Many insurance policies provide coverage for “direct physical loss of or damage to” property that gives the insurer the option to pay the cost of repair or the loss of value. The Georgia Supreme Court previously held in State Farm Mut. Auto Ins. Co. v. Mabry that an automobile insurance policy requiring the insurer to pay for loss to the insured’s car required the insurer to also pay for any diminution in value of the repaired vehicle. It has been unclear, however, whether this same interpretation should be applied to insurance policies insuring real property.

That was the question before the 11th Circuit Court of Appeals in Royal Capital Dev. LLC v. Maryland Cas. Co., when the owner of a commercial building in Atlanta submitted a claim to its insurer after construction activity on an adjacent property caused physical damage to the insured’s building. The owner sought from the insurer both the costs of repair and the post-repair diminution in value resulting from the damage. The insurer acknowledged that the damage to the building was a covered cause of loss and paid to compensate for the costs of repairs, but refused to acknowledge any responsibility for the diminution in value.

Because this precise issue had never before been addressed by Georgia courts, the 11th Circuit certified the question of whether the Mabry rule extends to standard insurance contracts for buildings to the Supreme Court of Georgia:

[I]f the insurer elects to repair the building, must it also compensate the insured for the diminution in value of the property resulting from stigma due to its having been physically damaged?

The Supreme Court of Georgia held that Mabry is not limited by the type of property and the insurer’s obligation to pay can include paying for any lost value. The Court stated that the measure of damages is intended to place an injured party in the same position they would have been if the injury had not occurred. Therefore, “The Mabry rule applies to the insurance contract at issue in this case. Accordingly, whether damages for diminution in value are recoverable under the [owner’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 Royal Capital decision is the first extension of the logic of Mabry since it was decided in 2001. In the aftermath of the original Mabry decision, insurers were forced to pay hundreds of millions of dollars in settlements and sanctions. Although the implications of the Royal Capital decision are still not completely clear, it seems that insurers could be faced with large settlements with property owners seeking “stigma” damages. These amounts could far exceed the stigma damages contemplated by the Mabry decision given the relative value of the property at issue. It also seems that after extending the Mabry logic from cars to property, the logic could be extended further into other areas of insurance, such as CGL policies, ultimately costing insurers even more as the rationale behind the decision continues to spread.

Royal Capital Dev. LLC v. Maryland Cas. Co., 2012 WL 1909842 (Ga. May 29, 2012).