Culhane v. Western Nat. Mut. Ins. Co.

• Decision Date: 07 September 2005
• Docket Number: No. 23442.,23442.
• Parties: Patrick CULHANE and Nancy Turbak, Plaintiffs and Appellees, v. WESTERN NATIONAL MUTUAL INSURANCE COMPANY, Defendant and Appellant.
• Court: South Dakota Supreme Court

704 N.W.2d 287

2005 SD 97

Patrick CULHANE and Nancy Turbak, Plaintiffs and Appellees, v. WESTERN NATIONAL MUTUAL INSURANCE COMPANY, Defendant and Appellant.

No. 23442.

Supreme Court of South Dakota.

Argued May 25, 2005.

Decided September 7, 2005.

Michael Abourezk, Abourezk Law Firm, Rapid City, South Dakota, Nancy J. Turbak, Watertown, South Dakota, Attorneys for plaintiffs and appellees.

James E. Moore of Woods, Fuller, Shultz & Smith, Sioux Falls, South Dakota, Attorneys for defendant and appellant.

ZINTER, Justice.

[¶ 1.] An automobile was involved in a single car accident triggering the collision coverage in a personal automobile policy. The insurer tendered the total cost of repairs. However, the insureds contended that they were also entitled to any diminished market value that existed after the vehicle was physically and mechanically repaired to its former condition. The trial court granted partial summary judgment in favor of the insureds, allowing them to present evidence of post-repair diminished market value. The trial court also permitted the insureds to proceed on a claim alleging bad faith in the denial of coverage for diminished market value. We granted both parties' requests for an intermediate appeal. We hold that, under the policy provision limiting indemnification to the lesser of actual cash value or repair, the insurer's liability for repair did not include diminished market value remaining after the vehicle had been repaired to its former physical, operating, and mechanical condition.

Facts and Procedural History

[¶ 2.] Western National Mutual Insurance Company issued a personal automobile policy covering Patrick Culhane and Nancy Turbak's 2001 Audi Quattro. On August 22, 2003, the Audi was involved in a one-vehicle accident. Culhane and Turbak (hereinafter collectively referred to as Culhane¹) submitted a repair estimate of almost $13,000 to Western. Culhane also claimed that after repairs, the Audi would sustain a diminution in market value of $8,000 to $10,000. Culhane demanded that Western pay for the repairs plus the post-repair diminished value. Western denied the diminished value claim but sent Culhane a check for the full cost of repairs, less the deductible.

[¶ 3.] Because Culhane continued to pursue the diminished value claim, Western retained independent local counsel to obtain an opinion concerning its indemnification obligation under the policy. Independent counsel advised Western that the question had not been resolved in South Dakota, but persuasive authority in other jurisdictions justified a denial of Culhane's diminished value claim.

[¶ 4.] Culhane subsequently sued Western for breach of contract and bad faith. Prior to trial, Western moved for summary judgment on all claims. Culhane also moved for partial summary judgment seeking a declaration that Western was required to indemnify for post-repair diminished value and that Western had engaged in bad faith in denying that claim. The trial court granted Culhane's motion, allowing evidence of diminished value and bad faith to be submitted to the jury.² The issues on appeal are:

(1) Whether the policy required indemnification for both the cost of repairs and post-repair diminished market value; and

(2) Whether Western acted in bad faith when it denied Culhane's post-repair diminished market value claim.

Analysis and Decision

[¶ 5.] Our standard of review on summary judgment is well-settled. We affirm the circuit court "when there are no genuine issues of material fact and the legal questions have been correctly decided." Sanford v. Sanford, 2005 SD 34, ¶ 11, 694 N.W.2d 283, 287 (citations omitted). The question in this case is legal in nature requiring insurance contract interpretation. We review that question of law de novo with no deference to the trial court. Auto-Owners Ins. Co. v. Hansen Hous., Inc., 2000 SD 13, ¶ 10, 604 N.W.2d 504, 509 (citations omitted).

Post-Repair Diminished Market Value

[¶ 6.] The policy's "limitation of liability" provision is central to this dispute. It contractually limits the portion of the loss that the insurer must indemnify. It provides:

Our limit of liability for loss will be the lesser of the:

1. Actual cash value of the stolen or damaged property; or

2. Amount necessary to repair or replace the property with other property of like kind and quality.

I

[¶ 7.] On two prior occasions, this Court has considered related questions under similar policy language limiting an insurer's liability to the lesser of cash value or repair. See Stucker v. Travelers Indem. Co., 77 S.D. 27, 84 N.W.2d 566 (1957)

and Grubbs v. Foremost Ins. Co., 82 S.D. 98, 141 N.W.2d 777 (1966). Because of the analogous limitation of liability language, Culhane strenuously argues that these decisions clearly establish that recoverable first-party collision loss includes the cost of repairs plus post-repair loss of market value.

[¶ 8.] We disagree. Stucker only held that an insurer's liability may be limited to the cost of repairs, but the repair limitation does not apply when the property cannot be restored to its former condition.

The policy provision limiting the insurers' liability to the cost of repairs applies only where the damaged vehicle can reasonably be repaired. It has no application in case the insured vehicle is damaged beyond repair and cannot thereby be restored to its former condition.

Stucker, 77 S.D. at 31, 84 N.W.2d at 569 (citation omitted). Similarly, Grubbs, in reaffirming the cost of repair limitation, held that the insured's "recovery was limited to the cost of repair or replacement only if that restored the property to substantially its prior condition." 82 S.D. at 102, 141 N.W.2d at 778-79.

[¶ 9.] Culhane, however, points out that the jury verdict affirmed in Stucker exceeded the cost of repairs. Culhane further asserts that both parties in Stucker had agreed that the vehicle could be restored to its former condition in all respects other than value. Because the Stucker jury instructions limited damages to the cost of repair if the vehicle could have been placed in substantially the same condition, Culhane argues that the Stucker affirmance of a verdict exceeding the cost of repair essentially approved post-repair loss of market "value" as a part of the cost of "repair."

[¶ 10.] However, the premise of Culhane's argument is incorrect because the witnesses in Stucker did not agree that the car could be repaired to its former condition in all respects other than value. The service manager for one garage testified that the car was "`damaged beyond repair' and couldn't possibly be as good a machine as before," while another witness testified that "the replacement of damaged parts with new parts would result in a car mechanically the same as when it came from the factory." Stucker, 77 S.D. at 31, 84 N.W.2d at 569. Considering this dispute, this Court noted that the issue was whether the car "could be restored to its former condition by suitable repairs or replacements." Id. at 32, 84 N.W.2d at 569 (emphasis added) (citation omitted). Consequently, this Court affirmed the jury award exceeding the cost of repairs only because of this conflicting evidence that would have allowed the jury to award damages for lost value if it found that the vehicle could not be reasonably repaired. Stucker did not, however, expressly or impliedly hold that the policy language, limiting indemnification to "repair," also required indemnification for post-repair diminished market value.

[¶ 11.] If anything, Stucker's dicta foreshadowed the opposite conclusion: a conclusion that has been reached by virtually all recent decisions on this question.³ Stucker noted that when a vehicle is repairable, this type of policy language limits recovery to alternatives: the reasonable cost of repairs or lost value, but not both. This Court stated:

The ... contract provision creates an express limitation on the insurers' liability in case the damaged vehicle is reparable.

Recovery is then limited to the reasonable cost of repairing the automobile or to its actual cash value whichever should be smaller in amount.

Id. at 29, 84 N.W.2d at 568.

[¶ 12.] Grubbs, decided nine years later, confirmed that this type of policy provision limits the loss recovery to the lesser of lost value or repair of the property. Grubbs involved a mobile home that was damaged by hail. The insurance policy contained a similar repair or lost value limitation. Again, this Court did not adopt Culhane's position that "repairs" include a component of post-repair lost market value. Instead, without any mention of lost value, Grubbs confirmed that cost of repair is an alternative that only requires restoration of the property. This Court stated:

The words `repair' and `replace' used in a policy of insurance mean the restoration of the insured property to substantially the same condition in which it was immediately prior to the damage.

Grubbs, 82 S.D. at 101, 141 N.W.2d at 778 (emphasis added).

[¶ 13.] Culhane, however, relies on other language in Grubbs to suggest that "repairs" include post-repair loss of value. Culhane points out that in affirming a verdict ($1,200) that exceeded the cost of repairs, this Court stated:

The jury could find the value of the trailer before the hail storm was $2,400 or $3,000; that after the repairs were made it would be worth $1,650 or $1,700, and the repairs mentioned would not, as the court instructed, `fairly compensate him for the damage.'

Id. at 102, 141 N.W.2d at 779 (emphasis added). However, Culhane's reliance on this reference to lost value "after the repairs were made" takes the reference out of context and, most importantly, fails to consider the trial court's instructions. When considered in context with the approved jury instructions, it is clearly apparent that the language was not intended to allow the cost of repairs plus post-repair diminished value. The trial court's instructions, approved by...