The Illinois Supreme Court determined that a homeowner insurer may not depreciate labor costs in calculating actual cash value (ACV) after a loss under the policy. Sproull v. State Farm Fire and Casualty Co., 2021 Ill. LEXIS 619 (Ill. Sept. 23, 2021).
Plaintiff was insured under a homeowner's policy that provided replacement cost coverage for structural damage. Under the policy, the insured would initially receive an ACV payment but then could receive replacement cost value (RCV) if repairs or replacement were completed within two years and the insurer was timely notified. The policy did not define "actual cash value."
Plaintiff suffered wind damage to his residence and timely submitted a property damage claim to State Farm. The adjuster determined that the building sustained a loss with RCV of $1711.54. In calculating ACV, State Farm began with the RCV and then subtracted plaintiff's $1000 deductible and an additional $394.36, including taxes, for depreciation. Plaintiff thus received an ACV payment of $317.18. Plaintiff claimed that he was underpaid on his ACV claim because State Farm depreciated labor, which is intangible and thus not subject to wear, tear, and obsolescence. Further, labor should not have been depreciated because it was not susceptible to aging or wearing and its value did not diminish over time.
Plaintiff alleged that State Farm concealed its practice of depreciating labor from its policyholders in several different ways. First, State Farm did not state in its written estimates that Xactimate software was set to depreciate nontangible items such as labor. Second, State Farm did not separate labor and materials in the estimates provided to policyholders. Third, for obvious labor-only charges such as debris removal or roof tear-off charges, State Farm did not depreciate labor. Plaintiff alleged that State Farm did this to help avoid detection of labor depreciation in other line items. In all, the more the ACV payment was lowered, the less likely it was that the policyholder could make up the difference between ACV and RCV and seek reimbursement later.
Plaintiff sued and State Farm moved to dismiss. The trial court denied the motion, finding the policy was ambiguous because it did not define the term "actual cash value." The appellate court affirmed.
On appeal, the Supreme Court noted that courts that adopt the view that labor can be depreciated generally (1) find the term "actual cash value" unambiguous, (2) find that materials and labor form an integrated product and that it is not logical to separate labor and materials when applying depreciation, and (3) believe that failing to depreciate labor overcompensates the insured.
The court determined that the policy was ambiguous on the question of labor depreciation and construed it in favor of the insured's reasonable interpretation. Labor was not logically depreciable, as it did not lose value over time due to wear and tear. Materials deteriorated with time, but labor did not. Labor was a fixed cost that was not subject to wear and tear, deterioration, or obsolescence.
