Illinois Supreme Court says State Farm, Other Insurers Can’t cut Claims Paid to Homeowners by Depreciating Labor

The Illinois Supreme Court recently issued its decision in a putative class-action lawsuit concerning the practice of State Farm of depreciating the cost of labor when paying out claims to holders of homeowner policies. In a 6-0 decision, the Illinois Supreme Court held that insurers may not depreciate labor costs when determining the “actual cash value” (ACV) of a covered loss where the policy does not define that term.

The case stems from a dispute following a homeowner’s insurance claim by the plaintiff Jarret Sproull under his policy issued by State Farm. Sproull’s home was damaged by wind in 2015. Sproull contacted State Farm and made a claim under his homeowner’s policy. Under Sproull’s policy, State Farm agreed to pay “only the actual cash value at the time of the loss of the damaged part of the property” initially and then the actual cost of repair or replacement after repairs were completed. Using a program called “Xactimate,” State Farm estimated a replacement cost value of $1,711.54 to repair the damage to Sproull’s home. After subtracting $1,000 for the deductible and $394.36 for depreciation and taxes, State Farm calculated an actual cash value of $317.18 and cut Sproull a check for that amount.

Believing that State Farm improperly calculated his actual cash value by depreciating labor in addition to materials, Sproull filed a putative class-action complaint in state court alleging that State Farm breached its contract by improperly depreciating the cost of intangible components of replacement cost, such as labor and concealing its practice from policyholders.

State Farm sought dismissal of Sproull’s complaint by arguing that its method of calculating actual cost value was mandated by an Illinois Department of Insurance (DOI) regulation which defined actual cash value as “replacement cost of property at time of loss less depreciation, if any.” The policy itself did not define the term actual cash value. The trial court denied the motion, finding the phrase “actual cash value” to be ambiguous in the context of State Farm’s policy.

At State Farm’s request, the trial court certified for interlocutory review the question of whether labor can be depreciated in determining actual cash value when the policy does not define the term. The appellate court initially denied leave to appeal, but later granted leave after the Illinois Supreme Court entered a supervisory order directing the appellate court to hear the appeal. On appeal the appellate court affirmed the trial court’s ruling, finding that State Farm had not demonstrated that it had incorporated the DOI’s regulation into its policy and also that the regulation in question did not support State Farm’s position. The appellate court concluded that when the regulation referred to the “replacement cost of property at the time of loss,” it was referring only to tangible items that can lose value over time due to wear and deterioration and not to intangible things like labor.

The Illinois Supreme Court granted State Farm leave to appeal the appellate court’s decision. It opened its unanimous decision by acknowledging that “the question before us has been the subject of much litigation.” It then proceeded to provide an in-depth discussion of conflicting federal and state court decisions on the issue. After setting forth the appellate court’s reasoning, the Court stated that it agreed with the appellate court’s conclusion but rejected its reasoning, referring to it as “unique amount courts to consider this issue.”

Although the Court acknowledged that State Farm’s interpretation of the DOI’s regulation and the language of the policy was reasonable, it also found the plaintiff’s interpretation reasonable. Based on this, the Court relied on the canons for constructing insurance policies which provide that if both parties provide reasonable interpretations of ambiguous language, courts are required to construe the policy in favor of the insured and against the insurer. The Court thus affirmed the lower court rulings and sent the matter back to the trial court for further proceedings.

The Court’s full opinion is available here.

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