The Supreme Court of Georgia recently held that stigma damages are potentially covered under a property insurance policy, leading to the possibility that the property insurer could pursue such damages in a subrogation action. Royal Capital Development LLC v. Maryland Casualty Company, 291 Ga. 262, 728 S.E.2d 234 (Ga. 2012).
In Royal Capital, the insured owned an eight-story commercial building in Atlanta. In 2003, the insured purchased an insurance policy from Maryland Casualty to insure the building. Construction damage on an adjacent property caused physical damage to the insured’s building. The insured submitted a claim to Maryland Casualty, seeking both (1) the cost to repair the damage and (2) the diminution in the market value of the property resulting from the stigma of the building’s past physical damage, even after all repairs had been made. Maryland Casualty agreed to pay the insured $1,132,072.96 as compensation for the estimated costs to repair the property, but refused to acknowledge responsibility for the alleged diminution in the value of the property.
In reaching its decision that an insurer could be responsible for both diminution in value and cost of repairs, the Court recognized that “cost of repair and diminution in value can be alternative, although often interchangeable, measures of damages with respect to real property.” In some circumstances, it may be appropriate to award a combination of both damages in order to make the insured whole. “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.” (quoting Thurmond & Associates v. Kennedy, 668 S.E.2d 666 (Ga. 2008)).
The Court did not answer the ultimate question of whether the policy at issue covered stigma damages. Rather, the Court stated: “whether damages for diminution of value are recoverable under [the insured’s] contract depends on the specific language of the contract itself and can be resolved through application of the general rules of contract construction.” The case is currently on remand to the District Court for the Northern District of Georgia.
Despite the Court’s decision in Royal Capital, the ability of a property owner (and an insurer as subrogee of the property owner) to recover stigma damages is far from clearly established. In general, stigma damage refers to some loss in a property’s market value caused by a public perception of a risk associated with the property. Stigma damage occurs when potential buyers of property fear that a disclosed problem may recur even after the problem has been repaired, and consequently demand a lower price for the property. In such circumstances, the property owner seeks to recover the difference between the market value of the property before the damage and the market value of the property after the damage has been repaired.
In seeking to recover for stigma damages, property owners (and their subrogated insurers) may encounter a number of obstacles. First, the plaintiff must establish that there has been an actual decrease in the market value of the property. This will most likely require testimony from an expert in real estate appraisal. The expert should be prepared to testify that the damaged property has a lower market value than comparable properties without the damage.
Second, the courts are generally reluctant to award stigma damages in the absence of permanent physical injury to property. If the property is capable of being repaired or remediated, the courts are likely to conclude that stigma damages are not recoverable.
Finally, the plaintiff must link the decrease in the market value of the property to the defendant’s conduct. A defendant can raise a variety of explanations for the alleged decrease in the market value of the property, independent from the defendant’s own conduct. If a defendant was confronted with a claim for stigma damages in the current marketplace, the defendant could easily argue that any decrease in the market value of the property resulted from a general reluctance to purchase property in the present economy.
The Supreme Court’s decision in Royal Capital presents the possibility that a claim for stigma damages may arise in the context of a subrogation action. It remains to be seen whether this decision will result in increased claims for stigma damages, or even more importantly, additional guidance as to what evidence is required to prove such damages.