It is a common perception that an automobile's market value is diminished after it has sustained damage in an accident, notwithstanding the fact that the resultant damage may have been properly repaired. In that regard, demands are sometimes made by an insured, or by a claimant, for recovery of damages in excess of the cost to repair the vehicle, i.e., for recovery of an additional amount equivalent to the diminution in market value of the repaired vehicle.
In such cases, the insured's automobile policy, and the claimant's rights, as a matter of law, are called into question; the issue being, whether the car's diminution in market value is covered under a personal automobile policy, or whether such damages are recoverable by a third-party claimant."PERSONAL AUTO POLICY" CONSTRUED
While automobile insurance policies differ somewhat amongst insurers, the Insurance Services Office's (ISO) Personal Automobile Policy form (PAP) is typical of the type of policy issued by many insurers to underwrite their personal automobile property and liability loss exposures.
The ISO's PAP provides in pertinent part:LIMIT OF LIABILITY
1. Actual cash value of the stolen or damaged property;
2. Amount necessary to repair or replace the property with other property of like kind and quality.
However, the most we will pay for loss to any "non-owned auto" which is a trailer is $500.
C. If a repair or replacement results in better than like kind or quality, we will not pay for the amount of the betterment.
Most personal automobile policies are considered "open policies", as opposed to "valued policies", i.e., like the PAP, open policies contain provisions which establish the cost of repair or replacement as the measure of the insurer's liability. Arguably, under this type of policy the insured should not recover the difference between the value of the vehicle before and after a loss in addition to the cost to repair the vehicle. 6 Appleman, Insurance Law & Practice, Sec. 3883, p 368-369.RULE OF STRICT CONSTRUCTION
It is axiomatic that ambiguities and uncertainties in a policy of insurance are generally resolved in favor of the insured. However, as one court has aptly stated; "although [a court should] construe all provisions, conditions, or exceptions that tend to limit liability strictly against the insurer, strict construction does not mean strained construction." Ray v. Farmers Ins. Exchange, 200 Cal.App.3d 1411, 246 Cal.Rptr. 593 (1988). Thus, courts should not, under the guise of strict construction, rewrite a policy to bind the insurer to a risk that it did not contemplate and for which it has not been paid."LIKE KIND AND QUALITY" CONSTRUED
In Ray v. Farmers Ins. Exchange, the plaintiff's parked car was damaged when struck by a truck. The plaintiff had purchased the vehicle about ten months previously, and it had a market value of $7,100 immediately before the loss occurred. The damages to the plaintiff's car totaled $4,000.
Subsequent to the loss, and after all damages had been repaired (questionably to the plaintiff's satisfaction), an expert testified that the vehicle's market value had dropped to $5,500. The expert, an automobile dealer, testified that he discounts a car's value by 50 percent if it has sustained collision damage costing more than half of the car's pre-accident value to repair.
The sole issue as outlined by the court in Ray, was whether the plaintiff's automobile insurance policy, which contained a collision coverage provision similar to the ISO's Personal Auto Policy, should provide coverage for the diminution in the car's market value due to the car's status as a previously wrecked vehicle. Id. at 594.
The court in Ray ultimately decided that diminution of the car's market value was not covered under the policy of insurance. In reaching its decision, the court concluded that the phrase "like kind and quality", as cited in the collision coverage section of the auto policy, contemplates a type and extent of repair that would place the insured automobile in substantially the same condition as it was before the accident. Id. at 596. Moreover, the court held that if the damages were such that the automobile could not be restored to that condition, the insurer should be required to pay the actual cash value of the vehicle at the time of loss. Id. at 596.
The court further held that one must assume that an automobile's market value will decrease after repairs are made; and, to hold the insurer liable for the automobile's diminution in market value would make the insurer an insurer of the auto's cash value in virtually all cases; and, it would render essentially meaningless the insurer's right to elect to repair rather than to pay the actual cash value of the vehicle at the time of loss. Id. at 596.
The court in Ray further held that, to the extent that the insured's auto was repaired to its pre-accident safe, mechanical, and cosmetic condition, the insurer's obligation under the policy to repair to "like kind and quality" was discharged. Id. at 596.
It is interesting to note that the court in Ray stated, in dicta, that presumably for an extra premium the insured could have purchased a "valued policy" which would have provided the type of coverage he sought to have. Id. at 596.ILLINOIS PERSPECTIVE
A search of Illinois law uncovers a single long standing case which addresses a similar issue, i.e., whether an insured-plaintiff is entitled to a jury instruction which provides for the consideration and potential award of damages for the diminution in market value of the insured automobile in addition to an award of damages equivalent to the cost for suitable repairs.
In Haussler v. Indemnity Co. Of America, 227 Ill. App. 504 (1923), the court concluded that the correct measure of damages under a personal automobile insurance policy, such as the ISO's PAP, is for the recovery of the cost of the suitable repair or replacement of the parts injured or destroyed, not to exceed an amount equivalent to the automobile's actual cash value at the time of such injury or destruction. Id. at 508. The court further held that the jury instruction given by the trial court which, in effect, fixed the measure of damages at the difference between the fair market value of the car immediately before the collision, and the fair market value of the car immediately after the collision, was clearly wrong. Id. at 509.DISSENTING OPINION
Overall, the various jurisdictions have developed two distinct lines of authority on the issue of whether collision coverage under a personal auto policy should cover the diminution in a car's market value due to the car's status as a previously wrecked vehicle.
A well-outlined dissent to the aforementioned viewpoint is cited in Ray v. Farmers Ins. Exchange, 200 Cal.App.3d 1411, 246 Cal.Rptr. 593 (1988). The dissenting justice in Ray opines that a windfall to the insurer occurs when the diminution of market value is not recoverable by its insured. Ray at 597. The dissenting justice further opined that, to permit the insurer to repair the car to a comparable physical condition and function, while its value has plummeted, does not compensate the insured with a car of "like kind and quality" as the average person would understand those words. Id. at 597.
According to the dissent, the purpose of the policy is to compensate the insured for any loss or damage, less any deduction and, accordingly, an insured is entitled to have a car just as valuable as the car was before the accident. Moreover, anything less would not be adequate compensation for the loss sustained. Ray at 599.
The dissenting opinion as outlined in Ray has been shared by a number of other states' courts. For example, in Superior Pontiac Co. v. Queen Insurance Co. of America, 434 S.W.2d 340, the Texas Supreme Court held that the cost of repairs of a stolen but recovered vehicle would not compensate the insured for the loss she had suffered, because such costs would not restore the vehicle to substantially its former condition and value. In so holding, the Texas Supreme Court reversed the Court of Appeals' construction that the terms "repair" and "replace", as cited in the policy of insurance, meant restoration of the car to substantially the same condition as before the theft.ACTIONS IN TORT
It is important to note at this point that the proper method for measuring damages and construing collision coverage under a contract of auto insurance, is not necessarily the proper method for determining similar damages in an action in tort. Thus, in the first instance, it is the language of the insurance contract sued upon that must prevail, and such language, so far as applicable to the question of coverage, must determine the rule as to the measure of damages to be followed. Haussler v. Indemnity Co. of America, 227 Ill. App. 504 (1923).
It is interesting to note, however, that in Ray v. Farmers Ins. Exchange, 200 Cal.App.3d 1411, 246 Cal.Rptr. 593 (1988), the third-party liability insurer also refused to compensate the plaintiff for the diminution in value to his automobile. Nevertheless, absent a brief statement that the "rules applicable to recovery in tort do not apply to an action on a contract of insurance", the court in Ray was silent respecting the issue of whether the diminution in market value was recoverable by a third-party claimant in like circumstances. Id. at 593.
It is a general rule that the law of torts attempts primarily to restore the injured party to as good a position as he held prior to the tort. Restatement of Torts 2d, Sec. 901 (1979). However, it is also well settled that, in order to accomplish that result, a court should view the rules governing the proper measure of damages in a particular case as guides only, i.e., not to be applied in an arbitrary, formulaic, nor in an inflexible manner, particularly where to do so would result in a substantial injustice. Roark v. Musgrave, 41 Ill. App.3d 1008, 355 N.E.2d 91 (1976).
No Illinois cases were uncovered which squarely held that a third-party claimant may, or may not recover for the diminution in a car's market value due to its status as a previously wrecked vehicle. However, there appears to be a majority position which holds that the term "property damage", from a tort standpoint, includes tangible property which has been diminished in value or made useless, irrespective of any actual physical injury to the tangible property. Pittway Corp. v. American Motorists Ins. Co., 56 Ill.App.3d 338, 370 N.E.2d 1271, 13 Ill. Dec. 244 (1977).CONCLUSION
The proper valuation of property is considered a question of fact in Illinois. Central Illinois Light Co. v. Porter, 96 Ill.App.2d 338, 342, 239 N.E.2d 298, 301 (1968). Moreover, it is the plaintiff's burden not only to establish that damages were sustained, but also to establish a reasonable basis for computation of those damages. Kohlmeier v. Shelter Insurance Company, 170 Ill.App.3d 643, 121 Ill.Dec. 288, 525 N.E.2d 94 (1988).
With respect to the proper method for computation of damages, the following passage is found to be instructive: "Computation of the amount of damages should be made on a fair and reasonable basis adequately reflecting the injury as revealed by the pleadings and evidence, and any damages awarded on the basis of speculation or conjecture must fall." 25 A Corpus Juris Secundum, Sec. 194 (1966).