Court Finds Against Labor Decline On ‘Actual Cash Value’ Payment
By Don R. Sampen, published, Chicago Daily Law Bulletin, November 9, 2021
The Illinois Supreme Court recently held that, where an insured under a property policy is entitled to receive reimbursement for an insured loss on an actual cash value basis, and the policy itself does not define “actual cash value,” the amount to be paid is the replacement cost of the property at the time of loss less depreciation, but that depreciation is not to be taken on labor costs.
The case is Sproull v. State Farm Fire & Casualty Co., 2021 IL 126446 (Sept. 23). The insured, Jarrett Sproull, was represented by Byron, Carlson, Petri & Kalb of Edwardsville. Riley, Safer, Holmes & Cancila of Chicago, and Heyl Royster Volker & Allen of Edwardsville represented the insurer.
Sproull was insured under a homeowner’s policy that provided replacement cost coverage for structural damage. Under the terms of his State Farm policy, the company would initially pay actual cash value for the loss, but if the repairs were completed within two years, Sproull would receive an additional amount up to the full replacement cost or policy limit, whichever was less.
In determining the actual cash value for a loss suffered by Sproull in 2015, State Farm calculated an amount that reflected a reduction for depreciation on the labor cost necessary to make the repair. Upon learning of the reduction, Sproull alleged State Farm had fraudulently concealed the reduction and, moreover, that the insurer’s failure to pay the full cost of labor left him underpaid for the loss.
Sproull brought suit for breach of contract and a declaration of rights, and sought to certify a class. In response, State Farm moved to dismiss based on a Department of Insurance regulation, 50 Ill. Adm. Code 919.80(d)(8)(A). The regulation stated that when the property adjustment is made on an actual cash value basis, the insurer is to determine that value by “replacement cost of property at time of loss less depreciation, if any.”
The trial court denied the motion to dismiss finding that, because “actual cash value” was undefined in the policy, the term was ambiguous. The court agreed with State Farm that it could rely upon a regulation to supply the definition, but the regulation here did not address whether depreciation could be taken on labor.
The court nonetheless agreed to certify the issue under Illinois Supreme Court Rule 308. The certified question asked, under the circumstances of State Farm’s policy and the Department of Insurance regulation, “may the insurer depreciate all components of replacement cost (including labor) in calculating actual cash value?”
The appellate court answered the question in the negative, and State Farm sought, and was granted, leave to appeal to the Illinois Supreme Court.
In an opinion by Justice Michael Burke, the Supreme Court affirmed. He observed that the question had been the subject of much litigation and had divided state and federal courts around the country. He emphasized at the outset that the court’s analysis would apply only to policies that did not define actual cash value to expressly include labor depreciation.
He proceeded to observe that courts that allow depreciation on labor generally find the term “actual cash value” unambiguous, hold that it is not logical to separate labor and materials when applying depreciation, and believe generally that failing to depreciate labor overcompensates the insured.
On the other hand, courts that disallow depreciation on labor usually find that “actual cash value” is ambiguous, depreciating labor makes no sense because labor does not lose value due to wear and tear, and allowing the depreciation leaves the insured underpaid.
Burke proceeded to find that both the policy and the regulation it incorporates are susceptible to multiple reasonable interpretations and are therefore ambiguous. State Farm nonetheless cited case law for the proposition that the policy should not be construed against State Farm because it relied upon the regulation.
Burke, however, observed that, with neither the policy nor the regulation having prescribed the method for calculating depreciation, the policy could only be described as ambiguous. Also, he wrote, the mere fact that the Department of Insurance approved the State Farm policy form and language could not be construed as an indication that labor could be depreciated under the form.
Ultimately, Burke said the policy would have to be interpreted in favor of the insured, who, in this case, had offered a reasonable interpretation of the policy. Burke also agreed with the propositions that labor is not logically depreciable, depreciating labor could result in an underpayment, and Sproull’s understanding was more in keeping with industry practice.
The Supreme Court therefore answered the certified question in the negative, and remanded.
In the absence of a policy definition otherwise, a property insurer’s payment for loss based on actual cash value may not be reduced for depreciation of labor.