to provide insurance in "high risk" areas, and the defendant
issued the instant policy as a subordinate insurer at the
direction of the FAIR Plan.
On February 6, 1972, the subject building sustained damage as a
result of fire, and the defendant under the instant policy paid
out approximately $18,000 to the insured at that time.
Subsequently, on April 7, 1972, Oddie Banks apparently purchased
the beneficial interest in the property and became the
beneficiary of Chicago Title & Trust Company Trust No. 49944. The
next day she made out an Application for Property Insurance
Placement to the Illinois FAIR plan, on the form normally
utilized for an initial application for insurance. The statute
pursuant to which the insurance had originally been issued speaks
only to initial applications and makes no mention of notice of
change of beneficiary on previously insured property. Whether or
not an assignment of a FAIR plan policy is proper or possible is
obviously an issue in this case.
The fire which gave rise to the instant claim and suit took
place 23 days later, on May 1, 1972. Sometime thereafter, the
building was demolished.
On May 8, 1972, FAIR ordered an inspection of the property
ostensibly pursuant to the April 8, 1972 application for
insurance. This inspection actually took place on August 16,
It is noteworthy that at the time of the fire on May 1, 1972,
there was pending in the Circuit Court of Cook County a complaint
brought by the City of Chicago against the plaintiff demanding
that numerous Building Code violations in the building be
corrected. On April 6, 1972, the day before Oddie Banks became
the beneficiary under the trust, Judge David Cerda had ordered
that the building be vacated and that no heat repairs be made on
it. On April 17, 1972, two weeks before the fire, Judge Irwin
Cohen ordered that the building be boarded and secured.
In its complaint, plaintiff seeks damages of $43,795 which it
alleges is the actual cash value of the subject building as
insured by the defendant, which damages it alleges were caused by
the fire of May 1, 1972.
The plaintiff's motion to preclude the defendant from
introducing any evidence of the purchase price of the fair market
value of the subject building obviously anticipates the position
which the plaintiff assumes defendant will take with respect to
damages if the issue of liability under the policy is resolved
against it. Assuming separate trials of the issues of liability
and damages such a motion may be ultimately unnecessary. However,
given the fact that a trial on the issue of damages, if the issue
of liability is resolved favorably to the plaintiff, will follow
immediately after resolution of the question of liability and the
fact that a ruling on the motion may facilitate a disposition of
the case without a trial, we will proceed to a ruling at this
The issue presented by this motion is whether, under Illinois
law, the facts of this case permit any evidence other than
reproduction cost minus depreciation to be presented to the fact
finder to determine "actual cash value" which is the amount owing
plaintiff under the policy. The principal statement of Illinois
law, which, as a federal court sitting in a diversity action, we
are bound to apply, was made in Smith v. Allemannia Fire Ins.
Co., 219 Ill. App. 506 (3d Dist. 1920). The Illinois Appellate
Court there held that actual cash value of a building as defined
in a fire insurance contract means the cost of reproducing that
building minus its depreciation. Market value was found
irrelevant to the determination of actual cash value. Despite the
fact that there has been no Illinois Supreme Court decision on
this point and despite the fact that there may be some factual
misapprehensions in the opinion, Smith has been consistently
followed on numerous occasions as the law in Illinois. See, e.g.,
Esquire Restaurant, Inc. v. Commonwealth
Ins. Co. of New York, 393 F.2d 111 (7th Cir. 1968); Wisconsin
Screw Co. v. Fireman's Fund Ins. Co., 297 F.2d 697 (7th Cir.
1962); Knuppel v. American Ins. Co., 269 F.2d 163 (7th Cir.
One exception to the general rule of Smith was recently
articulated by Judge Marovitz of this Court. In Aetna State Bank
v. Maryland Casualty Co., 345 F. Supp. 903, 909 (N.D.Ill. 1972),
he held that "actual cash value" is not the proper criterion for
determining the amount of loss for property which is in the
process of being demolished and whose demolition at the time of
the loss is no longer a matter of conjecture or speculation. He
further held that, although the insurance policies were in effect
at the time of the loss, the mortgagee having met its
obligations, there was nevertheless no compensable loss in view
of the fact that there is no value to buildings in the process of
demolition. Summary judgment was granted for the defendant in
The facts in Aetna State Bank are somewhat different from those
in the instant case in that the subject building there was
actually in the process of being demolished whereas here the
subject building was not being demolished but was standing vacant
and unoccupied, secured and boarded up, under court orders
requiring that it be vacated and boarded up and that its heating
system not be repaired. We find this difference to be without
distinction for the underlying theory behind the Aetna holding is
that it is inequitable to award substantial monetary damages to a
person to compensate him for what is of no current or present
In the instant case, when the subject building was destroyed on
May 1, 1972, it was an economically useless building. It was
empty, secured and boarded. It had been gutted by a previous
fire. It was not being used in any way.
Here, as in the Aetna State Bank, it would be ludicrous to
allow the plaintiff to recover a substantial amount of money
representing the replacement cost less depreciation of a building
that was for all practical purposes non-existent. It would be
grossly inequitable for plaintiff's beneficiary to recover
$43,000 for a building which less than one month prior to its
destruction she had purchased for $4,000 in what appears to have
been an arm's length transaction and in which building she had
made absolutely no additional investment or improvements.
We hold that the Smith doctrine of rigidly defining actual cash
value of a building as its reproduction costs minus depreciation
is limited in application to those buildings which are being
economically utilized at the time of their damage or destruction.
Such a limitation may be implied from the facts of those cases
which have purported to follow Smith. Despite the language in the
various opinions, Illinois has not allowed such windfalls as
plaintiff here seeks.
Illustrative of this is the recent case of Lieberman v.
Hartford Ins. Co., 6 Ill. App.3d 948, 287 N.E.2d 38 (1st Dist.
1972), in which the Appellate Court of Illinois went a step
further than Judge Marovitz in Aetna State Bank and held that,
where a contract for demolition exists on the subject building,
the plaintiff has no "insurable interest" in the building since
there is no economic value to the building. Judgment was entered
for the defendant in that case despite clear liability under the
In the instant case, the building was economically useless at
the time of the fire. While we would prefer a more flexible
standard of insurable "actual cash value" than the Illinois
courts have adopted so that, in cases like the instant one, an
insurable interest having some relationship to the actual value,
even though nominal, could be found, we conclude that under all
the precedents, there was no insurable interest in the building
at the time of the fire on May 1, 1972.
In cases such as the instant one, where the building is vacant,
boarded up and under a court order prohibiting repair
of its heating system, and, therefore, cannot be economically
utilized, reproduction cost new less depreciation has little or
no relationship to actual value. Other factors, such as market
value or salvage value, should be considered in establishing any
insurable interest of the building owner. In their present
posture, however, the Illinois cases preclude consideration of
such factors. They do, however, permit a finding that where, as
here, a building is economically useless and was obviously
purchased for its scrap or salvage value, there is no insurable
interest. This is such a case.
The fire insurance policy pursuant to which the plaintiff seeks
recovery contains a standard vacancy provision which provides:
Conditions suspending or restricting insurance.
Unless otherwise provided in writing added hereto
this Company shall not be liable for loss occurring:
(b) while a described building, whether intended for
occupancy by owner or tenant, is vacant or unoccupied
beyond a period of sixty consecutive days.
Plaintiff has moved to strike the defendant's affirmative defense
which alleges that the subject building was vacant for 60 days in
addition to moving to strike a similar affirmative defense which
alleges that the plaintiff, in violation of Municipal Building
Codes, allowed the subject building to fall into such a state of
disrepair as to constitute an increase in hazard in violation of
the terms of the policy. Each of these defenses would exculpate
defendant from liability under the policy.
Plaintiff's argument in support of its motion to strike is that
the defendant is "precluded" from asserting these defenses since
it had ample opportunity to determine whether to continue the
risk or cancel the policy after Oddie Banks made an application
for insurance to the FAIR program on April 8, 1972, three weeks
before the fire. Plaintiff contends that, pursuant to the statute
providing for application for insurance under the FAIR plan, an
applicant such as Banks is entitled to an inspection of the named
property and that failure of the insurer to inspect acts as a
type of estoppel upon the insurer preventing it from asserting
any defenses which it could have discovered upon inspection.
Plaintiff's reliance upon this statute is misplaced. The
portion relied upon, Ill.Rev.Stat. ch. 73 § 1065.71(1), provides:
Any person having an insurable interest in real or
tangible personal property at a fixed location in an
urban area who, after diligent effort has been unable
to obtain basic property insurance is entitled upon
application to the Facility [Illinois Industry
Placement Facility, i.e., the FAIR plan] to an
inspection of the property by representatives of the
After such an inspection, a policy will issue if the property is
found acceptable. By its own terms, the procedure envisages an
initial application for insurance only by an applicant who has
been unable to obtain insurance elsewhere.