Illinois Official Reports

Appellate Court

Sproull v. State Farm Fire & Casualty Co., 2020 IL App (5th) 180577

Appellate Court 

Caption

JARRET SPROULL, Individually and on Behalf of All Others 

Similarly Situated, Plaintiff-Appellee, v. STATE FARM FIRE AND 

CASUALTY COMPANY, Defendant-Appellant.

District & No. Fifth District 

No. 5-18-0577

Filed July 24, 2020

Decision Under 

Review

Appeal from the Circuit Court of Madison County, No. 16-L-1341; the 

Hon. William A. Mudge, Judge, presiding.

Judgment Certified question answered; cause remanded.

Counsel on

Appeal

Craig R. Unrath, of Heyl, Royster, Voelker & Allen, P.C., of Peoria, 

Patrick Cloud, of Heyl, Royster, Voelker & Allen, P.C., of 

Edwardsville, and Joseph A. Cancila Jr., Heidi Dalenberg, and Jacob 

L. Kahn, of Riley Safer Holmes & Cancila LLP, of Chicago, for 

appellant.

Christopher W. Byron and Christopher J. Petri, of Byron, Carlson, 

Petri & Kalb, LLC, of Edwardsville, Joe D. Jacobson and Allen P. 

Press, of Jacobson, Press & Fields, P.C., of St. Louis, Missori, David 

T. Butsch and Christopher E. Roberts, of Butsch Roberts & 

Associates, LLC, of Clayton, Missouri, and David C. Linder and T. 

Joseph Snodgrass, of Larson King, LLP, of St. Paul, Minnesota, for 

appellee.
- 2 -

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.

Panel 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 following question for interlocutory review pursuant to Illinois Supreme 

Court Rule 308(a) (eff. July 1, 2017): 

“Where Illinois’s 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.
- 3 -

¶ 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

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; 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.

¶ 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:
- 4 -

“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 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 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

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’s complaint, alleging that it was timebarred 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 
- 5 -

¶ 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 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 (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 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 

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.

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.”
- 6 -

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 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 

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”

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.
- 7 -

(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.

¶ 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 Insurance Companies5 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 

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.
- 8 -

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’s 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?”

¶ 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).

¶ 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. 10A Steven Plitt et al., Couch on Insurance § 148.1 (3d 

ed. rev. 2016). 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 
- 9 -

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 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).

¶ 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 

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).
- 10 -

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).

¶ 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 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 

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. See C.L. Maddox, 208 Ill. App. 3d at 

1054-55.
- 11 -

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 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 

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).
- 12 -

Wilcox v. State 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) 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.