Insurance Coverage: Stigma Damages vs. Diminished Value Damages

A recent Washington appellate case clarified the distinction between “stigma damages” and “diminished value damages” to a vehicle involved in a collision and addressed whether their recovery may be excluded from an automobile insurance policy.  In Ibrahim v. AIU Ins. Co., 177 Wn.App. 504, 312 P.3d 998 (2013), an insured’s vehicle was damaged by an at-fault driver, and the insured looked to the under-insured motorist protection in its automobile insurance policy for coverage.  The UIM provision clearly covered the vehicle’s repair, and the insurer provided reimbursement to restore the vehicle to a physical condition identical to its pre-accident physical condition.  However, the insured complained that it was also entitled to recovery for the vehicle’s reduced market value attributable to the lower price purchasers would pay upon resale, because the vehicle had been in an accident.  This case gave the Washington Court of Appeals, Division One, an opportunity to address “stigma damages” and determine whether their exclusion from coverage was permissible.

“Diminished value” damages are available where a vehicle sustains physical damage in an accident, but due to the nature of the damage, it cannot be fully restored to its pre-loss condition. For example, a repaired vehicle may have a diminished value if it has weakened metal that cannot be repaired. In contrast, stigma 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. In other words, diminished value damages may be available when the vehicle cannot be fully restored to its pre-loss condition; whereas stigma damages may be available when the vehicle can be fully restored to its pre-loss physical condition, but is perceived as being less valuable due to the accident. Moeller v. Farmers Ins. Co. of Wash., 173 Wash.2d 264, 271, 267 P.3d 998 (2011).

In Ibrahim, the court found that the insured was seeking “stigma damages,” not “diminished value damages.”  Specifically, the insured’s expert admitted that the “vehicle was fully repaired back to its pre-loss condition and there is no remaining physical damage after those repairs.” The uncompensated damage, the expert opined, resulted entirely from the “amount of money that would need to be taken off the retail market selling price (with full and complete disclosure to the vehicle buyer that it has been in a major collision).”  The appellate court found that the damages the insured was seeking, which did not arise from inadequate repair but solely concerned the perceptions of prospective purchasers upon resale, were “stigma damages.”

An automobile policy may or may not provide coverage for stigma damages. In Ibrahim, the court analyzed the insurance policy at issue and found that the insured was not entitled to stigma damages because coverage was limited to “the amount needed to restore the covered auto to its pre-loss condition.”  The court concluded that the term “pre-loss condition” meant that coverage was limited to returning the vehicle to the physical state it was in pre-accident, but intentionally did not include coverage for any additional value that may have been lost (such as the value associated with stigma damages).  Further, the court found that excluding coverage for stigma damages was permissible under Washington law because excluding stigma damages “did not contravene the letter or the spirit of the underinsured motorist statute.”

If you or your business has a question concerning insurance coverage, feel free to contact an experienced insurance coverage attorney at Montgomery Purdue Blankinship & Austin, PLLC.

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