How on Earth could you depreciate Labor? There is nothing to depreciate. It isn’t a tangible item that loses value over time. We argue this often, and we win often. And now, an Appellate Court has agreed.
The Appellate Court of Illinois recently issued a decision on an issue that we at Wheeler, DiUlio & Barnabei have been fighting for years.
The case of Sproull v. State Farm Fire and Casualty Company examined the below 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?”
In sum, the main issue is whether an insurance carrier should be able to take depreciation from labor costs.
Depreciation is the decline in market value of an asset overtime. There really is no dispute that an actual cash value policy (ACV) will take depreciation on tangible goods. For example, if you have a coffee table that you buy for $1,000, but now it is 5 years old with some dings and nicks, that coffee table may now only be worth $700. That $300 dollar difference is the depreciation that the insurance company would hold back until you actually spend the money to replace the coffee table.
The question here, and the argument that we make is, how exactly do you depreciate someone’s time when it comes to labor costs?
This is what the Illinois Court had to say:
“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.'”
Ultimately, the Court held that:
“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.“
This is great news! However, there are some important caveats to this.
First, this ruling only applies if the policy does not define “actual cash value.” It will be interesting to see how the insurance industry reacts and if they start changing the language in their policies based on this ruling.
Second, although we are making the same arguments in other states, that does not mean this ruling is binding on our Courts. This authority is something we will use to be persuasive, but the Courts here do not need to follow this ruling. However, the good news is that it is certainly a step in the right direction for policy holders!
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