Inherent Diminished Value: No Coverage in 2016 Auto Policy Form

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In a closely watched decision affecting Massachusetts auto insurers, policyholders, and third-party claimants, the Supreme Judicial Court has ruled that the 2016 Massachusetts Standard Automobile Insurance Policy does not provide property damage coverage for inherent diminished value (IDV) claims made by third parties.

As defined by the Supreme Judicial Court, IDV damages arising out of property damage represent “the difference between the market value of a motor vehicle immediately before a collision and the vehicle’s market value after a collision and subsequent repairs,” even when those repairs fully restore the vehicle to its pre-accident condition.

The Supreme Judicial Court decision, issued on January 30, 2025, in Cubberley v. The Commerce Insurance Company resolved two legal issues. The first is whether the 2016 policy’s explicit exclusion of “decreased value or intangible loss” barred IDV claims despite the policy’s “unless otherwise required by law” exception. The second is whether third-party claimants could directly sue insurers for IDV damages without first obtaining judgments against the insureds who caused the tangible property damage loss to their vehicles.

The Cubberley Court ruled insurers have no obligations to IDV claims under the 2016 Automobile Insurers Bureau policy form, which differs materially from the 2008 policy form that the Court previously interpreted in McGilloway v. Safety Insurance Company provided coverage for IDV claims. See Agency Checklists’ article of October 26, 2021, “Supreme Court Rules Auto Policies Cover Vehicles’ Post-Repair Losses of Value.”

The Court also ruled that third-party claimants could not directly sue a liability insurer for any damages caused by its insureds, including IDV damages, unless the claimant had recovered a judgment against the insured for the insured damages.

The significance of this issue to the Massachusetts insurance market is reflected by the three amicus briefs filed in the case – from the American Property Casualty Insurance Association and Massachusetts Insurance Federation jointly, the New England Legal Foundation, and the Massachusetts Academy of Trial Attorneys. Each organization recognized that the Court’s interpretation of the 2016 policy language would have substantial implications for claims handling automobile property damage claims, coverage disputes, and personal liability for insureds.

Facts of the Cubberley Case’s IDV Claims

The Cubberley case appeal arose from two separate accidents involving Commerce-insured drivers. In March 2018, Philip Seaver’s 2017 Honda Civic was damaged in an accident with Commerce’s insured, Anthony Fallica. The following year, in March 2019, Jeffrey Cubberley’s Ford Focus was damaged in an accident with another Commerce insured, Cindy Maclean. In both cases, Commerce accepted liability for its insureds and paid for the full cost of repairs to restore the vehicles to their pre-accident physical condition.

However, both Seaver and Cubberley claimed their vehicles suffered inherently diminished value beyond the physical damage that Commerce paid to repair. They argued their vehicles were worth less in the resale market simply because they had been in accidents, even though they were fully repaired.

When Commerce denied their IDV claims, they filed a class action lawsuit seeking to represent all similarly situated third-party claimants whose IDV claims Commerce had denied under the 2016 policy.

The case’s procedural path reflects its significance to Massachusetts auto insurance law. Initially filed in Superior Court, it was transferred to the Business Litigation Session in Boston and then stayed pending the SJC’s decision in the McGilloway case then pending before the Supreme Judicial Court. After the McGilloway decision ruled that the 2008 policy’s property damage agreement covered IDV claims, the stay was lifted. Commerce then moved to dismiss, arguing that the plaintiffs lacked standing to sue directly without first obtaining judgments against the insureds and that the 2016 policy’s explicit exclusion barred coverage for IDV claims.

After the Business Litigation Session agreed with Commerce’s position and dismissed the Cubberley suit, the Supreme Judicial Court accepted the Cubberley plaintiffs’ appeals for direct appellate review, bypassing the Appeals Court.

The Court’s Analysis of The 2016 Policy Language

The Supreme Judicial Court’s analysis focused on the differences between the 2016 policy language and the 2008 policy language previously interpreted in McGilloway. The Court emphasized that while McGilloway had found coverage for IDV claims under the 2008 policy, that decision was “narrowly tethered to the specific language in the 2008 standard policy.”

The key differences in Part 4. Property Damage of the 2016 policy that drove the Court’s analysis were:

First, the 2016 policy explicitly limits coverage to “damage or destruction of the tangible property of others.” In contrast, the 2008 policy broadly covered “property damage” without the “tangible property” limitation. The Court found this distinction significant because, as established in McGilloway, IDV damages represent an intangible loss in market value rather than physical damage to tangible property.

Second, and most critically, the 2016 policy contains an explicit exclusion stating that “The amount we will pay does not include compensation for… any decreased value or intangible loss claimed to result from the property damage unless otherwise required by law.” No similar exclusionary language appeared in the 2008 policy.

The plaintiffs primarily argued that coverage existed, despite this exclusionary language, because of the “unless otherwise required by law” exception. They contended that both the McGilloway decision and G.L. c. 90, § 34O (the compulsory property damage insurance statute) created legal requirements for IDV coverage that triggered this exception.

The Court rejected both arguments. Regarding McGilloway, the Court emphasized that its prior decision merely interpreted specific policy language and did not create a universal legal requirement for IDV coverage “irrespective of the policy language.” As for the statute, the Court noted that G.L. c. 90, § 34O expressly authorizes the Commissioner of Insurance to approve “conditions, exclusions, and limitations” in auto policies. Since the Commissioner approved the 2016 policy with its IDV exclusion, the statute could not be read to require coverage that the policy explicitly excludes.

The Court also rejected the plaintiffs’ argument that the Commissioner exceeded his authority in approving the IDV exclusion. The Court found the exclusion aligned with the Commissioner’s statutory power to approve policy exclusions and did not conflict with G.L. c. 90, § 34O’s basic mandate that insurers cover property damage liability. The Court noted that the statute’s $5,000 minimum coverage requirement itself demonstrates that insurers need not cover all sums an insured might owe.

The Standing Requirement: A Separate Basis for Dismissal

Although the Court’s interpretation of the 2016 policy language resolved the coverage issue, it also addressed what it called a “threshold issue” – whether third-party claimants have the legal right or “standing” to sue an insurer directly without first obtaining judgments against the insureds who caused their damages.

The Court’s standing analysis centered on two statutes: G.L. c. 175, § 112 and § 113. Together, these statutes establish what the Court called a “two-step procedure” that third-party claimants must follow:

1. First, obtain a final judgment against the insured tortfeasor

2. Then, if necessary, pursue the insurer to reach and apply the insurance policy to satisfy that judgment

The Court emphasized that this procedure is not merely procedural formality but a legal prerequisite for third-party claimants to have standing to sue a tortfeasor’s insurer for damages. Quoting from an earlier decision, the Court reiterated that “obtaining a judgment is a necessary predicate for maintaining a cause of action against” an insurer.

Neither Cubberley nor Seaver had obtained judgments against Commerce’s insureds before suing Commerce directly. The Court rejected their argument that Commerce’s payment of repair costs constituted an admission of liability that made obtaining judgments unnecessary. As the Court explained, “an insurer’s payment to a third party based on the insured’s potential liability ‘is not the same thing as conceding liability’ or admitting the scope of liability.”

The Court noted that while Massachusetts law does allow direct actions against insurers in some circumstances – particularly under G.L. c. 93A and c. 176D for unfair claims settlement practices — these statutory exceptions do not override the legal requirement that a claimant reduce their claim to a judgment requirement before seeking to reach and apply the insurance policy to satisfy their claim for damages against the policy’s insured.

Requiring a claimant to satisfy this condition precedent of obtaining a judgment against the insured serves several practical purposes in the Court’s opinion: (1) It prevents premature litigation over insurance coverage before the claimant establishes the insured’s liability, (2) It protects insurers from having to defend multiple suits over the same accident, (3) It ensures that the insured’s liability defenses are fully considered before insurance coverage is determined, and (4) It maintains the fundamental nature of liability insurance as an indemnity contract for the insured rather than a direct benefit to third parties.

Third-party Property Damage Claimants Still Have The Right To Collect IDV Damages

The Cubberley decision only decided that the 2016 standard auto policy’s property damage provision did not provide coverage for inherent diminished value claims.

The decision affirmed, as stated in McGilloway that third-party property damage claimants can recover for provable IDV damages to their vehicles. However, the Cubberley changes from whom the third-party claimant may recover:

1. If the driver causing the IDV damage is insured by an insurer using the 2008 auto policy form, the insurer is responsible for any provable IDV damages.
2. If the driver causing the IDV damage is insured by an insurer using the 2016 auto policy form, the insured is personally responsible for paying any provable IDV damages.

Whether it is the insurer or the insured who might have potential liability for IDV damages, the Court emphasized that IDV damages are not automatically “inherent” when a vehicle is damaged and repaired. As stated in both McGilloway and reaffirmed in Cubberley, a third-party claimant must prove “with individualized proof” both that:

1. The vehicle has actually suffered IDV damages
2. The specific amount of IDV damages at issue

A Comment on Agents Advising Clients Contemplating Seeking IDV Damages From an Uninsured Driver

An insurance agency advising one of their insureds considering pursuing an IDV claim against a driver who has no IDV coverage might suggest they carefully weigh the cost-benefit of suing an uninsured driver for IDV damages.

As a matter of legal proof, a third-party claimant seeking to recover for IDV damages, even with 100% liability, will need expert testimony in any court proceedings to prove both the existence and amount of any IDV damage to their vehicle as required by the Supreme Judicial Court.

The costs of an expert in an IDV lawsuit are not recoverable expenses and, when paid, can possibly reduce any IDV damages if the court awards IDV damages at all to zero.