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Letter to the Editor

South Carolina Supreme Court Issues Decision in Diminished Value Case Denying Rrecovery for Diminution in Value

The decision concerns a January 19, 2001 accident, involving a pickup truck owned by Albert Schulmeyer.At the time of the accident, Schulmeyer had an automobile insurance policy with State Farm Fire and Casualty Company.

A State Farm adjuster subsequently assessed Schulmeyer's loss at $3,268.02. State Farm then paid $3,018.02 for certain repairs and Schulmeyer paid his $250.00 deductible for repairs.

Schulmeyer does not dispute that his vehicle was returned to its pre-accident level of performance, appearance and function. Nevertheless, Schulmeyer, on behalf of himself and others similarly situated, sued State Farm in South Carolina state court on February 12, 2002. Schulmeyer alleged that under the terms of his insurance policy, State Farm is obligated to compensate him for "diminution in value" in addition to paying to have the vehicle adequately restored to its pre-accident level of performance, appearance and function.

Schulmeyer contends that State Farm's failure to pay for the purported diminution in value constitutes a breach of contract and a breach of the duty of good faith and fair dealing.

State Farm subsequently removed the case to federal district court in South Carolina, and Schulmeyer did not contest removal. Then, State Farm filed a Motion for Judgment on the Pleadings, or in the Alternative to Compel Appraisal Process, arguing that Schulmeyer's claim for diminution in value is not covered under the applicable policy, and even if it were, Schulmeyer would be bound by the appraisal provision included in the policy and the matter should therefore be dismissed or stayed pending appraisal.

The applicable policy language limits State Farm's liability for loss to property or any part of it to the lower of: (1) the actual cash value; or (2) the cost of repair or replacement. The "cost of repair or replacement" is defined in the insurance contract as: (1) the cost of repair or replacement agreed upon by the policyholder and State Farm; (2) a competitive bid approved by State Farm; or (3) "an estimate written based upon the prevailing competitive price."

In addition, the policy contained a "settlement of loss" provision that provided that State Farm has the right to settle a loss with the policyholder or the owner of the property in one of the following ways:

1. pay the agreed upon actual cash value of the property at the time of the loss in exchange for the damaged property;
2. pay to repair or replace the property; or
3. return the stolen property and pay for any damage due to the theft.

Finally, the policy also contained an appraisal/arbitration provision that provided, in part, that if the owner of the property and State Farm "cannot agree on the amount due, it shall be decided by an appraisal of the loss upon written request by either party. Each party shall select a competent appraiser. These two shall select a third appraiser. The written decision of any two appraisers shall be binding on each party."

Recognizing that the issue of diminution of value is one of first impression in South Carolina, on August 7, 2002, the district court, with the agreement of the parties, certified the following questions of law to the South Carolina Supreme Court:

1. Does State Farm's South Carolina automobile policy obligate it to compensate an insured making a comprehensive or collision claim for any diminution in market value where there is no dispute that the vehicle was adequately restored to its pre-accident level of performance, appearance, and function?
2. If the answer to question 1 is yes, is Plaintiff bound by the appraisal provision within the insurance policy?

On March 24, 2003, the South Carolina Supreme Court issued its decision in the case, answering question number one above in the negative.

In reaching its decision, the South Carolina Supreme Court reviewed decisions from other jurisdictions on the issue of diminished value and noted that there is a split of authority over coverage for diminished value, with the recent trend disfavoring the claim.

In examining the manner in which other states have treated the issue, the court distinguished the Georgia Supreme Court's decision in State Farm v. Mabry, 556 S.E.2d 114 (Ga. 2001), which allowed recovery for diminution in value. The South Carolina Supreme Court noted that the Georgia court based its decision on the understanding implicitly imported into each Georgia insurance contract that loss due to physical damages encompasses both utility and value.

However, the South Carolina Supreme Court went on to note that no similar public policy applies to insurance contracts in South Carolina. Rather, the supreme court noted that it "is required to give effect to the plain meaning of the words in an unambiguous contract."

The court next examined the definitions of the words "repair" and "replace," and ultimately concluded that the policy at issue does not recognize value as inherent in the concept of "repair or replacement."

According to the court, "the policy, read as a whole, defines repair or replacement as restoring the vehicle to pre-accident mechanical function and condition and not as restoring value."

©2003 Collision Repair Industry INSIGHT
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