Royal Capital Development, LLC v. Maryland Casualty Co.

Supreme Court of Georgia, decided May 29, 2012 (Thompson, J., writing for a unanimous court on a question of Georgia law certified by the United States Court of Appeals for the Eleventh Circuit). The complete opinion appears below, transcribed from the reported decision; only print artifacts have been removed.

The full opinion

ROYAL CAPITAL DEVELOPMENT LLC v. MARYLAND CASUALTY COMPANY. Supreme Court of Georgia (May 29, 2012). Docket No. S12Q0209. 291 Ga. 262, 728 S.E.2d 234.

Thomas William Curvin, Tracey Katagi Ledbetter, Sutherland Asbill & Brennan LLP, Atlanta, for amicus appellee. Jarome Emile Gautreaux, Gautreaux & Adams, LLC, Macon, Traci Green Courville, Oates & Courville, Columbus, for amicus appellant. John Stephen Berry, Letoyia Charmain Brooks, James Randolph Evans, McKenna, Long & Aldridge, LLP, Atlanta, for appellee. Anne Elizabeth Andrews, Alan Edward Lubel, Law Office of Alan E. Lubel, P.C., Atlanta, Sofia Youjin Jeong, Berman Fink Van Horn, P.C., Atlanta, for appellant.

THOMPSON, Justice.

By way of Royal Capital Dev. v. Maryland Cas. Co., 659 F.3d 1050 (11th Cir. 2011), the United States Court of Appeals asked this Court to decide the following question of law:

For an insurance contract providing coverage for “direct physical loss of or damage to” a building that allows the insurer the option of paying either “the cost of repairing the building” or “the loss of value,” if 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?

This question stems from a dispute over the proper interpretation under Georgia law of a contract insuring real property. The primary issue presented to this Court is whether our ruling in State Farm Mut. Auto. Ins. Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (2001), a case involving an automobile insurance policy wherein we held that a provision 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, is applicable. As the Eleventh Circuit observed, “the single question presented in this appeal is whether the Georgia courts would hold that the Mabry rule extends to standard insurance contracts for buildings.” Royal Capital Development, 659 F.3d at 1052. For the reasons which follow, we hold that our ruling in Mabry is not limited by the type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay.

The facts giving rise to this question are summarized as follows: Royal Capital owns an eight-story commercial building in the Buckhead area of Atlanta. In 2003, Royal Capital purchased the disputed insurance policy from Maryland Casualty to insure the building. After construction activity on an adjacent property caused physical damage to the building, Royal Capital submitted a timely claim under the policy to Maryland Casualty, seeking both the costs of repair and the post-repair diminution in value resulting from the damage. Maryland Casualty acknowledged that the damage to the building was a covered cause of loss under the policy and paid $1,132,072.96 to compensate Royal Capital for the estimated costs of repair. However, Maryland Casualty refused to acknowledge any responsibility to compensate Royal Capital for the alleged diminution in value of the property.

Royal Capital filed a one-count complaint in the Superior Court of Fulton County, Georgia and Maryland Casualty removed the case to the United States District Court for the Northern District of Georgia pursuant to 28 USC § 1332. Deferring discovery on the actual extent of the building’s loss of value, the parties filed cross-motions for summary judgment on the narrow issue of whether the insurance contract allowed recovery of diminution of value damages in addition to the costs of repair under Georgia law. The district court granted Maryland Casualty’s motion for summary judgment, holding that Mabry was inapplicable because it dealt exclusively with a consumer automobile policy and thus diminution of value damages were not available under this contract insuring real property. On appeal, the Eleventh Circuit determined that the sole question presented was whether Royal Capital’s insurance contract with Maryland Casualty required the insurer to pay for the alleged “diminution in value” of the insured building in addition to the costs of repair. Royal Capital, supra, 659 F.3d at 1052. In light of conflicting federal decisions and finding no controlling precedent from Georgia state courts, the Eleventh Circuit determined that this case raised an important unsettled question of state law. Accordingly, it certified to this Court the question of the proper interpretation of the parties’ insurance contract in light of Mabry. Id. at 1054.

While the district court in this case agreed with Maryland Casualty that Mabry was not controlling, noting that it “dealt exclusively with a consumer automobile policy,” see Royal Capital Dev. v. Maryland Cas. Co., No. 1:10–CV–1275–RLV, 2010 WL 5105157 (N.D.Ga., Dec. 2, 2010), in NUCO Invs. v. Hartford Fire Ins. Co., No. 1:02–CV–1622–CAP, 2005 WL 3307089 (N.D.Ga. Dec. 5, 2005) (unpublished), a different federal judge in an earlier case found that the rationale behind the Mabry rule did not justify a distinction for real estate.

1. Royal Capital contends that pursuant to Mabry, the insurance coverage provided under the contract at issue extends to compensation for the building’s diminution in value resulting from stigma due to the building’s past physical damage, even after all repairs have been made. In Mabry, this Court determined that

value, not condition, is the baseline for the measure of damages in a claim under an automobile insurance policy in which the insurer undertakes to pay for the insured’s loss from a covered event, and that a limitation of liability provision affording the insurer an option to repair serves only to abate, not eliminate, the insurer’s liability for the difference between pre-loss value and post-loss value.

274 Ga. at 506, 556 S.E.2d 114. As we noted in our decision, “[r]ecognition of diminution in value as an element of loss to be recovered on the same basis as other elements of loss merely reflects economic reality.” Id. at 508, 556 S.E.2d 114.

These same principles have long been applied under Georgia law in cases involving the proper determination for measuring damages to real property. Empire Mills Co. v. Burrell Engineering & Constr. Co., 18 Ga. App. 253, 89 S.E. 530 (1916) (as a general rule the measure of damages in actions for real property is the difference in value before and after the injury to the premises). This Court has consistently held that the measure of damages in such cases is intended to place an injured party, as nearly as possible, in the same position they would have been if the injury had never occurred. John Thurmond & Assoc. v. Kennedy, 284 Ga. 469, 668 S.E.2d 666 (2008). See BDO Seidman v. Mindis Acquisition Corp., 276 Ga. 311 (1), 578 S.E.2d 400 (2003); Redman Dev. Corp. v. Piedmont Heating, etc., 128 Ga. App. 447, 197 S.E.2d 167 (1973). Moreover, this Court has long considered diminution in value to be an element in determining the proper measure of damages to real property. See Thurmond, 284 Ga. at 470, 668 S.E.2d 666; see Harrison v. Kiser, 79 Ga. 588, 4 S.E. 320 (1887); Mercer v. J & M Transp. Co., 103 Ga. App. 141, 118 S.E.2d 716 (1961) (measuring damages by diminution in value where restoration would require construction of entirely new home).

In applying these principles, this Court has recognized that under Georgia law, cost of repair and diminution in value can be alternative, although often interchangeable, measures of damages with respect to real property. Thurmond, 284 Ga. at 471, 668 S.E.2d 666; Ray v. Strawsma, 183 Ga. App. 622, 623, 359 S.E.2d 376 (1987). More to the point in this case, in Thurmond we observed:

Although unusual, it may sometimes be appropriate, in order to make the injured party whole, to award a combination of both measures of damages. 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. [Cit.]

Thurmond, 284 Ga. at 471, fn. 2, 668 S.E.2d 666. Based on well-established precedent authorizing full recovery, including in some circumstances both diminution in value and cost of repair, we thus reject Maryland Casualty’s contention that the contract at issue did not include coverage for post-repair diminution in value as no insurer or insured had reason to expect such coverage under a standard real property insurance policy.

2. Maryland Casualty relies upon the Georgia Court of Appeals decision in City of Atlanta v. Broadnax, 285 Ga. App. 430, 646 S.E.2d 279 (2007) as support for its argument that this Court intended to limit Mabry to automobile insurance contract cases. Broadnax involved a nuisance action brought against the City of Atlanta regarding flooding allegedly due to overflow from the city’s combined system for drainage of sewer and storm water. Id. The Court of Appeals refused to allow the plaintiffs/homeowners to recover damages for both the diminution in value of their property due to the stigma of living in a flood prone area, as well as the costs of repair, holding that an award of both would constitute an impermissible double recovery of damages. Id. at 438–439, 646 S.E.2d 279. The Court of Appeals reached this decision after erroneously concluding that it was constrained from extending Mabry’s rationale based on this Court’s decision in Georgia Northeastern R. v. Lusk, 277 Ga. 245, 587 S.E.2d 643 (2003).

In Lusk, a property owner brought suit against a railroad alleging that his riverside property had eroded as a result of a nuisance maintained by the railroad. The evidence adduced at trial reflected that as a result of the nuisance, 60 percent of one acre of the property had already eroded into the river. The jury award included $5,400 for the diminution in fair market value of the property and $182,755 for the estimated cost to restore the eroded riverbank. Noting that the diminution in value award appeared to directly reflect the usable acreage that was irreparably lost and, further, that the amount awarded as the cost of “restoration” was the exact sum given by the railroad’s expert as the cost of stabilizing the eroded riverbank to prevent further deterioration and did not include any amounts to replace the soil already lost, this Court observed that the particular sums awarded by the jurors in the case indicated that they may not have returned impermissible double damages. However, because of the language used in the special verdict form, the Court was unable to conclusively determine whether the “diminution” award was limited to the decrease in value of the land based on the lost acreage, or whether it also included an award for the decrease in the value of the land caused by the destabilized condition of the riverbank—something remedied by the restoration award.

The question this Court addressed in Lusk was whether a diminution in value award based, in part, on the existence of a continuing nuisance for which sufficient damages to abate had already been awarded, would constitute impermissible double damages. In answering this question, we observed that in Georgia, “[a] plaintiff is entitled to only one recovery and satisfaction of damages, because such recovery and satisfaction is deemed to make the plaintiff whole.” Lusk, 277 Ga. at 246, 587 S.E.2d 643. We reiterated that “different means of measuring damages are not to be so applied as to give double damages for the same thing.” Id. We did not rule that Georgia law precludes a diminution in value award in addition to restoration and repair costs where the repair does not fully restore the property to its pre-damage value. Nor did we rule that “stigma” damages to property would constitute an impermissible double recovery, as “stigma” damages were not at issue in the Lusk case. Lusk, therefore, does not conflict with, nor limit Mabry. To the extent the Court of Appeals opinion in Broadnax holds otherwise, it is hereby disapproved. City of Atlanta v. Broadnax, supra, 285 Ga. App. 430, 646 S.E.2d 279.

3. Finally, we find no reason to distinguish Mabry from the instant case based on the alleged sophistication of the parties entering into insurance policies covering real property versus those who purchase automobile insurance policies. Although this case involves an insurance contract covering commercial property, a vast number of policies covering real property insure residential property for homeowners—a group far less sophisticated and more closely aligned to the automobile policyholders in Mabry.

4. We adhered in Mabry to the long-standing contract interpretation rule in Georgia that where “[an] insurance policy, drafted by the insurer, promises to pay for the insured’s loss; what is lost when physical damage occurs is both utility and value; therefore, the insurer’s obligation to pay for the loss includes paying for any lost value.” 274 Ga. at 508, 556 S.E.2d 114. We see no reason to limit our holding in Mabry to automobile insurance policies and we thus answer the primary question posed by the Eleventh Circuit Court of Appeals in the affirmative: The Mabry rule applies to the insurance contract at issue in this case. Accordingly, whether damages for diminution of value are recoverable under Royal Capital’s contract depends on the specific language of the contract itself and can be resolved through application of the general rules of contract construction. See, e.g., NUCO Invs. v. Hartford Fire Ins. Co., supra.

Question answered. All the Justices concur.

What it decided

Maryland Casualty had already paid $1,132,072.96 to repair Royal Capital’s eight-story office building in Buckhead after construction on the adjacent property damaged it. Royal Capital said the repair money did not make it whole: a building that has been through structural damage can be worth less on the market even after every repair is finished. The carrier refused to pay anything for that lost value, the dispute landed in federal court, and the Eleventh Circuit — finding no controlling precedent from Georgia state courts — asked the Supreme Court of Georgia to answer the question directly.

The answer was unanimous, and it favored the policyholder. The court held that its 2001 decision in State Farm Mutual Automobile Insurance Co. v. Mabry — where a promise to pay for “loss” to an insured car was held to include the car’s post-repair diminution in value — “is not limited by the type of property insured, but rather speaks generally to the measure of damages an insurer is obligated to pay.” Under Mabry, “value, not condition, is the baseline for the measure of damages,” and a policy clause giving the insurer the option to repair “serves only to abate, not eliminate, the insurer’s liability for the difference between pre-loss value and post-loss value.”

The court anchored this in more than a century of Georgia property-damage law — back to Harrison v. Kiser (1887) — and quoted its own Thurmond footnote: sometimes, “in order to make the injured party whole,” a court must award both repair costs and remaining diminution in value, because “an award of only the costs of remedying the defects will not fully compensate the injured party.” It rejected the carrier’s argument that no one expects such coverage under a standard real-property policy, and it expressly disapproved City of Atlanta v. Broadnax, the Court of Appeals decision carriers had used to keep Mabry confined to cars. It also refused to treat commercial building owners as too sophisticated for the rule, noting that “a vast number of policies covering real property insure residential property for homeowners — a group far less sophisticated and more closely aligned to the automobile policyholders in Mabry.”

One working part was left open, and honesty requires saying so: the court answered the certified question in the affirmative but held that whether diminished value is recoverable under any particular policy “depends on the specific language of the contract itself,” resolved under the general rules of contract construction.

What it did NOT decide

• It did not decide that Royal Capital gets paid. The Supreme Court answered a question of Georgia law for the Eleventh Circuit and sent it back. Its closing line is a condition, not a judgment: “whether damages for diminution of value are recoverable under Royal Capital’s contract depends on the specific language of the contract itself and can be resolved through application of the general rules of contract construction.”
• It did not adopt a way to measure or prove lost value. The parties came up on cross-motions after “[d]eferring discovery on the actual extent of the building’s loss of value,” so there was no evidence of diminution in the record and none was ruled on. The proof burden is real: in Omni v. Zurich a building owner’s own $500,000 diminished-value estimate was thrown out because he was not qualified to give it.
• It did not abolish the bar on double recovery. The court quoted Lusk with approval — “[a] plaintiff is entitled to only one recovery and satisfaction of damages” and “different means of measuring damages are not to be so applied as to give double damages for the same thing” — and the Thurmond footnote it relied on calls an award of both repair cost and diminution “unusual,” available where “notwithstanding remedial measures undertaken by the injured party, there remains a diminution in value of the property.” Broadnax was disapproved for reading Lusk to confine Mabry, not for enforcing the one-recovery rule.
• Coverage was never in dispute here. “Maryland Casualty acknowledged that the damage to the building was a covered cause of loss under the policy” and paid $1,132,072.96 toward repairs. The opinion decides nothing about a contested cause of loss, an exclusion, or a policy limit, and it does not reach whether lost value is payable once a limit is exhausted.
• It is not a claim-handling or penalty decision. The carrier paid the repairs and refused the lost value outright. The court answered whether that element of loss exists under Georgia law and said nothing about whether refusing it was unreasonable. Georgia’s penalty statute, O.C.G.A. § 33-4-6, has prerequisites of its own.
• It does not say who decides the number. Whether post-repair diminished value belongs to an appraisal panel fixing the “amount of loss” or to a court is not addressed anywhere in the opinion — appraisal is never mentioned in it.

Why it matters to policyholders

After a fire, a flood, or structural damage, “we paid for the repairs” is where many carriers stop. Royal Capital is the Supreme Court of Georgia saying that may not be the end of the claim: the insurer drafted a promise to pay for the insured’s loss, and “what is lost when physical damage occurs is both utility and value; therefore, the insurer’s obligation to pay for the loss includes paying for any lost value.”

Both readings, as each side actually uses them:

• The policyholder reading. A unanimous state supreme court, applying settled Georgia damages law, held that diminution in value is a real element of a building loss — including post-repair stigma — and that the repair option in the policy abates rather than eliminates the carrier’s liability for lost value. The court said the logic applies with extra force to homeowners.
• The carrier reading. Royal Capital answered a certified question about one commercial policy that expressly gave the insurer the option of paying “the cost of repairing the building” or “the loss of value.” Whether a given policy covers diminished value still turns on that policy’s own words, and the insured still has to prove the diminution actually exists — in Royal Capital itself, discovery on the actual extent of lost value had been deferred, so the decision established the right, not a number.

Both readings are in the opinion. What no fair reading supports is the flat position that Georgia building policies never pay diminished value — the court disapproved the case that stood for that. The practical takeaway: on a serious structural loss, the claim file should ask two questions, not one — what will repairs cost, and what is the building worth after those repairs compared to the day before the loss. The second question needs market evidence, and it is the policyholder’s to prove.

This value-first logic runs through the rest of Georgia claim law. Actual cash value in Georgia is tied to fair-market-value analysis (American Casualty Co. v. Parks-Chambers), and Georgia’s appraisal clause exists precisely to resolve “a disputed issue of value” (McGowan v. Progressive).

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