Whether labor can be written off to arrive at a real property loss solution has been a hot topic of debate for the past five years, and the topic of many Merlin lawyers blog posts. An Illinois appellate court recently considered the issue in Sproull v. State Farm Fire and Casualty Company . 1
There, an insured person lodged an admissible complaint about the state farm requesting damages for breach of contract and declaratory exemption. The insured claimed that State Farm incorrectly wrote off labor costs when calculating the fair cash value of losses covered and that State Farm conceals this practice from the insured complainant and similar policyholders. State Farm moved to dismiss the complaint, arguing that its method of calculating the actual cash value fully complied with the terms of its policy and Illinois law. The district court denied the proposal and found that the undefined term "fair cash value" was ambiguous and should be interpreted strictly against State Farm. The district court then granted State Farm's proposal to certify the following question to the Court of Appeal for call review:
Where Illinois insurance regulations provide that the "actual cash value" or "ACV" of an insured, damaged structure is determined as "compensation cost of property at the time of. loss minus depreciation, if any, "and the policy does not itself define the actual cash value, can the insurer depreciate all parts of compensation costs (including labor) when calculating ACV?
The appellate court answered 'no' to this question.
When he ruled that only the property structure and material are subject to a reasonable deduction for depreciation and that depreciation may not be applied to the intangible work component, the Court of Appeal concluded that the average, reasonable, reasonable homeowner for whom the policy was written had reasonably expected that depreciation would only apply to properties ie. physical structures and concrete materials, as they lose value with age, use and wear. The appeal further concluded that it was not reasonable to believe that the average homeowner would consider labor as a tangible asset included in the definition of depreciation.
The loss in question arose as a result of a storm in 201
In 2016, State Farm came out with its "Actual Cash Valuation," which clearly and unequivocally states that labor is subject to depreciation. 2 So, while the Sproull decision will have little impact on losses on state farms subject to its "Actual Cash Value Enclosure". It will have a significant impact on the insurance companies that write real estate policies in Illinois without defining the actual cash value to include depreciation on labor. In other words, insurance companies will violate Illinois law when they write off labor to arrive at a real property loss settlement.
1 Sproull v. State Farm Fire and Cas. Co. No: 5-18-0577 (Ill. App. July 24, 2020).
2 Under this approval (FE-3650), all components of the estimated actual cash value, defined as the estimated costs of repairing or replacing damaged property, are subject to depreciation, including labor, materials, taxes and overheads and profit.