Coverage for Inherent Diminished Value Dependent on Policy Version

The United States District Court recently issued a ruling in the case of Michael Merullo v. Amica Mutual Insurance Company, determining that the 2016 version of the standard Massachusetts automobile insurance policy does not cover third-party property damage claims for inherent diminished value.

In Massachusetts, “inherent diminished value,” or “inherent diminution in value” (IDV), refers to the decrease in value that a vehicle may experience as a result of being involved in an accident, even after it has been repaired. This decrease in value is typically calculated as the difference between the resale value of a vehicle before an accident and its resale value after an accident and subsequent repairs.

This federal court decision differs from a ruling made by the Massachusetts Supreme Judicial Court last year, in which that court held that the 2008 version of the standard policy does cover third-party inherent diminished value property damage claims.

The key difference between these two court decisions is the inclusion of a clause excluding coverage for inherent diminished value claims in the 2016 standard policy’s insuring agreement. The property damage insuring agreement in the 2008 standard policy form does not contain a similar exclusion.

This ruling has potentially created an unusual situation for insurance agents in Massachusetts. While third-party claims for inherent diminished value have not seen a surge since the Supreme Judicial Court decision, they still present a specific risk in any automobile property damage claim involving a third party.

Under the Supreme Judicial Court decision, policyholders whose agents place them with insurance carriers that use the 2008 standard policy are protected from this risk. However, policyholders placed with carriers that use the 2016 policy may not have this protection and may be personally liable for any inherent diminished value claims.

Facts concerning Mr. Merullo Merullo’s claim for inherent diminished value against Amica

On May 29, 2020, a vehicle covered by Amica insurance collided with Michael Mr. Merullo Merullo’s 2020 Acura RDX/AWD causing property damage. The driver that caused the property damage was insured by Amica under a 2016 Massachusetts standard auto policy form (“2016 Standard Policy”).

The 2016 Standard Policy allows for third-party recovery of property damage in Part 4, which states:

Part 4. Damage to Someone Else’s Property.

Under this Part, we will pay for damage or destruction of the tangible property of others caused by an accident and arising from the ownership, maintenance, or use of an auto, including loading or unloading. The amount we will pay is the amount the owner of the property is legally entitled to collect through a court judgment or settlement for the damaged property. We will pay only if you, a household member, or someone else using your auto with your consent is legally responsible for the accident. The amount we will pay includes, if any, applicable sales tax and the loss of use of the damaged property. The amount we will pay does not include compensation for physical damage to, or towing or recovery of, your auto or other auto used by you or a household member with the consent of the owner or any decreased value or intangible loss claimed to result from the property damage unless otherwise required by law. (Emphasis added).

Mr. Merullo demanded payment from Amica to repair his vehicle and for the inherent diminution in value (“IDV”) the vehicle suffered as a result of the accident. The IDV Mr. Merullo sought referred to the decrease in value that his vehicle experienced as a result of being involved in an accident, even though it had been repaired.

Amica accepted responsibility for the collision and paid for the repairs to Mr. Merullo’s vehicle. However, Amica did not provide any additional payment for any inherent diminished value.

Amica allegedly had all the necessary information to evaluate Mr. Merullo’s IDV claim but denied it based on the lack of coverage for IDV claims in the 2016 version of the standard Massachusetts automobile insurance policy, which does not pay for “intangible loss claimed to result from the property damage unless otherwise required by law.”

 On June 8, 2020, Amica formally notified Mr. Merullo that it would not indemnify him for the inherent diminished value loss.

In February 2021, Mr. Merullo filed a class action complaint against Amica in the Massachusetts Superior Court alleging breach of contract, violations of G.L. c. 93A and c. 176D for unfair claim practices and a declaratory judgment as to the scope of the property damage coverage under Amica’s policy.

Removal to the United States District Court and Amica’s motion to dismiss

Amica removed Mr. Merullo’s lawsuit to the United States District Court under the Class Action Fairness Act, which allows the removal of most class actions to federal court.

In federal court, Amica moved directly to dismiss Mr. Merullo’s complaint on the stated ground that his complaint failed to state and ground for relief because;

[T]he plain language of the 2016 Standard Automobile Insurance Policy explicitly excludes coverage for inherent diminished value and no other law “requires” that Amica – or any automobile insurer – pay for such damages.

“the amount we will pay does not include… decreased value or intangible loss claimed to result from property damage unless otherwise required by law.”

The federal judge ruling on the motion to dismiss acknowledged that according to the Supreme Judicial Court’s interpretation of the 2008 Standard Policy Form, a third-party claimant could recover damages for intangible property damage, such as a diminution in the value of their vehicle.

In its ruling on IDV coverage under the 2008 Standard Policy, The Supreme Judicial Court reviewed Part 4 of the 2008 standard policy, which stated:

Under this Part, we will pay damages to someone else whose auto or other property is damaged in an accident. The damages we will pay are the amounts that person is legally entitled to collect for property damage through a court judgment or settlement. We will pay only if you or a household member is legally responsible for the accident. We will also pay if someone else using your auto with your consent is legally responsible for the accident. Damages include any applicable sales tax and the costs resulting from the loss of use of the damaged property.”

In its decision, the Supreme Judicial Court reasoned that “a plain reading of the phrase `the amounts that person is legally entitled to collect for property damage through a court judgment or settlement’ entitles a claimant `to be made whole and compensated for what he has lost.’

Since it had previously held that “the term property damage . . . can include intangible damage such as the diminution in value of tangible property,” and “[b]ecause the plain language of part 4 of the [2008] [S]tandard [P]olicy does not limit recovery to merely repair or replacement costs,” the court found that the insurer may be liable for IDV damages to make the third-party claimant whole.

However, in ruling on Amica’s motion, the district court judge distinguished the 2016 policy form from the 2008 policy form.

Part 4 of the 2016 Standard Policy at issue in Mr. Merullo’s claim had more restrictive property damage coverage than Part 4 of the 2008 Standard Policy, which the Supreme Judicial Court interpreted in ruling on Part 4 of the 2008 standard policy.

The 2008 Standard Policy states that third-party coverage includes paying “damages to someone else whose auto or other property is damaged in an accident,” but the 2016 Standard Policy restricts third-party coverage to “damage or destruction of tangible property.”

More importantly, the 2016 Standard Policy’s property damage insuring agreement’s final clause, which is absent from the 2008 Standard Policy, the judge ruled, expressly disclaims third-party coverage of IDV damages by stating that:

“the amount we will pay does not include… decreased value or intangible loss claimed to result from property damage unless otherwise required by law.”

Judge finds Commissioner’s approval of the 2016 standard policy exclusion conclusive

Mr. Merullo’s main argument against the 2016 Policy Form’s restriction on IDV damages relied upon Mass. Gen. Law c. 90, § 34O, as requiring Amica to pay for IDV damages. This statute’s initial mandate for property damage coverage states:

“[e]very policy of property damage liability insurance shall provide that the insurer will pay on behalf of the insured all sums the insured shall become legally obligated to pay as damages because of injury to or destruction of property, including loss of use thereof, caused by accident and arising out of the ownership, maintenance or use, . . . of the insured motor vehicle.”

Mr. Merullo argued that based on this statute, the McGilloway decision, and the policy Amica was “required by law” to pay “all sums the insured shall become legally obligated to pay as damages because of injury to or destruction of property.”

Mr. Merullo’s argument based on the statute did not move the judge. He found that Mr. Merullo’s statutory argument failed to take into account the insurance commissioner’s role.

The judge noted that § 34O defined mandatory property damage liability insurance as:

“insurance containing provisions as prescribed in this section, among such other provisions, including conditions, exclusions, and limitations, as the commissioner of insurance may approve.”

In this case, the judge found decisive that the Commissioner of Insurance had approved the 2016 Standard Policy, with an “…express exclusion that the ‘amount [insurers] will pay does not include . . . any decreased value or intangible loss to result from the property damage unless otherwise required by law’.”

Final decision and appeal

The judge dismissed Mr. Merullo’s breach of contract, unfair claim practices, and declaratory judgment count, finding Amica had no liability under Part 4 of the 2016 Standard Policy form for Mr. Merullo’s claimed IDV damages.

Ten days after the final judgment was entered, Mr. Merullo appealed the dismissal of his class action to the First Circuit Court of Appeals.

Agency Checklists will keep you posted

Agency Checklists will monitor this case on appeal and keep its readers posted about any further developments.

For more information on inherent diminished value claims in Massachusetts:

See Agency Checklists’ articles of October 26, 2021, “Supreme Court Rules Auto Policies Cover Vehicles’ Post-Repair Losses of Value” and November 2, 2021, “Seven Points Agents Should Know About Inherent Diminished Value Property Damage Claims.”

Owen Gallagher

Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists

Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.

Connect with me directly, by calling me at 617-598-3801.