Sproull v. State Farm Fire & Cas. Co.

2021 IL 126446

184 N.E.3d 203

451 Ill.Dec. 616

Jarret SPROULL, Appellee,

v.STATE FARM FIRE AND CASUALTY COMPANY, Appellant.

Docket No. 126446

Supreme Court of Illinois.

Opinion filed September 23, 2021.

Joseph A. Cancila Jr. and Jacob L. Kahn, of Riley Safer Holmes & Cancila LLP, of Chicago, and Patrick Cloud, Craig Unrath, and Ann C. Barron, of Heyl Royster Voelker & Allen, PC, of Edwardsville, for appellant.

Christopher W. Byron and Christopher J. Petri, of Byron Carlson Petri & Kalb, LLC, of Edwardsville, T. Joseph Snodgrass, of Larson King, LLP, of St. Paul, Minnesota, and David T. Butsch and Christopher E. Roberts, of Butsch Roberts & Associates LLC, of Clayton, Missouri, for appellee.

Michael R. Enright, of Robinson & Cole LLP, of Hartford, Connecticut, for amici curiae American Property Casualty Insurance Association et al.

Edward Eshoo Jr., of Merlin Law Group, of Chicago, for amicus curiae United Policyholders.

OPINION

JUSTICE MICHAEL J. BURKE delivered the judgment of the court, with opinion.

¶ 1 At issue is 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. Plaintiff Jarret Sproull filed a putative class action against defendant, State Farm Fire and Casualty Company (State Farm), in the circuit court of Madison County, seeking declaratory relief and damages for breach of contract. Plaintiff alleged that State Farm improperly depreciated labor costs in determining ACV and concealed this practice from its policyholders. State Farm moved to dismiss the complaint for failure to state a claim and argued that its method of calculating ACV complied with Illinois law. The trial court denied the motion but agreed to certify the following question for interlocutory review:

"Where 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 Appellate Court, Fifth District, reformulated the question to address solely labor costs, rather than all components of replacement cost, and answered the question in the negative. 2020 IL App (5th) 180577, ¶ 41, 447 Ill.Dec. 182, 172 N.E.3d 1186.

¶ 2 BACKGROUND

¶ 3 Plaintiff was insured under a homeowner's policy that provided replacement cost coverage for structural damage. Under the terms of the policy, covered losses were paid in two parts. The insured would initially receive an ACV payment but then could receive replacement cost value (RCV) if repairs or replacement were completed within two years and the insurer was timely notified:

"COVERAGE A—DWELLING

1. A1—Replacement Cost Loss Settlement—Similar Construction.

a. We will pay the cost to repair or replace with similar construction and for the same use on the premises shown in the Declarations, the damaged parts of the property covered ***, subject to the following:

(1) until actual repair or replacement is completed, we will pay only the actual cash value at the time of the loss of the damaged part of the property, up to the applicable limit of liability shown in the Declarations, not to exceed the cost to repair or replace the damaged part of the property;

(2) when the repair or replacement is actually completed, we will pay the covered additional amount you actually and necessarily spend to repair or replace the damaged part of the property, or an amount up to the applicable limit of liability shown in the Declarations, whichever is less;

(3) to receive any additional payments on a replacement cost basis, you must complete the actual repair or replacement of the damaged part of the property within two years after the date of loss, and notify us within 30 days after the work has been completed ***."

The policy did not define "actual cash value."

¶ 4 According to plaintiff's complaint, he suffered wind damage to his residence on or about December 28, 2015, and timely submitted a property damage claim to State Farm requesting payment for the loss. On or about January 23, 2015, State Farm sent an adjuster to inspect the damage to plaintiff's property. State Farm determined that plaintiff had sustained a covered loss. The adjuster determined that the building sustained a loss with a replacement cost value (RCV) of $1711.54. In calculating ACV, State Farm began with the RCV and then subtracted plaintiff's $1000 deductible and an additional $394.36, including taxes, for depreciation. Plaintiff thus received an ACV payment from State Farm for $317.18. Plaintiff claimed that he was underpaid on his ACV claim because State Farm depreciated labor, which is intangible and thus not subject to wear, tear, and obsolescence. Plaintiff cited Black's Law Dictionary's definition of "depreciation" as a "decline in an asset's value because of use, wear, obsolescence, or age." See Black's Law Dictionary 506 (9th ed. 2009). According to plaintiff, labor may not be depreciated because it is not susceptible to aging or wearing and its value does not diminish over time.

¶ 5 Plaintiff alleged in the complaint that State Farm uses a program called "Xactimate" to calculate replacement and repair costs. The default setting is to apply depreciation to materials only when estimating structural repairs. However, State Farm's adjuster set the program to also depreciate nontangible items such as labor. According to plaintiff, other property insurers within the State of Illinois do not depreciate intangibles such as labor when adjusting property claims, and State Farm did not used to do so either. The written estimate provided to plaintiff showed 26 line-item repairs. Depreciation for materials and labor was applied to seven of the line items—painting the walls in the dining room, kitchen, hallway, and living room; painting the ceilings in the dining room and kitchen; and removing and replacing fiberboard in the dining room. Depreciation was not applied to other items, such as sealing and priming the surfaces to be painted, drywall work, and removing and replacing insulation.

¶ 6 Plaintiff alleged that State Farm conceals its practice of depreciating labor from its policyholders in several different ways. First, State Farm does not state in its written estimates that the Xactimate software has been set to depreciate nontangible items such as labor. Second, State Farm does not separate labor and materials in the estimates provided to policyholders. Third, for obvious labor-only charges such as debris removal or roof tear-off charges, State Farm does not depreciate labor. Plaintiff alleged that State Farm does this to help avoid detection of labor depreciation in other line items.

¶ 7 Plaintiff alleged that State Farm was under an affirmative duty to disclose the manner in which it calculates ACV payments and that State Farm was fraudulently concealing breaches of contract from its policyholders. Plaintiff claimed that State Farm's failure to pay the full cost of labor necessary to repair or replace plaintiff's damaged property in the ACV payment left plaintiff underpaid for his losses. According to plaintiff, State Farm's practice unlawfully discourages policyholders from repairing their property, as they may be left with insufficient funds to commence repairs if excessive depreciation is charged against their claims on top of their deductible obligations. Plaintiff argued that State Farm profits if the consumer fails to seek RCV for his or her claim. The more the ACV payment can be lowered, the less likely it is that the policyholder will be able to make up the difference between ACV and RCV and seek reimbursement later.

¶ 8 Plaintiff proposed a class action on behalf of "All Illinois resident persons and Illinois resident legal entities that received ‘actual cash value’ payments, directly or indirectly, from State Farm for loss or damage to a dwelling or other structure located in the State of Illinois, where the cost of labor as defined herein was depreciated." Plaintiff alleged that common questions of law and fact existed as to all putative class members and predominated over any questions affecting only individual class members. According to plaintiff, his claims are typical of the claims of all putative class members.

¶ 9 Count I of the complaint alleged breach of contract. Plaintiff claimed that State Farm breached its contractual duty to pay plaintiff and other putative class members the ACV of their claims by unlawfully depreciating labor costs. Count II sought declaratory relief. Plaintiff sought a declaration that the consumer property insurance contracts of the class members prohibit the deduction of depreciation for labor.

¶ 10 State Farm moved to dismiss the complaint pursuant to section 2-615 of the Code of Civil Procedure ( 735 ILCS 5/2-615 (West 2016) ). State Farm argued that plaintiff's allegations did not suggest a breach of contract because State Farm's method of calculating ACV fully complied with Illinois insurance regulations and the terms of the policy. For the same reason, State Farm contended that plaintiff was not entitled to declaratory relief. In a supporting memorandum, State Farm explained that the Illinois Department of Insurance (DOI) has promulgated a regulation mandating the "replacement cost less depreciation" method of determining ACV:

"When the insurance policy provides for the adjustment and settlement of losses on an actual cash value basis on residential fire and extended coverage *** the company shall determine actual cash value *** as follows: replacement cost of property at time of loss less depreciation, if any." 50 Ill. Adm. Code 919.80(d)(8)(A) (2002).

State Farm argued that its method of calculating ACV fully complied with the regulation and that plaintiff was improperly trying to add language to the regulation....