Excluding Stigma Damages in the Under Insured Motorist Context

“Stigma damages” and “diminished value” damages are not synonymous concepts. “Diminished value” damages generally are available where a vehicle sustains physical damage in an accident, but due to the nature of the damage, the vehicle could not be fully restored to its pre-loss condition. One example of this type of situation occurs where, as a result of the motor vehicle accident, metal that was weakened in the collision could not be repaired. See e.g., Moeller v. Farmers Ins. Co. of Wash., 173 Wash.2d 264, 271, 267 P.3d 998 (2011). Stigma damages, unlike diminished value damages occur when the vehicle has been fully restored to its pre-loss condition but it carries an intangible taint due to its having been involved in an accident.

The question of whether a stigma damage exclusion in an under insured motorist (UIM) policy violated the state’s UIM statute and public policy came before the Washington Court of Appeals recently in Ibrahim v. AIU Ins. Co., 312 P.3d 998 (Wash. Ct. App. 2013). The insured, Firoz Ibrahim, had been involved in an automobile accident. Ibrahim’s vehicle was repaired and restored to a physical condition identical to its pre-loss condition. After the repair was completed Ibrahim submitted a claim to his insurer for the diminished value of the vehicle. The insurance policy provided UIM property damage coverage. The insurer took the position that, while diminished value was covered under the policy, such damage was only available to the extent it could be proved and that proof of “diminished value” could only be determined at the time the vehicle was sold. Thereafter, Ibrahim filed a lawsuit alleging a wrongful denial of his claim for diminished value.

During the litigation, Ibrahim and his expert witness acknowledged that the vehicle had been restored to its pre-loss condition. Ibrahim’s expert did offer the opinion that there was a diminished value (a mischaracterization of stigma damages) to the vehicle because some amount of money would need to be taken off the retail market selling price of the vehicle because it had been involved in a “severe wreck” with substantial structural damage. The expert also opined that potential buyers would turn away from purchasing the vehicle when presented with an opportunity to purchase a similarly priced certified vehicle from a dealer or private party that had not been involved in an accident.

The policy in question contained a limits of liability clause which indicated that the insurer would pay for property damage to a covered automobile arising from an accident that was the lowest of: (1) the actual cash value of covered auto at the time of the accident; (2) the amount necessary to replace the covered auto; (3) the amount needed to restore the covered auto to its pre-loss condition; or (4) any limit of liability shown on the declarations page for property damage. Reviewing the policy terms the trial court rejected Ibrahim’s argument that he was entitled to loss of value of the vehicle concluding that the insurance company was only required to restore the vehicle to its pre-loss condition, not its pre-loss value. Ibrahim then appealed.

The Washington Court of Appeals found that Ibrahim’s claimed damages should be characterized as stigma damages not diminished value. The Court noted that Ibrahim had mistakenly inflated “loss of value” and “diminished value.” The Court found that the two were not synonymous. Although diminished value was a term of art applying to situations when the accident vehicle could not be restored to its pre-loss condition, the evidence was undisputed that the vehicle had been restored to its pre-loss physical condition. Because of this, Ibrahim’s claim damages were properly characterized as stigma damages not diminished value as mischaracterized by the expert. Therefore the question of whether the policy covered diminished value damages was immaterial.

The material question according to the Washington Court of Appeals was whether Ibrahim’s damages were recoverable. The Court found that Ibrahim did not have a viable claim for stigma damages against the underinsured motorist. In situations where the personal property is harmed but not destroyed, the Court found that the measure of damages may be calculated as the loss in the market value of the property following the harm. Because Ibrahim’s vehicle had been harmed but not destroyed, the market value that was lost was coextensive with the stigma damages incurred. Therefore, Ibrahim was “legally entitled to recover” stigma damages from the underinsured motorist as a matter of tort law. However, the Court also found that Ibrahim was not contractually entitled to recover stigma damages from the insurance company because the insurer had validly limited its contractual liability.

The Court found that the policy structure and content demonstrated that the insurance company validly limited its liability to restoring the vehicle to its pre-loss condition and further that the insurer did not intend for pre-loss condition to be synonymous with pre-loss value. Viewing the policy as a whole, the Court interpreted the phrase “pre-loss condition” with the rest of the insurance policy. The Court found that the first limit under the limits of liability clause made the actual cash value of the covered vehicle at the time of the accident recoverable (so long as it was the lowest of the enumerated items). Because of this, if the phrase “pre-loss condition” were interpreted in isolation of the rest of the terms in the policy then two of the four enumerated limits on liability under the limit of liability clause would be identical with both, allowing the insured to recover the actual cash value of the vehicle at the time of the accident. This interpretation, in turn, would render the third limit “pre-loss condition” to be superfluous. The limit of liability clause indicated that for property damage to a recovered auto arising from an accident the value would be the lowest of four optional limit scenarios. If Ibrahim’s interpretation were accepted, two limits would have one meaning which would render one of them superfluous. As an example, “actual cash value” would carry an identical meaning to Ibrahim’s requested interpretation of “pre-loss condition.” Therefore, in order to avoid redundancy in the policy interpretation, the Court concluded that the insurer intentionally used the word “value” to mean what the car was worth on the market before the accident, and that the insurer intentionally used the word “condition” to mean the physical state the car was in before the accident.

Next, the Washington Court of Appeals addressed Ibrahim’s argument that the insurer’s limit of liability clause violated Washington’s UIM statute and public policy. The Court rejected both of these assertions. First, Washington’s UIM statute contained no express or implicit prohibition on limiting liability to “[t]he amount needed to restore the covered auto to its pre-loss condition, reduced by applicable deductible,” as the policy in question provided. The insurer had established a limit on damages that Ibrahim would otherwise be legally entitled to receive and that limit did not contravene the letter or spirit of Washington’s UIM statute. The insurer and Ibrahim agreed to the terms of the contract and where the UIM statute was silent, the Court declined to speak on the issue. Addressing public policy, the Court noted that no Washington decision had ever condemned a UIM insurer for limiting its liability to restoring a vehicle to its pre-loss condition as opposed to its pre-loss value.