Depreciation Not a Deduction in Loss of Income Calculation

Commercial Lines – Property	Continuing Expenses
Time Element	Depreciation Excluded from Recovery

When an insured's building was destroyed by fire, a dispute arose over the business interruption insurance claim. The building was used for commercial rental. The issue was whether the insurer's adjuster properly deducted approximately $15,000 for depreciation from the gross rents that were lost due to the building's destruction. The item was listed along with non-continuing expenses such as water, power, cleaning, and similar costs.

A trial court determined that depreciation was a continuing expense and should not be deducted from recovery under the policy. The decision was reversed on appeal and was then appealed to the Illinois Supreme Court.

Loss of income coverage, in pertinent part, applied to: "....the reduction in rents, less charges and expenses which do not necessarily continue during the period of untenantability."

The insured argued that depreciation functioned as a tax credit rather than a direct expense, since it does not involve actual funds that lowered the rents received. Conversely, the insurer argued that depreciation is an expense or charge that may not persist throughout the loss period. As such, it should be deducted from the total prevented gross rents, alongside other non-recurring expenses, when determining the settlement.

The high court stated: "The insured property was destroyed, such that depreciation could no longer be subtracted from the value of the building." It agreed with the insured that, under the loss of rents provision in the contract, depreciation is purely a tax measure and not a non-continuing charge or expense. Therefore, depreciation could not be deducted from the gross rents that were prevented.

The appellate court was reversed, and the circuit (trial) court affirmed in favor of the insured and against the insurer.

Grevas, Appellant v. US Fidelity And Guaranty Co., Appellee. Illinois Supreme Court. Docket No. 73127. October 15, 1992. CCH 1993 Fire and Casualty Cases, Paragraph 3986.