Let’s say you own a factory building. Construction activity on an adjacent lot causes damage to the structure. You have the standard first-party property insurance policy providing coverage for “direct physical loss or damage,” and the policy gives the carrier the option of paying either the “cost of repair” or “loss of value.” If the carrier elects to repair the building, must it also pay for diminution in value of the property caused by the “stigma” of having been physically damaged?
This question was very recently answered by the Georgia Supreme Court in Royal Capital Development, LLC v. Maryland Casualty Company. The carrier acknowledged that damage to the building was a covered loss under the policy and paid out over $1 million for the estimated costs of repair. But the carrier refused to pay anything for the alleged diminution in value due to stigma.
Citing to, and analogizing to, its prior authority in the context of automobile coverage, the Court unanimously held: “An insurance policy, drafted by the insurer, promises to pay for the insured’s loss; what is lost when physical damage occurs is both utility and value; therefore, the insurer’s obligation to pay for the loss includes paying for any lost value.”
The Court also wrote that “recognition of diminution in value as an element of loss to be recovered on the same basis as other elements of loss merely reflects economic reality…the measure of damages…is intended to place an injured party, as nearly as possible, in the same position they would have been if the injury had never occurred.”
Carriers may argue that, under the usual policy language, they have a right to pay for either (A) the costs of repair or replacement or (B) the loss in value. In the Royal Capital case, for example, the form required Maryland Casualty to pay either “(a)…the value of lost or damaged property; [or] (b)…the cost of repairing or replacing the lost or damaged property.” By making stigma damages an element of the costs of repair, the argument goes, the Court has muddied the distinction.
The problem with that argument may be the actual wording of the form. Subpart (b) of the language quoted above speaks of repairing or replacing the property. Webster’s defines “repair” as “to restore to a sound or healthy state,” and defines “replace” in part as to “to restore to a former place or position.” And the Georgia Court found that to accomplish either of these things required the policyholder to be placed in as good a position as it would have been in had the injury not occurred.