NEWSFLASH! Insurers in Illinois Will Need to Contract with Specificity After Recent Illinois Supreme Court Decision

Authors: Joseph M.V. Amari, Esquire

A dividing issue amongst courts across the United States was recently settled in the Illinois Supreme Court last month. In the case of Sproull v. State Farm, the Court considered whether an insurance provider could depreciate the cost of labor when compensating a homeowner for a damage claim.

Put simply, courts around the country have found different requirements for the amount that an insurance provider could depreciate when determining the “Actual Cash Value” of a property which was damaged. This means that the insurer can subtract from the property’s value the amount that the property depreciated since it was purchased. Some insurance contracts define Actual Cash Value and explain how that amount is calculated, but other policies do not define the term or how Actual Cash Value is determined, including whether labor costs will be depreciated.

In Sproull, the insured’s roof was damaged by wind, and the insured filed a claim with State Farm under their homeowner’s policy, which did not define Actual Cash Value. When determining the valuation of the roof, State Farm depreciated the value of the labor costs of installing the roof sixteen years earlier. The insured filed suit, arguing that the labor costs should not be depreciated. State Farm moved to dismiss the lawsuit, and the trial court denied the motion. State Farm appealed the case to the Fifth District Appellate Court and ultimately to the Illinois Supreme Court.

When deciding the case, the Illinois Supreme Court affirmed the Fifth District’s determination that labor costs should not be depreciated in the same way that tangible property may be depreciated under Illinois law. The Court reasoned that, unlike tangible physical property, labor costs do not depreciate as they are necessary for the insured to be made whole. Therefore, where the insurance policy does not define Actual Cash Value, the insurance company may not depreciate the labor costs when compensating an insured.

The holding in Sproull is narrow and applies only to homeowner’s policies of real property used as a principal place of residence. Further, while the Illinois Supreme Court’s holding in Sproull does not allow for an insurer to depreciate labor costs when Actual Cash Value is not defined, the insurer is free to define the term in its policy to depreciate those costs.

CONTACT:

Joseph M.V. Amari, Esquire
jamari@satclaw.com
Direct: (312) 554-3105

John W. Campbell, Jr., Esquire
jcampbell@satclaw.com
Direct: (312) 554-3126

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