IL App 5th / Class Actionshoke2013
Actual Cash Value Does Not Allow for Depreciation of Labor Costs
The Illinois Appellate Court for the Fifth District, in an opinion written by Justice Cates with Justices Moore and Barberis concurring, applying Illinois law, answered a certified question and held that “actual cash value” does not include depreciation of intangible labor costs.
A policyholder filed a putative class action suit alleging State Farm Fire and Casualty Company (“State Farm”) improperly depreciated labor costs when it calculated “actual cash value” of covered losses and that State Farm concealed the practice from its policyholders. State Farm moved to dismiss the complaint. The trial court denied State Farm’s motion finding that the term “actual cash value” was ambiguous and that it should be strictly construed against State Farm. The following question was then certified for interlocutory review: “Where Illinois’ insurance regulations provide that the ‘actual cash value’ or ‘ACV’ of an insured, damaged structure is determined as ‘replacement cost of property at time of loss less depreciation, if any,’ and the policy does not itself define actual cash value, may the insurer depreciate all components of replacement cost (including labor) in calculating ACV?”
The appellate court reformulated the question and limited its response to the sole issue of whether the cost of labor can be depreciated when determining the actual cash value of a loss. The appellate court answered the question in the negative. The State Farm homeowner’s insurance policy at issue did not define the term “actual cash value” or explain how actual cash value is calculated. The policy also did not define “depreciation,” nor did it indicate that labor costs are subject to depreciation. Thus, only the property structure and materials are subject to a reasonable deduction for depreciation, and depreciation may not be applied to the intangible labor component. The appellate court held that an “average, ordinary homeowner” purchasing the State Farm policy at issue would have reasonably expected that depreciation would apply only to property, such as physical structures and tangible materials, “as those lose value with age, use, and wear and tear[,]” not to intangible labor costs.
“We further conclude that it is not reasonable to believe that an average homeowner would consider labor to be a tangible asset included within the definition of depreciation. State Farm sought to apply a technical definition of depreciation that is not evident in the language of the policy or in the regulation upon which it relies,” the appellate court said. “Courts will not adopt an interpretation which rests on fine distinctions that the average person, for whom the policy is written, cannot be expected to understand.” Thus, the appellate court answered the certified question and remanded the case back to the trial court. Sproull v. State Farm Fire & Casualty Co., 2020 IL App (5th) No. 180577 (July 24, 2020).