Repaired, But Not Worth As Much!

My insurance company paid to have it repaired, but now it is not worth nearly as much!

That’s the subject of Baldwin v. AAA Northern California, Nevada & Utah Ins. Exch. (2016) — Cal.App.4th —, 2016 WL 3398446 (filed 6/13/16, modified and certified for publication on 7/6/16)

Plaintiff Baldwin had an almost-new Toyota Tundra  (pickup).  Baldwin’s parked pickup suffered structural damage when it was hit following a collision between two other cars (driven by Hollandsworth and Sebastian).  Baldwin had his own insurance with AAA.  Hollandsworth was also insured by AAA – for property damage caused by his negligence.

AAA refused to consider Baldwin’s pickup a “total loss,” and instead had the pickup repaired for $8,196.06.  Following repairs, the pickup’s future resale value was decreased by more than $17,100 (aka “diminution in value” “diminished value” “lower resale value”).

Baldwin sued the drivers Hollandsworth and Sebastian for negligence, and sued AAA for breach of contract and bad faith.  The appeal involves the Baldwin’s claims against AAA.

Baldwin contended that AAA was obligated either to pay him the entire pre-accident value of the pickup or to repair the pickup to its original pre-accident condition.  Baldwin alleged that the repaired pickup did not match its pre-accident condition “with respect to safety, reliability, mechanics, cosmetics and performance” and with respect to future resale value (decreased $17,000).

AAA filed a demurrer, contending that diminished resale value of Baldwin’s pickup was specifically excluded under the AAA auto insurance policy. The trial court agreed, and ordered a final judgment of dismissal with prejudice for AAA.

As to breach of contract, the Court of Appeal said the policy language was clear and explicit, stating that AAA “may pay the loss in money or repair … damaged … property.” The policy’s use of the term “may” suggests AAA had the discretion to choose between the two options.  This suggestion was supported by the statement (in the same section of the policy), under “LIMITS OF LIABILITY,” that AAA’s coverage responsibility for car damage would “not exceed” “the lesser of” those two options, namely, paying “the actual cash value of the … damaged property” or “the amount necessary to repair … the property with similar kind and quality.”

As to Baldwin’s claim that it was not possible to restore his almost-new pickup to its pre-accident condition, the Court of Appeal said that Baldwin had not alleged any flaws, unrepaired damage or performance issues with the pickup.  He only alleged lower future resale value.  Baldwin’s general allegation that the pickup was not restored to its pre-accident condition “with respect to safety, reliability, mechanics, cosmetics and performance” was too conclusory.  “Facts alleging a breach…must be pleaded with specificity.”

The Court of Appeal noted the similarity to Ray v. Farmers Ins. Exchange (1988) 200 Cal.App.3d 1411, where the policy gave the insurer the right to elect repair of the insured’s vehicle to a similar condition if cost to repair would be less than the actual cash value of the vehicle at the time of the loss.  The court held that the insurer’s election to make repairs was conclusive if the repairs put the vehicle “substantially in its pre-accident condition.”  It specifically rejected the notion that repairing the vehicle meant “to both its pre-accident condition and market value.” Rather, the policy language gave the insurer the right to elect the most economical method of paying claims.

Further, citing Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409, the court in Baldwin noted that repairing a car to its pre-accident condition did not mean restoring it to its condition “when it left the factory or showroom floor,” reasoning that “no repair can ever restore a vehicle to its pristine factory condition,” and applying such a standard would mean “no vehicle could be adequately repaired.”

Because the AAA policy defined its repair obligation as not including “diminution in value,” the Court of Appeal agreed that Baldwin failed to allege breach of contract against AAA.

Baldwin also argued it was against public policy to give “AAA an incentive to attempt superficial repairs to cars sustaining structural damage, returning unsafe cars to the roads, rather than declare them a total loss and pay out their actual (greater) pre-accident cash value.”  The Court of Appeal, however, noted two countervailing incentives:  (1) that the insurer would be financially responsible under the same policy for any damages resulting from future accidents of an insufficiently repaired vehicle (Baldwin did not contend that AAA canceled his policy after the accident); and (2) insurers would be liable for tort damages if, in bad faith, they directed cosmetic or superficial repairs to an insured vehicle.

While acknowledging that public policy concerns would come into play if an insurer “refused to acknowledge the vehicle was nonrepairable but nevertheless proceeded with a purely cosmetic restoration,” the court noted that Baldwin did not contend that the resulting repairs were purely cosmetic or that the pickup returned to him actually was unsafe.  Nor did he allege that his pickup type or vehicles generally are incapable of being restored to a safe condition once having sustained structural damage.  Absent those types of allegations, it was clear that Baldwin’s claim rested solely on the insurer’s failure to take into account the vehicle’s depreciation in value when opting to repair the vehicle, which the court said is not against public policy.

The court also upheld the demurrer to Baldwin’s claim for breach of the implied covenant of good faith and fair dealing, because Baldwin alleged that AAA performed as promised under the insurance policy by directing the repair of his pickup following the accident and providing him a rental car.  Absent allegations that AAA unreasonably delayed repairs, or that the pickup was returned to him defective in some specific way other than diminished resale value, Baldwin had failed to state a cause of action against AAA for breach of the implied covenant under his insurance policy.

As to Baldwin’s claim under the other driver Hollandworth’s AAA policy, the Court of Appeal held that Baldwin stood in the shoes of a third party claimant.  And under Moradi–Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, a third party claimant—an individual who is injured by the alleged negligence of an insured party—does not have a private right of action against the insurer for unfair settlement practices.

Finally, the Court of Appeal addressed whether Baldwin should have been allowed to amend his Complaint.  The Court of Appeal noted that a plaintiff “must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading.” Since Baldwin argued only that he would add allegations that the express terms of the insurance policy are ambiguous “considering the implied terms and representation to the public that the insurance policy covers ‘losses’ to the insured’s property,” the Court of Appeal found that denial of his request to amend the Complaint was proper.

There are plenty of take-aways on this one, and I am sure I’ll miss some, so please add your own in the comments.  But here are some:

  • This appeal addresses only Baldwin’s claims against AAA under its insurance policies, and not whether the other drivers are liable to Baldwin for the diminished value of his pickup.
  • Future plaintiffs should consider having an independent car expert and/or appraiser investigate the mechanical, structural, and cosmetic condition of the repaired car, and have a lawyer assess whether the Complaint should include specific allegations of flaws, unrepaired damage, and/or performance issues. (Sample Google Search)
  • Future plaintiffs should assess whether to include specific allegations to support public policy arguments, including whether the insurer later refused to insure the repaired vehicle after a structural repair, and other facts relating to public safety.
  • Drivers, especially those with new or almost-new cars, should review their auto policies and consult their agents regarding their coverage and policy language relating to the insurer’s ability to elect to repair, and language that may exclude compensation for diminished value after repair.
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