recoverable in a property damage court judgment, the SJC ruled that third-party property damage claimants had the right to recover, in addition to the repairs necessary to bring their vehicle back to its pre-accident condition, IDV damages. Auto insurers in Massachusetts have always paid for repair costs on third-party property damage claims. Now, however, they will have to pay under the McGilloway decision valid claims for IDV in addition to paying repair costs.

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The SJC’s decision reverses prior decisions by the Superior Court and the United States District Court finding no coverage

The Supreme Judicial Court reversed a decision of the Superior Court that found neither Commerce nor Safety Insurance had an obligation to third-party property damage claimants to pay IDV claims in addition to the repair costs for the property damage to the vehicle. See Agency Checklists’ article of  April 7, 2020, “Massachusetts Court Rules 3rd Party Auto Property Damage Claimants Cannot Recover Inherent Diminished Value Damages.

The SJC’s decision also implicitly overruled a decision in the United States District Court that held, under Massachusetts law, that third-party property damage claimants could not collect under the standard Massachusetts automobile policy IDV as part of their damages in addition to the money needed to repair the vehicle. See Agency Checklists’ article of August 20, 2019, “Mass. Court Rules Inherent Diminished Value Not Recoverable Under Standard Auto Policy’s Property Damage Coverage.”

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The claims involved in the SJC finding IDV as recoverable property damage

The appeal before the SJC involved third-party property damage claims made by Jared McGilloway, Linda Estrella, and Adam Ercolini (Plaintiffs). In each case, the Plaintiffs had owned an automobile involved in a collision with vehicles owned by Safety or Commerce insureds in which there was no dispute about the liability of Safety and Commerce’s insureds. Also, in each case, Safety and Commerce paid to repair the automobiles to bring them back to their pre-collision condition.

The Plaintiffs, however, sought additional damages, alleging that because of the accident, the fair market value of their vehicle was less than the fair market value of their motor vehicles immediately before their collisions. As a result, the Plaintiffs claimed that the payment by Commerce and Safety did not adequately compensate them under the terms of Part 4 of the standard Massachusetts automobile insurance policy.

In Mr. McGilloway’s case, Safety paid $5,700.00 to have the vehicle repaired and returned to its pre-accident condition. However, Mr. McGilloway claimed that the actual cash value of his vehicle following the repairs by Safety was diminished by $4,425.00. After Safety offered $1,125.00 to avoid a suit, Mr. McGilloway filed a class action in 2017.

The second plaintiff, Linda Estrella, had her vehicle damaged by an insured of Safety Insurance. Safety admitted liability and paid $8,700.00 to have her vehicle repaired. Subsequently, Safety received a demand letter from Ms. Estrella’s attorney. The attorney demanded that Safety pay an additional $3,100. The attorney claimed that Safety had liability under its property damage liability coverage to Ms. Estrella for the IDV to her vehicle. Safety offered $1,200 to resolve the matter and avoid a suit. However, Ms. Estrella’s counsel rejected the offer and filed suit.

The final plaintiff, Adam Ercolini, had his vehicle damaged by a Commerce insured. Commerce assumed liability and had the vehicle repaired. However, Mr. Ercolini then made a demand on Commerce for additional IDV damages of $4,450.00. Commerce, as opposed to Safety, did not make an offer to avoid any litigation and, as a result, Mr. Ercolini filed suit.

All these suits were consolidated in the business litigation session of Suffolk Superior Court, and initially, the court denied the motions to dismiss filed by Safety. (see Agency Checklist article of November 27, 2018, “Court Allows Inherent Diminution In Value Of Auto Suit To Go Forward Against Property Damage Insurer.”)

Finally, after discovery, Commerce and Safety moved for summary judgment, and the Superior Court judge hearing the matter allowed the motion finding that an earlier SJC decision concerning IDV claims under Part 7, Collision, of the standard policy controlled.

The judge also found that “where the damaged property had been fully repaired and the responsible party has paid the full repair cost, under Massachusetts law the property owner is not entitled to collect, and the responsible party is not obligated to pay any additional amount for residual diminution of value.”

The Plaintiffs appealed, and the SJC granted direct appellate review, which allowed the appeal to bypass the Appeals Court.

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The Arguments of the Claimants and the Insurance Companies before the SJC

Before the SJC, the Plaintiffs argued that under Massachusetts law, they were entitled to collect IDV under Part 4 of the standard policy because IDV damages are included as part of “the amounts [the claimant] is legally entitled to collect for property damage through a court judgment or settlement” and, therefore, such damages

The defendant insurance companies, Safety and Commerce, argued that the summary judgment entered by the Superior Court was appropriate because the claimed: “Massachusetts tort law does not permit IDV recovery.”

The insurers argued, in the alternative, though, that even if IDV damages were recoverable as tort damages, such damages are not covered under the standard policy because Massachusetts regulations governing the claims made pursuant to the standard policy are silent as to how insurers should treat IDV damages.

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The SJC’s de novo review and decision

Appellate courts review summary judgment decision de novo. That is, they look at the summary judgment evidence anew and do not give the lower court’s decision any weight.

Based on its independent review, the SJC stated the issues before it as:

(1) Whether, under Part 4 of the standard Massachusetts automobile insurance policy, 2008 edition (“standard policy”), an automobile insurer must pay a claim for the IDV of a car that has been damaged and subsequently repaired, and

(2) Whether [Commerce or Safety] violated either G.L. c. 93A (Consumer Protection Act) or G.L. c. 176D (statute prohibiting unfair interceptive insurance practices) in their course of the dealings with the plaintiffs.

In deciding these issues, the SJC first stated the basic legal principles of insurance policy interpretation that it applied, stating:

• We interpret the words of the standard policy in light of their plain meaning, giving full effect to the document as a whole”
• A policy of insurance whose provisions are plainly and definitely expressed in appropriate language must be enforced in accordance with its terms.”
• In discerning the meaning of the contract provisions, we are guided by “what an objectively reasonable insured, reading the relevant policy language, would expect to be covered.”

The Court focused on the plain reading of the phrase “the amounts that person is legally entitled to collect for property damage through a court judgment or settlement” and found that this language entitled the claimant to be “made whole and compensated for what he or she had lost.” This meant to the SJC a claimant who establishes the right to a judgment for property damage has the right to all the damages that the law allows, and those damages the Court noted: “… can include intangible damages such as the diminution in value of tangible property.”

The Court then stated that the plain language of Part 4 of the standard policy did not limit any recovery by a third-party property damage claimant to “merely repair or replacement costs” and that “contrary to the [insurance] defendant’s assertions, Massachusetts case law did not foreclose the plaintiffs from recovering IDV damages as third-party claimants under Part 4 of the standard policy. Instead, the Court held that recovery under Part 4 of the standard policy must compensate a claimant for any loss of value the claimant incurred as a result of a collision offset by any increase in value that may occur from repairs to the vehicle.

The Court summed up its decision as:

“In short, if a third-party claimant’s vehicle suffers IDV, even after it is fully repaired, then under Part 4 of the standard policy, the insurer may be liable to the claimant for IDV damages so that he or she may be ‘made whole’ once again.”

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Commerce’s argument that allowing IDV recoveries will cause economic chaos rejected

The SJC noted that Commerce had argued that a decision finding that IDV damages were recoverable on third-party property damage claims would “cause a seismic shift in the insurance marketplace,” which in turn would “economically destabilize the insurance marketplace.” Commerce also argued orally to the Court that IDV damages are “very difficult, if not impossible,” to calculate.

The SJC, however, did not accept the argument concerning the calculability of IDV damages since in the Superior Court, Commerce’s codefendant, Safety, had “admit[ed] that IDV may be suffered in some cases” and conceded that “IDV may be quantifiable.”

On the economic disruption argument, the SJC noted that numerous other states recognize net recovery of IDV damages, and therefore, it was not persuaded by Commerce’s argument about the supposed destabilization of the insurance market based upon a decision making IDV damages recoverable.

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The Standards for Recovery of IDV Damages

While the SJC found that IDV damages were includable in any recovery under Part 4 of the standard policy, it did not rule that every automobile that is involved in a collision and is subsequently repaired will have suffered IDV damages. The Court stated that as other states have held, claimants seeking IDV damages must present individualized proof to demonstrate that their automobile has sustained a diminution in value due to a collision or vehicular accident after repairs have brought back the vehicle to its pre-accident physical condition.

The Court held as condition precedents to recover IDV damages, a third-party property damage claimant must establish:

(1)       That his or her vehicle has suffered IDV damages, and

(2)       The amount of IDV damages at issue.

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No finding of unfair claim practices against Safety or Commerce for denying the Plaintiffs’ IDV claims

On the Plaintiffs’ claim that Safety and Commerce had engaged in unfair claim practice in denying their IDV claim, the SJC summarily affirmed the Superior Court’s dismissal of those claims.

The Court found no violation because it agreed with the Superior Court that the insurers relied on a “plausible, although ultimately incorrect, interpretation of its policy” since the commissioner of insurance had never recognized that Part 4 of the standard policy covered IDV damages and there were no Massachusetts appellate decisions that had previously considered that issue. Thus, the Court said, “we cannot find anything “immoral, unethical or oppressive in such an action [denial of the Plaintiffs’ IDV claims]” requiring recovery under G. L. c. 93A.

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SJC remands the case back to the Superior Court for damage hearing and class action determination

After ruling that the Plaintiffs had viable causes of action to recover IDV damages from Safety and Commerce, the Court remanded the case to the Superior Court for the Plaintiffs to prove that their vehicles suffered ID V damages and, if so, the extent of those damages.

Also, the Plaintiffs had requested class-action status for their lawsuit. The Superior Court will have to determine whether these plaintiffs satisfy all the conditions needed under the Massachusetts Rules of Civil Procedure for a class action which include:

• the class must be so numerous that joinder of all members is impracticable
• there must be questions of law or fact common to the class,
• the claims of the Plaintiffs must be typical of the claims of the class, and
• the Plaintiffs will fairly and adequately protect the interests of the class.

The SJC also found that neither the Safety nor Commerce, under the circumstances of this case where there had been no case decision in Massachusetts on the issue of the application of Part 4 of the standard policy to IDV damages, meant that they acted in good faith.

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Agency Checklists will keep you posted

Based on the importance of this case and the further actions that the Superior Court will take on class action certification and damage assessment, Agency Checklists will monitor this case and keep its readers posted as to any further developments.

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