Sproull v. State Farm Fire & Casualty Co.

2020 IL App (5th) 180577
NOTICE
Decision filed 07/24/20. The
text of this decision may be NO. 5-18-0577
changed or corrected prior to
the filing of a Peti ion for IN THE
Rehearing or the disposition of
the same.
APPELLATE COURT OF ILLINOIS

FIFTH DISTRICT
______________________________________________________________________________

JARRET SPROULL, Individually and on Behalf of All
) Appeal from the
Others Similarly Situated, ) Circuit Court of
) Madison County.
Plaintiff-Appellee, )
)
v. ) No. 16-L-1341
)
STATE FARM FIRE AND CASUALTY )
COMPANY, ) Honorable
) William A. Mudge,
Defendant-Appellant. ) Judge, presiding.
______________________________________________________________________________

JUSTICE CATES delivered the judgment of the court, with opinion.
Justices Moore and Barberis concurred in the judgment and opinion.

OPINION

¶1 Plaintiff, Jarret Sproull, filed a putative class action complaint against defendant, State

Farm Fire and Casualty Company (State Farm), and sought damages for breach of contract and

declaratory relief. Plaintiff alleged that State Farm improperly depreciated labor costs when it

calculated the “actual cash value” of covered losses and that State Farm concealed this practice

from plaintiff and similarly situated policyholders. State Farm moved to dismiss the complaint for

failure to state a claim and argued that its method of calculating actual cash value fully complied

with the terms of its policy and Illinois law. The trial court denied State Farm’s motion to dismiss,

finding that the term “actual cash value” was ambiguous and that it should be strictly construed

against State Farm. The trial court subsequently granted State Farm’s motion to certify the

1
following question for interlocutory review pursuant to Illinois Supreme Court Rule 308(a) (eff.

July 1, 2017):

“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?”

¶2 This court initially denied State Farm’s application for leave to appeal under Rule 308(a).

Sproull v. State Farm Fire & Casualty Co., No. 5-18-0577 (Jan. 10, 2019). The Illinois Supreme

Court then denied State Farm’s petition for leave to appeal but issued a supervisory order directing

this court to vacate its January 10, 2019, order and allow State Farm’s application for leave to

appeal. Sproull v. State Farm Fire & Casualty Co., No. 124484 (Ill. Mar. 20, 2019) (supervisory

order). Accordingly, we vacated our prior order and granted State Farm’s Rule 308(a) application.

Sproull v. State Farm Fire & Casualty Co., No. 5-18-0577 (Apr. 26, 2019).

¶3 I. BACKGROUND

¶4 The basic facts are not disputed. On December 28, 2015, plaintiff’s home sustained wind

damage during a storm. Plaintiff submitted a timely property damage claim under a homeowners

policy issued to him by State Farm.

¶5 The State Farm policy covered replacement costs for structural damage and contained a

two-step process for settling a claim for a covered loss.

“Coverage A—Dwelling

1. A1—Replacement Cost Loss Settlement—Similar Construction

2
 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;

***.”

¶6 The State Farm policy does not define the term “actual cash value” or explain how actual

cash value is calculated. It does not inform the policyholder that actual cash value is the

replacement cost of the property at the time of loss, less depreciation, if any. The policy does not

define “depreciation,” and it does not indicate that labor costs are subject to depreciation.

3
¶7 On January 23, 2016, a State Farm adjuster inspected plaintiff’s home and determined that

plaintiff sustained a covered loss. The adjuster used an electronic software program called

“Xactimate” to prepare the repair estimate. The adjuster identified 26 line-item repairs and input

that data into the program. The Xactimate program provided an estimated cost for each component

of the repair items. The Xactimate software contained an option that allowed the adjuster to mark

boxes of his own choosing in order to depreciate one or more of the individual components of the

repair cost, including materials, non-materials (labor), removal, overhead and profit, and sales tax.

In the absence of active intervention by the adjuster, the software program automatically

depreciated for materials only. In this case, the adjuster ticked the box to depreciate the labor

component on some repair items.

¶8 Using the Xactimate program, the adjuster generated an estimate report. A copy of the

estimate report was subsequently provided to plaintiff. According to the estimate, depreciation was

applied to both material costs and labor costs on 7 of the 26 repair items. The estimate indicated

that repair and replacement cost totaled $1711.54, and that depreciation totaled $394.36. The

“actual cash value” of plaintiff’s loss was calculated by subtracting $394.36 in depreciation from

$1711.54 in estimated repair costs, which equaled $1317.18. After accounting for the $1000

deductible, plaintiff received a payment of $317.18.

¶9 An “Explanation of Building Replacement Cost Benefits” (Explanation of Benefits)

accompanied the estimate provided to plaintiff. The Explanation of Benefits provided, in pertinent

part:

“Your insurance policy provides replacement cost coverage for some or all of the

loss or damage to your dwelling or structures. Replacement cost coverage pays the actual

4
 and necessary cost of repair or replacement, without a deduction for depreciation, subject

to your policy’s limit of liability. To receive replacement costs benefits you must:

1. Complete the actual repair or replacement of the damaged part of

the property within two years of the date of loss; and

2. Notify us within 30 days after the work has been completed.

3. Confirm completion of repair or replacement, by submitting

invoices, receipts or other documentation to your agent or claim office.

Until these requirements have been satisfied, our payment(s) to you will be for the

actual cash value of the damaged part of the property, which may include a

deduction for depreciation.

***

The estimate to repair or replace your damaged property is $1,711.54. The

enclosed payment to you of $317.18 is for the actual cash value of the damaged

property at the time of loss, less any deductible that may apply. We determined the

actual cash value by deducting depreciation from the estimated repair or

replacement cost. Our estimate details the depreciation applied to your loss. Based

on our estimate, the additional amount available to you for the replacement cost

benefits (recoverable depreciation) is $394.36.” (Emphases added.)

¶ 10 On September 23, 2016, plaintiff filed a putative class action complaint. Plaintiff alleged

that State Farm breached its contractual obligations to plaintiff and similarly situated policyholders

when it improperly calculated the actual cash value of covered losses by depreciating labor costs

in addition to the cost of materials. Plaintiff also alleged that State Farm’s practice of depreciating

intangible items, such as labor, was deceptive. Plaintiff sought an order certifying the class, a

5
judgment declaring that State Farm’s insurance contract did not allow a deduction for depreciation

of labor, and an award of damages that would make all class members whole. The itemized

estimate and the Explanation of Benefits were attached to the complaint.

¶ 11 State Farm filed a combined motion, under section 2-619.1 of the Code of Civil Procedure

(735 ILCS 5/2-619.1 (West 2014)), to stay the proceedings, or alternatively, to dismiss plaintiff’s

complaint. In its motion to stay the proceedings under section 2-619(a)(3) (735 ILCS 5/2-619(a)(3)

(West 2014)), State Farm alleged that another class action case involving duplicate claims (Jenkins

v. State Farm Fire & Casualty Co., No. 15-CH-8242 (Cir. Ct. Cook County, May 21, 2015)), was

pending in the Illinois Appellate Court First District, having been dismissed by the circuit court of

Cook County.1

¶ 12 State Farm also moved to dismiss plaintiff’s complaint under section 2-615 of the Code of

Civil Procedure (735 ILCS 5/2-615 (West 2014)). State Farm argued that plaintiff could not state

a cause of action for breach of contract or declaratory relief because its method for calculating

actual cash value fully complied with the terms of its policy and applicable Illinois insurance

regulations. State Farm further argued that the term “actual cash value” was not subject to more

than one reasonable interpretation and was unambiguous. Additionally, State Farm claimed that a

1
In Jenkins v. State Farm Fire & Casualty Co., plaintiff Jenkins filed a purported class action
complaint for breach of contract and declaratory judgment in the circuit court of Cook County. Jenkins
alleged State Farm had improperly depreciated labor costs when it calculated the actual cash value of a
covered structural loss. State Farm moved to dismiss Jenkins’ complaint, alleging that it was time-barred
by the policy’s one-year limitation and that it failed to state a cause of action. The circuit court denied State
Farm’s motion to dismiss for failure to state a claim, reasoning that labor does not lose value over time or
due to wear and tear. The court dismissed the action based upon plaintiff’s failure to timely file it within
the one-year period allowed under the policy. Jenkins v. State Farm Fire & Casualty Co., No. 15-CH-8242
(Cir. Ct. Cook County, May 21, 2015). Jenkins appealed. State Farm filed a cross-appeal, challenging the
circuit court’s determination that labor should not be depreciated in calculating actual cash value under its
policy. Our colleagues in the First District affirmed the circuit court’s decision to dismiss the action based
on the one-year limitation in the policy and dismissed State Farm’s cross-appeal as moot. Jenkins v. State
Farm Fire & Casualty Co., 2017 IL App (1st) 160612-U.
6
dismissal of the contract claim was warranted because plaintiff did not allege any facts to

demonstrate that he had been damaged by the alleged breach.

¶ 13 In a supporting memorandum, 2 State Farm asserted that section 919.80(d)(8)(A) of Title

50 of the Illinois Administrative Code (50 Ill. Adm. Code 919.80(d)(8)(A) (2002)) provided that

the method for calculating “actual cash value,” under insurance policies similar to plaintiff’s

policy, was “replacement cost of property at time of loss less depreciation, if any.” State Farm

argued that no provision within section 919.80(d)(8)(A) limited depreciation to the materials’

component of replacement cost and that administrative regulations, when unambiguous, should be

applied as written.

¶ 14 In its memorandum, State Farm further indicated that the Illinois Department of Insurance

permitted several insurance companies to sell homeowners policies that (i) provided for the initial

payment based on the actual cash value of a loss, (ii) identified the various components of

replacement costs (including both material and nonmaterial components), and (iii) specified that

when calculating actual cash value all components of replacement cost were depreciable. Copies

of homeowners policies from Shelter Insurance Company and Farmers Insurance Company were

attached as supporting exhibits.

¶ 15 The Shelter Insurance policy defined “actual cash value” as “total restoration cost less

depreciation.” Within the definition, Shelter noted that where a state’s laws “limit the factors that

may be considered in determining actual cash value, only those factors allowed by law will be

considered.” The Shelter policy provided that depreciation was based on “the decrease in value of

2
In its supporting memorandum, State Farm noted that plaintiff did not attach the insurance policy
to his complaint and that the failure to attach a contract in a breach of contract claim was grounds for
dismissal under section 2-606 of the Code of Civil Procedure (735 ILCS 5/2-606 (West 2014)). Rather than
raise this point as a basis for dismissal, State Farm elected to attach a certified copy of the policy to its
pleadings so that the policy was before the court. State Farm then proceeded with its other section 2-615
arguments “in the interest of judicial economy.”
7
the property since it was new” and that “the condition, age, extent of use, and obsolescence of the

property, and the property as a whole” would be considered in determining depreciation. The

policy further stated that depreciation applied to “the labor and applicable sales tax necessary to

complete covered repairs and replacements.” The Farmers Insurance policy defined “actual cash

value” as “the reasonable replacement cost at the time of loss less deduction for depreciation.” It

also informed policyholders: “We may depreciate all replacement costs, including but not limited

to the costs of materials and labor.”

¶ 16 In its memorandum, State Farm acknowledged that it had recently amended its Illinois

homeowners policy, adding “Form FE-3650 Actual Cash Value Endorsement.” The endorsement,

containing a copyright date of 2015, was attached to the memorandum as an exhibit. 3 In its

endorsement, State Farm defined the term “actual cash value” and expressly stated that labor costs

were subject to depreciation. State Farm noted that the endorsement did not take effect until at

3
“Endorsement FE-3650 Actual Cash Value Endorsement

The following is added to any provision which uses the term ‘actual cash value’:

Actual cash value means the value of the damaged part of the property at the time of loss, calculated
as the estimated cost to repair or replace such property, less a deduction to account for pre-loss depreciation.
For this calculation, all components of this estimated cost including, but not limited to:

1. materials, including any tax;
2. labor, including any tax; and
3. overhead and profit;
are subject to depreciation.

The depreciation deduction may include such considerations as:
1. age
2. condition;
3. reduction in useful life;
4. obsolescence; and
5. any pre-loss damage including wear, tear, or deterioration;
of the damaged part of the property. All other policy provisions apply.

FE-3650 © Copyright, State Farm Mutual Automobile Insurance Company, 2015”

8
least February 1, 2016, “long after” plaintiff’s policy was issued. 4 State Farm argued that the

endorsement could not be construed as an admission that the language in plaintiff’s policy was

ambiguous or different in substance or operation.

¶ 17 In response, plaintiff argued that a stay of the proceedings was unnecessary because the

only issue certain to be addressed in the Jenkins appeal was whether Jenkins’ individual lawsuit

had been timely filed. Plaintiff further argued that the term “actual cash value” was not defined in

the policy and was ambiguous because it was subject to more than one reasonable interpretation.

Plaintiff noted that other insurers, such as Shelter Insurance and Farmers Insurance, had issued

policies that expressly stated that labor costs were subject to depreciation, while State Farm

declined to define “actual cash value” or to inform policyholders of its intent to apply depreciation

to labor costs.

¶ 18 On March 8, 2017, State Farm’s combined motion was heard and taken under advisement.

On May 16, 2017, the trial court granted State Farm’s request to stay the proceedings pending a

resolution of the Jenkins appeal. On June 20, 2017, our colleagues in the First District affirmed

the dismissal of the Jenkins action based upon Jenkins’s failure to file his suit within the one-year

limitation in the policy. Jenkins v. State Farm Fire & Casualty Co., 2017 IL App (1st) 160612-U.

Following a status hearing on August 9, 2017, the trial court lifted the stay order and permitted the

parties to file supplemental arguments. Both parties indicated that the depreciation of labor costs

was a novel issue in Illinois, and they submitted case law from other jurisdictions in support of

their respective arguments.

4
The record contains a renewal certificate indicating that plaintiff’s policy was renewed and in
effect from November 25, 2015, to November 25, 2016.
9
¶ 19 On February 26, 2018, the trial court denied State Farm’s section 2-615 motion to dismiss.

In its order, the trial court agreed there were no Illinois cases addressing the issue. The court

provided a thoughtful analysis, reviewing the case law from other jurisdictions and recognizing

the split of authority on the issue. The court found that the term “actual cash value” was not defined

in the State Farm policy and was susceptible to more than one reasonable interpretation. The court

further found that State Farm drafted the policy and could have stated that labor costs were subject

to depreciation. The court concluded that the term “actual cash value” was ambiguous and that the

ambiguity should be construed in favor of the insured and against the insurer.

¶ 20 On April 18, 2018, State Farm filed a motion to certify a question of law pursuant to Rule

308(a). State Farm argued that the labor depreciation question raised a new and undecided question

under Illinois law and that a resolution of the question would materially advance the ultimate

termination of the litigation. In response, plaintiff asked the trial court to certify the class before

certifying a question of law for interlocutory review. Plaintiff argued that certification of a class

would remove the risk that State Farm would later argue against class certification because a

common question had already been resolved. Plaintiff also proposed modifications to the question

proposed by State Farm.

¶ 21 On November 14, 2018, the trial court denied plaintiff’s motion to determine the issue of

class certification prior to certifying a question of law and certified the question of law proposed

by State Farm. State Farm’s application for leave to appeal under Rule 308(a) was ultimately

granted. Upon motions filed pursuant to Illinois Supreme Court Rule 345 (eff. Sept. 20, 2010), the

American Property Casualty Insurance Association and the National Association of Mutual

10
Insurance Companies 5 were granted leave to jointly file an amicus curiae brief in support of State

Farm’s position, and United Policyholders 6 was granted leave to file an amicus curiae brief in

support of plaintiff’s position.

¶ 22 II. ANALYSIS

¶ 23 Illinois Supreme Court Rule 308(a) (eff. July 1, 2017) gives the appellate court discretion

to grant an appeal from an interlocutory order not otherwise appealable if the trial court finds that

the order “involves a question of law as to which there is substantial ground for difference of

opinion and that an immediate appeal from the order may materially advance the ultimate

termination of the litigation.” Generally, the scope of review in a Rule 308 appeal is limited to the

question of law identified by the trial court. Rozsavolgyi v. City of Aurora, 2017 IL 121048, ¶ 21.

A reviewing court will decline to answer a certified question where the answer is dependent upon

the underlying facts of a case or where the question calls for an answer that is advisory or

provisional. Rozsavolgyi, 2017 IL 121048, ¶ 21. A question certified under Rule 308 presents a

question of law that is reviewed de novo. Rozsavolgyi, 2017 IL 121048, ¶ 21.

¶ 24 In this case, the trial court certified the following question:

“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?”

5
American Property Casualty Insurance Association and National Association of Mutual Insurance
Companies identify themselves as national trade organizations representing property and casualty insurers
writing business in Illinois, nationwide, and globally.
6
United Policyholders identifies itself as a not-for-profit public interest consumer advocacy
organization.
11
¶ 25 The certified question involves the interpretation of a personal homeowners insurance

policy, drafted and issued by State Farm. When interpreting the language in an insurance policy,

the general principles of contract construction apply. Hobbs v. Hartford Insurance Co. of the

Midwest, 214 Ill. 2d 11, 17 (2005). A court’s primary objective in construing the language in an

insurance policy is to determine and give effect to the intent of the parties as expressed by the

agreement. Hobbs, 214 Ill. 2d at 17; Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154

Ill. 2d 90, 108 (1992). If the language in the policy is clear and unambiguous, the provision will

be applied as written, unless it contravenes public policy. Outboard Marine, 154 Ill. 2d at 108.

Whether an ambiguity exists turns on whether the policy language is subject to more than one

reasonable interpretation. Hobbs, 214 Ill. 2d at 17. Where competing reasonable interpretations of

a policy exist, courts will construe the policy in favor of the insured and against the insurer who

drafted the policy. Outboard Marine, 154 Ill. 2d at 108-09.

¶ 26 A policy term is not rendered ambiguous simply because the term is not defined within the

policy or because the parties can suggest creative possibilities for its meaning. Hobbs, 214 Ill. 2d

at 17. Undefined terms will be given their plain, ordinary, and popular meaning; that is, they will

be construed with reference to “the average, ordinary, normal *** reasonable [person].” (Internal

quotation marks omitted.) Outboard Marine, 154 Ill. 2d at 115. A court will not strain to find an

ambiguity where none exists; likewise, a court will not adopt an interpretation that rests on fine or

tenuous distinctions that the average person, for whom the policy is written, cannot be expected to

understand. Founders Insurance Co. v. Munoz, 237 Ill. 2d 424, 433 (2010); Canadian Radium &

Uranium Corp. v. Indemnity Insurance Co. of North America, 411 Ill. 325, 334 (1952)

(construction to be given insurance contract should be a natural and reasonable one).

12
¶ 27 We begin our analysis from a historical perspective, recognizing that property insurance

was borne of fire insurance policies, and that property insurance policies, like those fire policies,

were contracts of indemnity. Couch on Insurance 3d § 148.1 (June 2020). Furthermore, the

fundamental principle of a contract of indemnity is to place the insured in as good a position, as

reasonably practicable, as he would have been had the loss not occurred. See generally Outboard

Marine, 154 Ill. 2d at 103; General Casualty Co. v. Tracer Industries, Inc., 285 Ill. App. 3d 418,

423 (1996).

¶ 28 The homeowners policy at issue provided for replacement costs for structural damage and

contained a two-step process for settling a covered loss. In step one of the process, which applied

prior to the completion of the actual repair or replacement of the damaged property, State Farm

was to pay the actual cash value, at the time of the loss, of the damaged part of the property. Thus,

State Farm was obligated to indemnify plaintiff, thereby placing plaintiff in the position he enjoyed

prior to the loss. In step two, which applied when the repairs were completed, State Farm was to

make additional payments for the actual and necessary repairs to the damaged property.

¶ 29 The parties’ disagreement here centers on whether labor costs may be depreciated when

calculating the actual cash value of damaged property under the homeowners insurance policy at

issue. State Farm claims that its method for calculating actual cash value fully complies with

section 919.80(d)(8)(A) of Title 50 of the Code (50 Ill. Adm. Code 919.80(d)(8)(A) (2002)). State

Farm asserts that section 919.80(d)(8)(A) directs insurance companies to determine “actual cash

value” as “replacement cost of property at time of loss less depreciation, if any,” and that no

provision within section 919.80(d)(8)(A) limits depreciation to materials only. 50 Ill. Adm. Code

919.80(d)(8)(A) (2002). In response, plaintiff asserts that under section 919.80(d)(7)(C) (50 Ill.

Adm. Code 919.80(d)(7)(C) (2002)), repair estimates must be of a sufficient amount to allow

13
repairs to be made “in a workmanlike manner.” Plaintiff reasons that if actual cash value is

calculated as replacement costs, less depreciation for materials and labor, the insured’s payment

would not be sufficient to allow repairs to be done in a “workmanlike manner.” As evidenced by

their arguments, both parties have failed to consider the regulation in its entirety and to give the

words used their plain, ordinary, and commonly understood meanings. People ex rel. Madigan v.

Illinois Commerce Comm’n, 231 Ill. 2d 370, 380 (2008).

¶ 30 Section 919.80 of Title 50 of the Code (50 Ill. Adm. Code 919.80 (2002)) regulates

insurance claim practices involving private passenger automobiles. It also regulates claim practices

of property and casualty companies. 50 Ill. Adm. Code 919.80 (2002).

¶ 31 Section 919.80(d)(7) sets forth required claims practices by property and casualty

companies for fire and extended coverage losses. 50 Ill. Adm. Code 919.80(d)(7) (2002).

Subsection A of section 919.80(d)(7) addresses unreasonable delay in payment of claims made on

fire and extended coverage insurance policies. 50 Ill. Adm. Code 919.80(d)(7)(A) (2002).

Subsection B requires insurers to provide reasonable written explanations for delays in the

resolution of those claims. 50 Ill. Adm. Code 919.80(d)(7)(B) (2002). Subsection C of section

919.80(d)(7) addresses partial losses and provides in part:

“If partial losses are settled on the basis of a written estimate prepared by or for the

company, the company shall supply upon request of the insured, a copy of the

estimate upon which the settlement is based. The estimate prepared by or for the

company shall be reasonable, in accordance with applicable policy provisions, and

of an amount which will allow for repairs to be made in a workmanlike manner.” 50

Ill. Adm. Code 919.80(d)(7)(C) (2002).

14
¶ 32 Section 919.80(d)(8) sets forth the formula for calculating actual cash value losses and

provides in pertinent part:

“A) When the insurance policy provides for the adjustment and settlement

of losses on an actual cash value basis on residential fire and extended coverage as

defined in Section 143.13 of the Code [215 ILCS 5/143.13], 7 the company shall

determine actual cash value *** as follows: replacement cost of property at time of

loss less depreciation, if any. Upon the insured’s request, the company shall provide

a copy of the claim file worksheet(s) detailing any and all deductions for

depreciation, including, but not necessarily limited to, the age, condition, and

expected life of the property.” 50 Ill. Adm. Code 919.80(d)(8)(A) (2002).

¶ 33 It is no coincidence that the provisions for calculating actual cash value follow the

provisions covering claims practices for property losses due to fire. As mentioned above, property

insurance coverage evolved from insurance policies that indemnified policyholders for losses

caused by fire. A century ago, in Smith v. Allemannia Fire Insurance Co. of Pittsburg, 219 Ill.

App. 506, 512-13 (1920), the Illinois Appellate Court construed an indemnity clause in a fire policy

and announced that it would follow the rule that stated that “actual cash value” means

“reproduction value less depreciation for age and not market value.” The Smith rule, defining

actual cash value as reproduction value less depreciation for age, has been applied by Illinois courts

when calculating damages under other types of actual cash value policies. See, e.g., C.L. Maddox,

Inc. v. Royal Insurance Co. of America, 208 Ill. App. 3d 1042 (1991); Carey v. American Family

Brokerage, Inc., 391 Ill. App. 3d 273, 281-82 (2009).

7
Under section 143.13, a policy of fire and extended coverage means “a policy delivered or issued
for delivery in this State, that includes but is not limited to, the perils of fire and extended coverage, and
covers real property used principally for residential purposes.” 215 ILCS 5/143.13(b) (West 2014).
15
¶ 34 Decades after the Smith rule was announced, this court was asked to consider the definition

of actual cash value where the loss was occasioned by an explosion and fire. C.L. Maddox, 208 Ill.

App. 3d 1042. In C.L. Maddox, the parties did not dispute that the insurance policy at issue was an

“actual cash value” policy. The trial court defined actual cash value as reproduction costs minus

depreciation and excluded evidence of the building’s fair market value. C.L. Maddox, 208 Ill. App.

3d at 1054. On appeal, the defendant claimed that fair market value was relevant to the

determination of actual cash value. Relying on Smith, this court held that “actual cash value means

reproduction costs less depreciation for age and not market value.” 8 C.L. Maddox, 208 Ill. App.

3d at 1055.

¶ 35 In Carey, 391 Ill. App. 3d 273, the owners of a building filed a breach of contract action

against their insurer after their building was damaged by a fire. During trial, plaintiff’s expert

estimated that the replacement costs for the building totaled $398,725. The expert acknowledged

that she did not employ an actual cash valuation, so she did not consider or calculate depreciation.

Following a bench trial, the court awarded damages based on replacement costs rather than the

actual cash value called for in the policy. The appellate court found that the proper measure of

damages was based on actual cash value. Carey, 391 Ill. App. 3d at 280. The court set aside the

award and remanded the case for a new trial on damages. Relying on the rule announced in Smith,

the Carey court held that the proper calculation of actual cash value under both Illinois law and

the insurance policy at issue was “replacement cost less depreciation.” Carey, 391 Ill. App. 3d at

281. In discussing damages, the court pointed out that depreciation in an insurance context, rather

than an accounting context, meant “the decrease in the actual value of property based on its

8
At the time C.L. Maddox was decided, Illinois Department of Insurance Rule 9.19(15) defined
“actual cash value” as reproduction costs minus depreciation. C.L. Maddox, 208 Ill. App. 3d at 1054-55.
16
physical condition, age, use, and other factors that affect the remaining usefulness of the property.”

Carey, 391 Ill. App. 3d at 281 (citing Black’s Law Dictionary 473 (8th ed. 2004)). Another

dictionary reference defines “depreciation” as “a reduction in value of an asset with the passage of

time, due in particular to wear and tear.” Concise Oxford American Dictionary 243 (2006).

Considering these references, the plain, common, and ordinary meaning of depreciation is a

reduction in value of a property because of aging and wear and tear to the physical structure of that

property.

¶ 36 The State Farm policy at issue here does not define “actual cash value” or “depreciation.”

The policy does not inform the insured that “actual cash value” will be calculated as replacement

cost less depreciation for the costs of labor and materials. State Farm has not demonstrated that it

incorporated section 919.80(d)(8)(A) into its policy. State Farm’s reliance on section

919.80(d)(8)(A), even if it had been incorporated into the policy, would not have resolved the issue

in favor of State Farm. Indeed, the regulation relied on by State Farm states that actual cash value

is calculated as “replacement cost of property at time of loss less depreciation, if any.” (Emphasis

added.) This provision specifically pertains to replacement cost of the damaged “property,” less

depreciation of that “property.” According to the dictionary definitions, property refers to

something tangible, something that is owned, or possessed. 9 Again, the insurance regulations

governing required claims practices are to be construed together, and the terms used therein, unless

otherwise defined, are to be given their plain and ordinary meaning. Madigan, 231 Ill. 2d at 380.

Thus, it is clear, based upon the plain language of the State Farm policy at issue and the language

9
Indeed, depending on which dictionary is referred to, there are multiple definitions of the word
“property.” All of the varying definitions, however, refer to something tangible, owned, or possessed. See
Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/property (last visited
July 20, 2020) [https://perma.cc/P7HD-9CD4]; Concise Oxford American Dictionary 710 (2006); Black’s
Law Dictionary 1095 (5th ed. 1979).
17
in the Code that “actual cash value” refers to real property—an asset that can lose value over time

due to wear and deterioration, resulting from use or the elements, and does not refer to services,

such as labor. We note that this definition of “property” is further supported by the language in

State Farm’s own policy. The subject policy defines “property damage” as “physical damage to or

destruction of tangible property, including loss of use” of that property. (Emphasis added.) Thus,

an ordinary layperson may reasonably interpret “depreciation, if any,” to describe the depreciation

of physical, tangible materials, particularly where the language follows the word “property.”

¶ 37 As previously noted, the certified question before us has not been previously considered

with regard to this State Farm policy under Illinois law. There is no dispute, however, that under

Illinois law, the term “actual cash value” begins with a determination of the “cost of replacement”

of the damaged property. General Casualty Co., 285 Ill. App. 3d at 422. In the fire-related claims

cases decided by Illinois courts, the cost of replacement has always allowed for a deduction for

depreciation of the property based on age. C.L. Maddox, 208 Ill. App. 3d 1042; Smith, 219 Ill.

App. at 513.

¶ 38 The parties and the amici have cited cases from other jurisdictions that reveal that courts

are split on whether depreciation may be applied to labor costs when determining actual cash value

under state law. Compare, e.g., Redcorn v. State Farm Fire & Casualty Co., 2002 OK 15, 55 P.3d

1017 (under the broad evidence rule, depreciation of labor and materials was appropriate in

determining the ACV of a covered loss where ACV was not defined in insurance policy), with

Adams v. Cameron Mutual Insurance Co., 2013 Ark. 475, 430 S.W.3d 675 (cost of labor may not

be depreciated when determining ACV under indemnity policy that does not define ACV),

superseded by statute, Ark. Code Ann. § 23-88-106(a)(2) (West 2017); see also Wilcox v. State

18
Farm Fire & Casualty Co., 874 N.W.2d 780, 785 (Minn. 2016) (labor costs may be depreciable

depending on facts and circumstances of the particular case).

¶ 39 In answering the certified question before us, we remain mindful that we must consider

whether the average, ordinary, reasonable person, for whom the policy was written, would have

understood that the “actual cash value” of a covered loss meant replacement costs of property less

depreciation for materials and labor. Outboard Marine, 154 Ill. 2d at 115. We think not. We

conclude that an average, ordinary homeowner who purchased the State Farm policy at issue would

have reasonably expected that depreciation would apply only to property, i.e., physical structures

and tangible materials, as those lose value with age, use, and wear and tear. We further conclude

that it is not reasonable to believe that an average homeowner would consider labor to be a tangible

asset included within the definition of depreciation. State Farm sought to apply a technical

definition of depreciation that is not evident in the language of the policy or in the regulation upon

which it relies. Courts will not adopt an interpretation which rests on fine distinctions that the

average person, for whom the policy is written, cannot be expected to understand. Outboard

Marine, 154 Ill. 2d at 115; Canadian Radium & Uranium Corp., 411 Ill. at 334. Our resolution is

in keeping with the primary purpose of an indemnity clause in an insurance contract.

¶ 40 III. CONCLUSION

¶ 41 The original certified question in this case referred to all components of replacement cost,

including labor. The parties’ arguments in the trial court and this court addressed only whether the

labor component could be depreciated. Thus, we have reformulated the common question of law,

pursuant to Rule 308 and have limited our response to the sole issue of whether the cost of labor

can be depreciated when determining the actual cash value of a loss as defined under “Coverage

A” of the State Farm policy at issue. Crawford County Oil, LLC v. Weger, 2014 IL App (5th)

19
130382, ¶ 11. Accordingly, we conclude that the answer to the certified question, as reformulated,

is “No.” Where Illinois’s insurance regulations provide that the “actual cash value” 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, only the property structure and

materials are subject to a reasonable deduction for depreciation, and depreciation may not be

applied to the intangible labor component.

¶ 42 Finally, we have considered several motions to cite additional authorities from jurisdictions

outside Illinois, which were filed by the parties after oral arguments were heard and the case was

under advisement. Initially, we ordered each motion to be taken with the case. Because the

language in an insurance policy is interpreted under the laws of Illinois, decisions from other

jurisdictions generally provide limited guidance. Nevertheless, we have hereby granted each

motion to cite additional authority, and we reviewed those decisions as we considered the issues

before us.

¶ 43 Certified question answered; cause remanded.

20
 2020 IL App (5th) 180577

NO. 5-18-0577
IN THE
APPELLATE COURT OF ILLINOIS
FIFTH DISTRICT

JARRET SPROULL, Individually and on Behalf of All ) Appeal from the
Others Similarly Situated, ) Circuit Court of
) Madison County.
Plaintiff-Appellee, )
)
v. ) No. 16-L-1341
)
STATE FARM FIRE AND CASUALTY )
COMPANY, ) Honorable
) William A. Mudge,
Defendant-Appellant. ) Judge, presiding.
_____________________________________________________________________________________________

Opinion Filed: July 24, 2020
_____________________________________________________________________________________________

Justices: Honorable Judy L. Cates, J.

Honorable James R. Moore, J., and
Honorable John B. Barberis, J.
Concur
_____________________________________________________________________________________________

Attorneys Craig R. Unrath, Heyl, Royster, Voelker & Allen, PC, 300 Hamilton Boulevard, Box 6199,
for Peoria, IL 61601-6199; Patrick Cloud, Heyl, Royster, Voelker & Allen, P.C., 105 W. Vandalia
Appellant Street, Suite 100, Edwardsville, IL 62025; Joseph A. Cancila, Jr., Heidi Dalenberg, Jacob L.
Kahn, Riley Safer Holmes & Cancila LLP, Three First National Plaza, 70 W. Madison Street,
Suite 2900, Chicago, IL 60602
_____________________________________________________________________________________________

Attorneys Christopher W. Byron, Christopher J. Petri, Byron, Carlson, Petri & Kalb, LLC, 411 St. Louis
for Street, Edwardsville, IL 62025; Joe D. Jacobson, Allen P. Press, Jacobson, Press & Fields, P.C.,
Appellee 168 N. Meramec Avenue, Suite 150, St. Louis, MO 63105; David C. Linder, T. Joseph
Snodgrass, Larson King, LLP, 30 E. Seventh Street, Suite 2800, St. Paul, MN 55101; David T.
Butsch, Christopher E. Roberts, Butsch Roberts & Associates, LLC, 231 S. Bemiston Avenue,
Suite 260, Clayton, MO 63105
_____________________________________________________________________________________________

Amicus Michael R. Enright, Robinson & Cole, LLP, 280 Trumbell Street, Hartford, CT 06103-3597 (for
Curiae American Property Casualty Insurance Association and National Association of Mutual Insurance
Companies)
_____________________________________________________________________________________________

Amicus Edward Eshoo, Jr., Merlin Law Group, 181 W. Madison, Suite 3475, Chicago, IL 60602; Amy
Curiae Bach, Executive Director, United Policyholders, 384 Bush St., 8th Floor, San Francisco, CA
94104 (for United Policyholders)
_____________________________________________________________________________________________