The Illinois Supreme Court has determined that a homeowners insurer may not depreciate labor costs in calculating the actual cash value (ACV) after a loss under the policy. The case is Sproull v. State Farm Fire & Cas. Co., 2021 IL 126446.
Jarret Sproull was insured under a homeowner's policy that provided replacement cost coverage for structural damage. Under the policy terms, covered losses were paid in two parts; an ACV payment and then a replacement cost value (RCV) payment if repairs or replacements were completed within two years and the insurer was notified in a timely manner. The policy failed to define "actual cash value."
According to Sproull's complaint, he suffered wind damage to his residence and timely submitted a claim for property damage to State Farm requesting payment for the loss. State Farm's adjuster determined that the building sustained a covered loss with an RCV of over $1,700. In calculating ACV, State Farm took the RCV and subtracted the $1,000 deductible and $394.36, including taxes, for depreciation. The ACV payment came to $317.18. Sproull claimed he was underpaid on his ACV payment because State Farm depreciated labor, which is tangible and thus not subject to wear, tear, and obsolescence. He further argued that labor should not have been depreciated because it was not susceptible to aging or wearing and its value did not diminish over time.
Sproull also alleged that State Farm concealed its practice of depreciating labor from its policyholders in the following ways. First, State Farm did not state in its written estimate that their analytic software was set to depreciate nontangible items such as labor. State Farm also did not separate labor and materials in the estimates provided to policyholders. Lastly, State Farm did not depreciate labor for labor-only charges such as debris removal or roof tear-off. Sproull argued that these tactics all were utilized to help the insurer avoid detection of labor depreciation in other line items. In all, the more the ACV was lowered, the less likely it was that the policyholder could make up the difference between ACV and RCV and seek reimbursement later.
Sproull sued, and State Farm moved to dismiss. The trial court denied the motion, and found that the policy was ambiguous because it did not define the term "actual cash value." The appellate court confirmed.
The Illinois Supreme Court considered the certified question pursuant to Illinois Supreme Court Rule 308(a) "[w]here 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 Illinois Supreme Court noted that courts that adopt the view that labor can be depreciated generally find "actual cash value" to be an unambiguous term, find that materials and labor form an integrated product and that it is not logical to separate labor and materials when applying depreciation, and lastly 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 is not logically depreciable because it does not lose value over time due to wear and tear in the way a roof or other physical implement does. Materials deteriorate with time, but labor does not.
Editor's Note: Depending on the policy's definition, depreciation of labor may be allowed. If the policy remains mute on the subject, the insurer may not depreciate labor. In this case, State Farm seemed to be trying to conceal the fact that it was depreciating labor despite failing to define ACV as depreciating labor in the policy. State statutes may also prohibit insurers from depreciating labor.