In a recent unanimous opinion authored by Justice Michael Burke, the Illinois Supreme Court answered the certified question of whether an insurer may depreciate labor costs in determining the “actual cash value” (ACV) of a covered loss when a homeowner’s policy does not define that term.
The putative class plaintiff sustained wind damage to his residence. State Farm Fire and Casualty Company (State Farm) covered the loss, first determining the replacement cost value (RCV) but then subtracting the deductible, taxes, and depreciation (including labor costs) to calculate the ACV. Plaintiff argued that depreciated labor is an intangible and not subject to wear, tear, and obsolescence, whereas State Farm argued that Illinois Department of Insurance (DOI) regulation (50 Ill. Adm. Code 919.80(d)(8)(A) (2002)) mandated the “replacement cost less depreciation” method of determining ACV. State Farm also relied on language in its insurance policy and case law.
After setting forth the rules of construction for insurance contracts and providing an in-depth discussion of conflicting federal and state court decisions, the supreme court rejected the appellate court’s reliance on the plain language of the policy and the DOI regulation to support its conclusion that labor may not be depreciated, stating the appellate court’s reasoning was “unique among courts to consider this issue.”
While the supreme court found State Farm’s reliance on policy language and regulation reasonable (and accepted by several state and federal courts), it further found the policy language and the regulation ambiguous on the question of labor depreciation (in line with other state and federal courts). Although the regulation prescribed the method of calculating ACV to include a deduction for depreciation, it did not define that term or prescribe a method of computation to include labor depreciation. State Farm, as the drafter of the policy, did not do so either.
Following rules of construction when a policy is ambiguous, the court construed the policy in favor of the insured, noting that the insured’s interpretation of ACV and depreciation was not only reasonable but in line with State Farm’s valuation software that allowed for the depreciation of materials only. In addition, State Farm’s interpretation would place the insured in a worse position than before suffering the loss. For these reasons, the court answered the certified question in the negative and affirmed the appellate court’s judgment but not its reasoning.
You can find the full opinion here.