The Worth of “Diminished Value” Claims in Ontario

Introduction

The claim goes by many names: “diminished value”, “diminution in value” and “accelerated depreciation”. The terms are interchangeably used to describe the economic loss of a property’s value as a result of the property having been damaged.[1] The concept of diminished value as it relates to vehicles is associated with the perceived loss of value in a vehicle following an accident-related repair. The “loss” is premised on the likelihood that an informed buyer will pay less to buy a vehicle that was in an accident compared with the amount the same buyer will pay for the same vehicle had it not been in an accident.

Common Law versus the Legislative Scheme

The common law has recognized and permitted diminished value claims since the early 20^th century. In Payton v. Brooks[2] the U.K. Court of Appeal determined that damages for diminished value could be claimed. Lord Roskill set out the following principle:

In a case where the evidence justifies a finding that there has been, on top of the cost of repairs, some diminution in market value – or, to put the point another way, justifies the conclusion that the loss to the plaintiff has not been fully compensated by the receipt of the cost of complete and adequate repairs, because of a resultant diminution in market value, I can see no reason why the plaintiff should be deprived of recovery under that head of damage.[3]

Diminished value claims are permitted in some U.S. states. In fact, some states permit individuals to claim the diminished value loss under their own auto policies.[4]  In Canadian provinces like British Columbia and Alberta, individuals can sue tortfeasors at fault for an auto accident for the diminished value of a vehicle. The quantification of the “stigma cost” associated with the vehicle being less than perfect is often difficult to prove.[5]  Generally, a plaintiff can sell the vehicle and quantify the loss as being the difference between the pre-accident and post-accident market value of the vehicle, or in lieu of a sale, a plaintiff can obtain expert evidence to calculate the value the loss.

Once upon a time, such claims were also permitted in Ontario.  In the 1978 decision Wood v. Husband[6], the plaintiff was selling a vehicle and had received an offer to purchase it. Before closing the sale, the vehicle was involved in an accident. The vehicle was repaired, but the purchaser no longer wanted to pay the offered purchase price. The plaintiff subsequently sold the vehicle for a lesser amount. The plaintiff sued the tortfeasor who caused the accident and claimed the diminution in the value of the vehicle caused by the accident. The quantum of the claim was the difference between the original offer and the ultimate purchase price. The court characterized the claim as one for recoverable economic loss because it was directly consequential upon the physical damage to the car.  The loss in value of the vehicle was characterized as “depreciation” rather than “loss of expected profit”[7].  The depreciation was held to “fall within the accepted range of a tortfeasor’s responsibility” and within the rule of compensation that “renders the tortfeasor responsible for the unexpectable costs of expected consequences”[8].  The court reasoned that a defendant may not expect the damage to the plaintiff’s car to result in depreciation in its market value; however, it does not affect the defendant’s liability for such damages.

Diminished value claims have been relatively unheard of in Ontario due to the “no-fault” legislative regime introduced into the province’s Insurance Act in 1990. Section 263 prohibits the right to pursue claims for recovery for damages to an insured’s automobile and its contents and for loss of use against anyone other than the insured’s insurer.  In Clarendon National Insurance v. Candow, the Ontario Court of Appeal explained the no-fault direct compensation scheme:

Section 263 of the Insurance Act replaced the tort system that resolved automobile damage claims prior to its enactment. In the new statutory scheme, insureds can no longer sue the tortfeasor driver whose negligence has caused damage to their cars. Rather, their own liability insurer pays for the damage, to the extent that they were not at fault, under the third party liability section of their motor vehicle liability policies. Insureds can recover the at-fault portion of their damage by purchasing collision coverage. Insurers have no right of subrogation for payments to their own insureds, but, on the other hand, do not have to pay the subrogated claims previously brought by other insurers in the tort system. The result is that the statutory regime eliminates the transactions costs that were inherent in the tort system.[9]

Section 263 applies when three criteria are met:

1. An automobile or its contents, or both, suffers damage arising directly or indirectly from the use or operation in Ontario of one or more other automobiles;
2. The automobile that suffers the damage or in respect of which the contents suffer damage is insured under an motor vehicle liability policy issued by an insurer that is licensed to undertake automobile insurance in Ontario; and
3. At least one other automobile involved in the accident is insured under a motor vehicle liability policy issued by an insurer licensed to undertake automobile insurance in Ontario.[10]

When the criteria is met, s. 263(2) provides that the insured is entitled to recover property damage to the vehicle and its contents and for loss of use from his or her own insurer.  There is a limited exception to the no-fault rule described in s. 263(5)(a.1):

If this section applies,

…

(a.1) an insured has no right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured’s automobile or its contents or loss of use, except to the extent that the person is at fault or negligent in respect of those damages or that loss.

When the no-fault scheme was first passed in 1990, section 263 did not contain section 263(5)(a.1).  The section was added in 1996 through Bill 59 (together with other amendments) without any explanation for its insertion.[11]

Section 263(5)(a.1) provides a limited exception to s. 263’s prohibition of a right of action between two insureds.  In order to fit under the exception, two conditions must be met: (1) there must be an agreement for the damage, content, loss of use; and (2) the agreement must be between the plaintiff and the person at fault (negligent) for the damage.

The narrow exception found in s. 263(5)(a.1) has been applied in relatively few cases.  Most deal with a tortfeasor who agrees to pay for the cost to repair a plaintiff’s vehicle following an accident without the parties resorting to their insurance.[12] However, none of the accident-related cases deal with claims for diminished value.

Case Law

There has been a recent rash of cases in Ontario where individuals have advanced diminished value claims. Some are non-accident contract-based cases, which have succeeded; others are accident tort-based cases, which have not.  Perhaps the latter lawsuits were misguided attempts to follow suit with claims that are permitted in other parts of the country.  The amount at stake in diminished value claims – typically only a few thousand dollars, and likely never exceeding $25,000 – results in the adjudication of most of these claims in in the Small Claims Court.[13]

Dempster v. Newmarket Hyundai [14]

The facts of this 2014 decision are similar to those in the Wood v. Husband case.  Judgment was granted in favour of a plaintiff who advanced a diminished value claim arising from a reduction in the value of the purchase price of her vehicle after it was determined – post-purchase – that the vehicle had been involved in an accident. The plaintiff argued that had she known that the vehicle was involved in an accident, she would not have purchased it. At the very least, she would not have purchased the vehicle at the price she paid for it. The plaintiff retained an expert to quantify the “diminished value”.  The action was not barred by the Insurance Act.  The Act was not applicable to the case because there was no accident or insurer involved.  The case dealt with contract, not tort.  The diminished value was assessed through an expert.  The plaintiff was awarded $2,750 for that aspect of the claim.

Moore v. Lee [15]

In this 2015 case, Moore’s vehicle was damaged in an accident by the fault of the defendant, Lee.  Both vehicles were insured and were repaired.  Moore advanced a diminished value claim on the basis that his vehicle had depreciated by $4,000.  Moore argued that his claim was not precluded by the Insurance Act because he was seeking recovery for “depreciation”, not “property damage” per se.  Moore pointed out that the Insurance Act deals with damage and repair to vehicles, contents and loss of use; the Act fails to address the “loss of value” of the vehicle due to the accident.  Deputy Judge Buie viewed the situation differently.  The diminished value loss arose as a direct result of the motor vehicle accident: the loss flowed from the accident and the resulting property damage.  The claim is based in tort.  The claim did not fall within the agreement exception of section 263(5)(a.1). The case was dismissed.

Keyhani v. Downsview Chrysler Toronto [16]

This 2016 decision involved a plaintiff, Keyhani, who had purchased a 2004 limited edition Dodge Viper. The vehicle was in for repair with the defendant dealership, Downsview Chrysler. While the vehicle was in the possession of Downsview Chrysler, it was involved in an accident. While parked, it was struck by another customer’s vehicle driven by one of the licenced mechanics. The dealership admitted responsibility for the accident and offered to repair the vehicle. The dealership put its insurer on notice of a claim. Keyhani sued Downsview Chrysler on the basis that the property damage repair was insufficient to compensate him for the full loss occasioned by the accident. Keyhani presented an expert’s opinion about the value of the diminished value in an amount that is not disclosed in the decision. Keyhani presented his case not as a tort case, but instead as a contract / bailment case. Keyhani claimed that the dealership breached its obligation as a bailee to ensure that his vehicle was safeguarded while in its possession.

Deputy Judge Hunt dismissed the action on the basis that the no-fault regime in Ontario completely barred Keyhani’s claim. The no-fault regime governs all disputes arising out of automobile accidents, which Deputy Judge Hunt characterized as “… clearly indisputable law”.[17]  While acknowledging that Keyhani’s claim had grounds in both tort (insurance) and contract (bailment), the true nature of the claim prevailed.  The true basis of the claim was grounded in tort, and so it is governed by the Insurance Act. There were two vehicles involved in the accident and both were insured in Ontario.  Keyhani could not dress-up the claim differently in order to avoid the bar imposed by the Insurance Act.

Kennedy v. Gervais [18]

This decision, made in April 2016, involved the plaintiff, Kennedy, who claimed $20,000 for the diminished value of his vehicle following a motor vehicle accident. The vehicle was a 2013 Porsche Carrera 911. The defendant, Gervais, struck the Porsche causing $45,000 damage. The cost of the vehicle’s repair was paid by Kennedy’s insurer. Kennedy proceeded to trade in the vehicle at a Porsche dealership and was told that the vehicle had to be placed at an alternate lot because it had been in an accident. The Porsche dealership estimated the diminished value to the vehicle to be about $20,000 arising solely from the fact that it had been in an accident and notwithstanding that it was repaired.

Justice Shaw reviewed section 263 of the Insurance Act and acknowledged that the section “… curtails certain common law rights of action arising from motor vehicle accidents”[19]. He further stated:

Pursuant to the common law, an action in negligence results in a reward of damages against the tortfeasors to put the injured party back in the position they were in before the accident occurred. However, the legislation has ousted that common law position when the accident involves an insured motor vehicle. It is not up to the court to change the legislation.[20]

Kennedy relied on case law from British Columbia and Alberta which permit diminished value claims. Justice Shaw correctly noted that the Insurance Acts in British Columbia and Alberta are not the same as the Ontario legislation, and so those cases were readily distinguishable.  Predictably, Kennedy’s claim was dismissed.

Conclusion

Recent cases adjudicated in the Small Claims Court in Ontario have consistently dismissed claims for diminished value where the claims are founded in tort arising from motor vehicle accidents.  Ontario’s no-fault legislative scheme trumps the common law, notwithstanding that the common law acknowledges the viability of diminished value claims. The case law trend clearly establishes that diminished value claims with a basis in tort will not succeed in Ontario. However, diminished value cases are not shut out in all instances. Dempster v. Newmarket Hyundai[21] is an example of a contract (non-tort) based case where a diminished value claim was allowed.  Hafeez v. Sunaric[22] and McClinton v. Estein[23] are examples of tort-based cases where the no-fault bar created by s. 263 was overridden by a tortfeasor’s agreement to pay for property damage.  The agreements in those cases were sufficient to qualify for the exception to the no-fault scheme set out in s. 263(5)(a.1).  In those cases, the plaintiff’s recovered the cost of repair to their vehicles; no claim was advanced for the accelerated depreciation to the vehicles caused by the accident related repair.

Query whether a tortfeasor’s agreement to pay for the “property damage” to a vehicle impliedly also includes an agreement to pay its diminished value.  According to Deputy Judge Buie in Moore v. Lee, a depreciation claim flows from an accident and therefore constitutes property damage to the vehicle[24].  It would follow then that in situations where tortfeasors agree to pay for “property damage” arising from accidents, they might also impliedly be agreeing to pay for the diminished value of the vehicle.  Tortfeasors beware!