Royal Capital owned an eight-story commercial building in the Buckhead area of Atlanta. In 2003, Royal Capital purchased an insurance policy from Maryland Casualty to insure the building. After construction activity on an adjacent property caused physical damage to the building, Royal Capital submitted a timely claim under the policy to Maryland Casualty, seeking both the costs of repair and the post-repair diminution in value resulting from the damage. Maryland Casualty acknowledged that the damage to the building was a covered cause of loss under the policy and paid $1,132,072.96 to compensate Royal Capital for the estimated costs of repair. However, Maryland Casualty refused to make payment on Royal Capital’s claim of diminution in the value of the building.
Royal Capital filed a lawsuit against Maryland Casualty in Georgia state court. The case was removed to the US District Court for the Northern District of Georgia. The district court concluded that Georgia law did not permit recovery on insurance contracts for diminution of value damages in addition to the costs of repair. Royal Capital appealed to the US Court of Appeals for the Eleventh Circuit. Finding no controlling precedent from Georgia state courts, the Eleventh Circuit determined that the case raised an important unsettled question of state law. Accordingly, it certified the issue of whether state law permitted recovery of diminutions of property value as well as repair costs to the Georgia Supreme Court.
JUSTICE THOMPSON The United States Court of Appeals asked this Court to decide the following question of law: For an insurance contract providing coverage for “direct physical loss of or damage to” a building that allows the insurer the option of paying either “the cost of repairing the building” or “the loss of value,” if the insurer elects to repair the building, must it also compensate the insured for the diminution in value of the property resulting from stigma due to its having been physically damaged?
This question stems from a dispute over the proper interpretation under Georgia law of a contract insuring real property. The primary issue presented to this Court is whether our ruling in State Farm Mut. Auto. Ins. Co. v. Mabry, 556 SE2d 114 (2001), a case involving an automobile insurance policy wherein we held that a provision requiring the insurer to pay for loss to the insured’s car required the insurer to also pay for any diminution in value of the repaired vehicle, is applicable. As the Eleventh Circuit observed, the single question presented in this appeal is whether the Georgia courts would hold that the Mabry rule extends to standard insurance contracts for buildings. For the reasons which follow, we hold that our ruling in Mabry is not limited by the type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay.
In Mabry, this Court determined that value, not condition, is the baseline for the measure of damages in a claim under an automobile insurance policy in which the insurer undertakes to pay for the insured’s loss from a covered event, and that a limitation of liability provision affording the insurer an option to repair serves only to abate, not eliminate, the insurer’s liability for the difference between pre-loss value and post-loss value. As we noted in our decision, “[r]ecognition 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.”
These same principles have long been applied under Georgia law in cases involving the proper determination for measuring damages to real property. This Court has consistently held that the measure of damages in such cases 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. Moreover, this Court has long considered diminution in value to be an element in determining the proper measure of damages to real property.
In applying these principles, this Court has recognized that under Georgia law, cost of repair and diminution in value can be alternative, although often interchangeable, measures of damages with respect to real property. Although unusual, it may sometimes be appropriate, in order to make the injured party whole, to award a combination of both measures of damages. In such cases, notwithstanding remedial measures undertaken by the injured party, there remains a diminution in value of the property, and an award of only the costs of remedying the defects will not fully compensate the injured party. Based on wellestablished precedent authorizing full recovery, including in some circumstances both diminution in value and cost of repair, we thus reject Maryland Casualty’s contention that the contract at issue did not include coverage for post-repair diminution in value as no insurer or insured had reason to expect such coverage under a standard real property insurance policy.
Finally, we find no reason to distinguish Mabry from the instant case based on the alleged sophistication of the parties entering into insurance policies covering real property versus those who purchase automobile insurance policies. Although this case involves an insurance contract covering commercial property, a vast number of policies covering real property insure residential property for homeowners—a group far less sophisticated and more closely aligned to the automobile policyholders in Mabry.
We adhered in Mabry to the long-standing contract interpretation rule in Georgia that where 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. We see no reason to limit our holding in Mabry to automobile insurance policies and we thus answer the primary question posed by the Eleventh Circuit Court of Appeals in the affirmative: The Mabry rule applies to the insurance contract at issue in this case. Accordingly, whether damages for diminution of value are recoverable depends on the specific language of the contract itself and can be resolved through application of the general rules of contract construction.
CRITICAL THINKING:
Was this the correct decision in this case? Are there significant differences between automobile and real property insurance policies that the court failed to recognize?
ETHICAL DECISION MAKING:
What interests is the court protecting in this case? Is the court looking beyond the facts of this case and attempting to set rules that might apply when the parties are not of equal sophistication, such as in the context of a homeowner’s policy? Should there be different rules regarding the interpretation of insurance contracts depending on the parties’ sophistication? Why or why not?