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June 7, 1973


The opinion of the court was delivered by: Will, District Judge.


This is an action on an insurance contract which provided coverage for property damage caused by fire. The parties are of diverse State and the amount in controversy exceeds $10,000. An answer having been filed, plaintiff has filed two motions — 1) a motion in limine seeking an order precluding the defendant from introducing any evidence of the purchase price or market value of the building covered by the defendant's policy of fire insurance and damaged by fire on May 1, 1972, and 2) a motion to strike both the defendant's affirmative defense number 3 in which it is alleged that the building was abandoned and left vacant and unoccupied for a period in excess of sixty days, in violation of the provisions of the policy thereby rendering it void, and defendant's affirmative defense number 4, in which it is alleged that the plaintiff and its beneficiary increased the hazard to the insured property through its management thereof, having permitted it to exist in such condition of disrepair and uninhabitability as to constitute an increase of hazard, in violation of the provisions of the policy of insurance, and that the plaintiff caused and permitted the building to fall into such a state of disrepair as to violate the various Building Codes of the City of Chicago, constituting an increase of hazard, in violation of the provisions of the policy of insurance. For the reasons stated below, these two motions will be denied.

On May 1, 1972, and for a period prior to that date, the plaintiff, as trustee, held title to a building located at 1312-1316 West 79th Street, Chicago, Illinois. A policy of insurance including coverage for damage and loss by fire was issued on the subject building by the defendant under the direction of the Illinois Property Insurance Placement Facility, commonly known as the Illinois FAIR Plan. This program was created pursuant to Federal and State statutes 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, 1972.

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 time.

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. 1959).

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 that case.

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 monetary value.

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 ...

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