Carson v. Mercury Insurance Company ? Insurer satisfied obligations under an automobile policy when it paid for a car repair to the manufacturer's repair standards rather than to original factory condition.

October 2012

On September 24, 2012, Division Three of California’s Fourth Appellate District issued its opinion in Carson v. Mercury Insurance Company and held that, under a standard automobile insurance policy, an insurer satisfies its obligations when it pays to repair the vehicle to the manufacturer’s established repair standards rather than to the vehicle’s original factory condition.

Melody Carson (“Carson”), who was insured by Mercury Insurance Company (“Mercury”), was involved in an automobile accident.  The policy issued by Mercury provided that Mercury had the option of repairing or paying for Carson’s damaged vehicle, subject to several limitations and exclusions.

At the time of the accident, Carson’s vehicle had a market value of $25,000.  Rather than pay this amount to Carson, Mercury elected to repair the car based on an initial restoration estimate of approximately $8,000.  During the repair process, additional damages were identified.  Mercury ultimately paid a total of $18,774 to repair the vehicle.

Carson argued that Mercury breached the policy, as well as the implied covenant of good faith and fair dealing, because Mercury should have declared the vehicle a total loss and simply paid Carson the $25,000 pre-accident market value.  In support of this argument, Carson asserted that Mercury should have taken into consideration the fact that, after the vehicle was repaired, its market value was only $8,000.

The court rejected Carson’s contention and held that “[i]n California, and the majority of jurisdictions, when the insurer elects to repair the car to its preaccident condition, it is not also required to pay for any loss of value to the vehicle” because to hold otherwise “would render essentially meaningless [the insurer’s] clear right to elect to repair rather than to pay the actual cash value of the vehicle at the time of the loss.”

The court further held that Mercury satisfied its repair obligation under the policy when it paid to repair the vehicle pursuant to the manufacturer’s established repair standards.  In so holding, the court rejected Carson’s contention that the vehicle had to be repaired to its original factory or showroom condition because requiring the insurer to meet such a standard would be impossible and would render the insurer’s option to repair meaningless.

The court also held that the policy’s failure to define “repair” did not render the term ambiguous and that Mercury’s exclusion “clearly and plainly” explained that there was no coverage for loss due to diminution in value of any vehicle repaired under the policy’s coverage.  Based on these additional holdings, the court determined that Mercury did not breach the implied covenant of good faith and fair dealing by failing to take into consideration the vehicle’s depreciation in value when it opted to repair the vehicle.

Click here for a copy of the opinion.

This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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