The recent Georgia decision of Royal Capital Development LLC v. Maryland Casualty Company, 291 Ga. 262, 728 S.E.2d 234 (Ga. 2012) opened a new world of claims for property insurers, in that the Court concluded that economic loss ensuing from property damage (in this particular case so-called “stigma damage” was at issue) was covered under a commercial property policy.
While this decision changed the first-party claim landscape for insurers of property in Georgia, it also creates both additional challenges and opportunities for subrogation recovery as well. To the extent that diminution of value beyond repair cost is compensable under an insurance policy as “damage,” that diminution of value should be recoverable in a subrogation action, but only upon presentation of adequate proof to take the claim of diminished value beyond speculation to a level that is quantifiable and susceptible to consideration by a jury without guesswork.
To establish diminution of value in a commercial property loss, the first step will be to involve competent and licensed property appraisers, preferably at the outset, to assist in evaluation of the question of diminution of value. Since recent economic history has demonstrated that property values can fluctuate quickly and significantly because of external influences from the general economy, getting this work done as soon as practicable after the loss is important. Subrogation cases may progress for a period of years before getting to trial, with investigation taking considerable time even before any filing of litigation can occur and the ability of an appraiser to obtain useful and reliable data will diminish over time.
In Georgia, as in most jurisdictions and in the Federal courts, a property appraisal intended to establish recoverable diminution of value will have to employ a reliable and acceptable methodology that will withstand scrutiny in litigation under Daubert and its progeny. Appraisal opinion evidence is the type of expert opinion evidence that will be evaluated in Georgia civil matters and in the Georgia Federal District Courts under the standard for admission of any type of expert opinion evidence and, in both state and Federal courts, the Daubert standard of reliability is applicable.
Use of “comparables” (i.e., comparing a subject property with recent sales or appraisals of property of similar size, cost of replacement, siting, etc.) to establish value of property is a typical and generally accepted methodology used by appraisers. For most types of property, it is generally not too difficult for the appraiser to find appropriate “comparables” to establish the value of a subject property. However, use of “comparables” to establish proof of diminution of value after a casualty and subsequent repair is more problematic. There is no established index or track record of sales or appraisals for reference to determine the extent to which a casualty, fully repaired, nonetheless diminishes the value of a building by stigma or otherwise. Use of appraisers with MAI status (Member of the Appraisal Institute) or other recognized advanced professional certifications will be advisable for any large diminution of value claim.
It should also be noted that, even if a particular property policy does not, by its terms, afford coverage for diminution of value, that component of loss may still be present and recoverable against responsible third parties. One of the traditional measures of damage for injury to property has been comparison between fair market value of the property immediately prior to the loss and immediately after the loss. “Stigma” or other economic damage that is not remedied by repair of the structure can factor into this measure of damage.
A subrogation claim against third parties is predicated upon the actual damage sustained by the owner/insured, not the amount indemnified by the insurer under the insurance contract (such as is the case with replacement cost coverage for personal property). The amount of the insurer’s payment may cap what the insurer can recover, but it does not cap the amount of claim that can be asserted in a recovery action. When established and included as an element of actual damage in a claim against third parties, diminution of value can provide additional leverage in negotiations and also provides additional “skin in the game” for an insured, giving the insured more motivation to cooperate and assist with recovery efforts. For these reasons, it can be advantageous for the subrogation professional to investigate and document diminution of value even if the contract giving rise to the subrogation claim does not provide coverage for such loss.
It should not be assumed that every loss will have a component of economic loss for diminution of value. However, if reasonable investigation of this loss component demonstrates a rational basis to support a claim of diminution of value of the covered property proximately caused by the casualty resulting in the loss and that diminution of value cannot be alleviated by repair or restoration of the property, subrogation professionals should be alert to this issue and be prepared to expend the resources necessary to document the diminished value sufficiently to make that portion of a property loss a realistic component any claim against responsible third parties.