SPRINGFIELD — The Illinois Supreme Court has affirmed two lower court rulings holding insurers can’t depreciate the cost of labor when paying out claims to holders of homeowner policies.
Justice Michael Burke wrote the 6-0 opinion, filed Sept. 23; Justice Mary Jane Theis took no part in the decision.
Jarret Sproull sued State Farm for breach of contract after the company processed a 2015 wind damage claim. According to court documents, State Farm’s adjuster determined the building in question had a replacement cost value of $1,711. The company subtracted his $1,000 deductible as well as $394 for depreciation and taxes.
Michael J. Burke
| illinoiscourts.gov
Sproull’s breach of contract lawsuit alleged the company factored depreciation in the cost of labor, not just building materials. Further, the lawsuit accused the insurer of combining labor and materials in line item estimates given to clients, allegedly making the scheme harder to detect. Although policyholders can seek additional reimbursement if they make repairs within two years, Sproull said improperly suppressing the actual cash value makes it harder for property owners to make up the difference, discouraging them from pursuing additional payouts.
State Farm moved to dismiss Sproull’s class action, arguing it complied with state regulations and policy terms. A Madison County Circuit Court judge denied the motion to dismiss but granted State Farm’s request to ask the Illinois Fifth District Appellate Court to answer the question of whether insurers with policies that don’t define actual cash value can depreciate all components of replacement costs.
The appellate panel reformulated the question, addressing only labor costs, and said insurers could not depreciate labor. It found State Farm didn’t show it incorporated Illinois Department of Insurance actual cash value regulations. Although tangible property can lose value over time, services like labor have a quantifiable cost in the present. State Farm appealed, and the Supreme Court allowed an amicus brief from United Policyholders supporting Sproull and a joint amicus brief from Allstate, the American Property Casualty Insurance Association and the National Association of Mutual Insurance Companies.
According to Burke, a 2002 Oklahoma Supreme Court decision in Redcorn v. State Farm was the first to address the issue. In that case, the majority held a “roof is the product of materials and labor” and that the client “did not pay for a hybrid policy of actual cash value for roofing materials and replacement costs for labor.” But three dissenting justices said while it is fair for an insurer to pay for the value of 16-year-old shingles rather than new materials, the cost to install those shingles would be the same regardless of their age.
After Redcorn, Burke wrote, “state and federal courts have split on this issue.” The courts siding with the dissent, and by extension Sproull, tend to view “actual cash value” as ambiguous, something that should be construed in the client’s favor. But the Fifth District Appellate Court found no such ambiguity. The appellate court merely sided with Sproull by determining his policy and the state regulation referred expressly to “property,” not something intangible like labor.
Although the Supreme Court rejected that conclusion, it also was “not persuaded by State Farm’s argument that the language ‘depreciation, if any’ mandates a conclusion that labor may be depreciated.” With an established record of courts determining depreciation can apply only to physical items, Burke continued, “we believe that the policy and the regulation it incorporates are susceptible to multiple reasonable interpretations and are therefore ambiguous.”
The Illinois Department of Insurance hasn’t addressed the issue of labor depreciation, Burke wrote, and State Farm failed to show a DOI policy statement that should dictate judicial opinion. The clear ambiguity forces the court to construe Sproull’s policy in his favor, Burke said, so long as his interpretation is reasonable. And it was, Burke continued, because he argued he was in a financially worse position than before the storm damage.
The Supreme Court affirmed the lower court rulings, and sent the matter back to the original court for further proceedings.
Sproull has been represented in the case by attorneys Christopher W. Byron and Christopher J. Petri, of Byron Carlson Petri & Kalb, of Edwardsville; T. Joseph Snodgrass, of Larson King, of St. Paul, Minnesota; and David T. Butsch and Christopher E. Roberts, of the firm of Butsch Roberts & Associates, of Clayton, Missouri.
State Farm has been represented by attorneys Joseph A. Cancila Jr. and Jacob L. Kalm, of the firm of Riley Safer Holmes & Cancila, of Chicago, and Patrick Cloud and Craig Unrath, of the firm of Heyl Royster Voelker & Allen, of Edwardsville.