Our panel of leading appellate attorneys reviews the four Illinois Supreme Court opinions handed down Thursday, September 23. 

Board of Education of Richland School Dist. No. 88A v. City of Crest Hill, 2021 IL 126444

By Amelia Buragas

The Illinois Tax Increment Redevelopment Act (TIF Act) requires that properties included in a Redevelopment Project Area (TIF District) be contiguous. However, the TIF Act does not specifically define the term “contiguous.” In The Board of Education of Richland School District No. 88A v. The City of Crest Hill, 2021 IL 126444, the Illinois Supreme Court was tasked with both defining the term “contiguous” in the context of the TIF Act as well as determining whether exceptions to contiguity contained elsewhere in the Illinois Municipal Code created exceptions to contiguity applicable to TIF Districts.

The TIF Act is a tool adopted by the state legislature to empower municipalities to remedy blighted areas through redevelopment. Section 11-77.4-4(a) of the TIF Act requires that a redevelopment project area “shall include only those contiguous parcels of real property and improvements thereon substantially benefited by the proposed redevelopment project improvements.”  The dispute leading to this case arose after the City of Crest Hill placed three parcels into a TIF District. While the parcels were in close proximity, two of them, parcel A and parcel B, were separated by a 100.4-foot-wide by 234.9-foot-long portion of a utility parcel that had not been incorporated into city limits. The Richland School District filed suit seeking equitable relief from the trial court by arguing that the TIF District created by the city violated the contiguity requirement of the TIF Act. The parties filed cross motions for summary judgment. Crest Hill argued, and the trial court agreed, that the public-utility-right-of-way exception to contiguity contained in the annexation division of the Municipal Code allowed the city to “jump” the gap between parcel A and parcel B—as it had when it annexed the properties—to find contiguity within the TIF District. The appellate court, however, reversed the finding of contiguity and granted summary judgment in favor of Crest Hill.

The supreme court granted the school district’s petition for leave to appeal and first considered the term, “contiguity.” The supreme court noted that in the context of annexation cases, “contiguity has long been defined” as “tracts of lands which touch or adjoin another in a reasonably substantial physical sense.” The court further concluded that this definition, although adopted in the context of annexation, “is well suited to determine questions arising under the TIF Act.” Using this definition, the court found that parcel A was not contiguous with parcels B or C. The court next considered whether the public-utility-right-of-way exception to contiguity contained in the annexation division of the Municipal Code applied to contiguity in the context of the formation of a TIF District and concluded that it does not. The court explained that the plain language of section 7-1-1 of the annexation division, which contains the language “[f]or the purposes of this [a]article,” “clearly provides that the public-utility-right-of-way-exception to the contiguity requirement for annexation is limited to article 7 of the Municipal Code.” Since the TIF Act is found in article 11, the exception does not apply. As a result, in a unanimous opinion, the Illinois Supreme Court affirmed the judgment of the appellate court, which held that the parcels were not contiguous pursuant to the TIF Act and granting summary judgment in favor of the school district.

Eighner v. Tiernan, 2021 IL 126101

By Michael T. Reagan, Law Offices of Michael T. Reagan

Chief Justice Anne M. Burke, writing for a unanimous court, affirmed a unanimous appellate court, but as will be seen, in the interest of justice and considering the unique phrasing of a circuit court order, changed the outcome of the appeal.

Plaintiff voluntarily dismissed  his complaint pursuant to 735 ILCS 5/2-1009(a).  The order stated, in part, that the dismissal was “without prejudice and with leave to reinstate within one year.” Within that year, plaintiff filed his “Notice of Refiling Complaint Being Reinstated within One Year of Voluntary Dismissal,” under the original case number. When he could not get a case management schedule, and after the expiration of that year, plaintiff filed a new lawsuit.  Defendant’s motion to dismiss that new case was denied, but the circuit court certified a Rule 308 question which asked whether the refiling of the complaint in the original action “satisfies the language of 735 ILCS 5/13-217, which states a plaintiff may commence a new action after the case is voluntarily dismissed …”. The appellate court accepted this appeal,  answered in the negative, and directed the circuit court to dismiss the case.

The first two sentences of this opinion state the issue and the holding.  “The principal issue…is whether the phrase ‘may commence a new action’ in section 13-217 (735 ILCS 5/13-217) refers to a new lawsuit, with a new case number, filing fee, and summons.  We hold that it does.” The court later stated “A plaintiff who wishes to take advantage of section 13-217 more than 30 days after the entry of a voluntary dismissal order when no postjudgment motion has been filed will necessarily have to file a new complaint because the circuit court no longer has jurisdiction over the original case.” The direction from the court, grounded on the statute, could not be clearer.

But the court did not stop there. Plaintiff attempted to argue, outside the confines of the Rule 308 question, that he should have been granted leave to reinstate the original case.  The court stated that the appellate court acted appropriately in carefully confining its analysis to the certified question.  It is at this point that the supreme court delineated the relevant powers of the appellate and supreme courts more specifically than it typically has. “While the appellate court could not address matters beyond the certified question and the circuit court’s order denying defendant’s motion to dismiss in case number 18-L-11146, this court may.” The court stated that this is one of those “exceptional circumstances” justifying exercise of the court’s supervisory authority. The court observed that the voluntary dismissal order was unusual in that it did not state that plaintiff was granted leave to file a motion to seek reinstatement, but rather that plaintiff was granted “leave to reinstate.” The court believed it unreasonable to penalize plaintiff for complying with that order, treated plaintiff’s filing as a motion to vacate the dismissal and to reinstate, and remanded for reinstatement of the original case nunc pro tunc.

The mandate states that the judgment of the appellate court is affirmed, and that relief is being granted pursuant to supervisory authority.

Sproull v. State Farm Fire & Casualty Co., 2021 IL 126446

By Joanne R. Driscoll, Forde & O'Meara LLP 

In a unanimous opinion, authored by Justice Michael Burke (Justice Theis took no part), the court answered the certified question of whether an insurer may depreciate labor costs in determining the “actual cash value” (ACV) of a covered loss when a homeowner’s policy does not define that term.

The putative class plaintiff sustained wind damage to his residence. State Farm Fire and Casualty Company (State Farm) covered the loss, first determining the replacement cost value (RCV) but then subtracting the deductible, taxes, and depreciation (including labor costs) to calculate the ACV. Plaintiff argued that depreciated labor is an intangible and not subject to wear, tear, and obsolescence, whereas State Farm argued that Illinois Department of Insurance (DOI) regulation (50 Ill. Adm. Code 919.80(d)(8)(A) (2002)) mandated the “replacement cost less depreciation” method of determining ACV. State Farm also relied on language in its insurance policy and case law.

After setting forth the rules of construction for insurance contracts and providing an in-depth discussion of conflicting federal and state court decisions, the supreme court rejected the appellate court’s reliance on the plain language of the policy and the DOI regulation to support its conclusion that labor may not be depreciated, stating the appellate court’s reasoning was “unique among courts to consider this issue.”

While the supreme court found State Farm’s reliance on policy language and regulation reasonable (and accepted by several state and federal courts), it further found the policy language and the regulation ambiguous on the question of labor depreciation (in line with other state and federal courts). Although the regulation prescribed the method of calculating ACV to include a deduction for depreciation, it did not define that term or prescribe a method of computation to include labor depreciation. State Farm, as the drafter of the policy, did not do so either.

Following rules of construction when a policy is ambiguous, the court construed the policy in favor of the insured, noting that the insured’s interpretation of ACV and depreciation was not only reasonable but in line with State Farm’s valuation software that allowed for the depreciation of materials only. In addition, State Farm’s interpretation would place the insured in a worse position than before suffering the loss.  For these reasons, the court answered the certified question in the negative and affirmed the appellate court’s judgment but not its reasoning.

Haage v. Zavala, 2021 IL 125918

By Karen Kies DeGrand, Donohue Brown Mathewson & Smith LLC 

This appeal arose from two automobile personal injury actions in which an insurer intervened to contest its obligations under the federal Health Insurance Portability and Accountability Act (“HIPAA”) and implementing regulations (the “Privacy Rule”). The insurer, State Farm Mutual Automobile Insurance Company, unsuccessfully argued that insurers are exempt from the “return or destroy” requirement under federal regulations. In rejecting State Farm’s position, the supreme court considered 1) the Privacy Rule’s preemptive effect on Illinois insurance regulatory law; 2) the concept of “reverse preemption,” pursuant to a federal act providing that state laws regulating the “business of insurance” in some instances supersede federal regulations; 3) whether Illinois insurance regulations require a property and casualty insurer to retain protected health information (“PHI”) beyond litigation; and 4) the Privacy Rule’s preemptive effect on the Cook County standard protective order.

The dispute arose in the context of two personal injury cases against State Farm insureds in which the plaintiffs moved for entry of a HIPAA qualified protective order containing use and disclosure restrictions set forth in the Privacy Rule (45 C.F.R. § 164.512(e)(L)(v)(A), (B)), federal regulations adopted to govern the use and disclosure of PHI. The plaintiffs’ proposed orders required any person or entity receiving PHI from a covered entity to return or destroy the PHI within 60 days after conclusion of the litigation and prohibited the recipient from using or disclosing the PHI for any purpose other than the litigation.

State Farm objected to the plaintiffs’ proposed HIPAA orders on the basis that State Farm is not a “covered entity” under HIPAA. For this reason, State Farm contended it was exempt from HIPAA’s application. State Farm also argued that the PHI restrictions in the plaintiffs’ proposed orders conflicted with the Illinois Insurance Code and administrative provisions governing business operations of insurers. State Farm proposed that the Circuit Court of Lake County enter  a Cook County form protective order, which exempts insurers from the “return or destroy” restrictions. Plaintiffs prevailed in the circuit court and the appellate court.

In an opinion providing a statutory overview of HIPAA and the regulations that the Department of Health and Human Services promulgated to provide a national framework for health privacy protection, the supreme court explained that the Privacy Rule mandates that a “covered entity” or “business associate” may not use an individual’s PHI other than as mandated or permitted under the Privacy Rule. State Farm argued that property and casualty insurers are non-covered entities and are exempted from HIPAA given the role of liability insurance in judicial proceedings. Rather than providing medical or healthcare to injured persons, State Farm argued, property and casualty insurers indemnify their policy holders against the risk of bodily injury or property damages resulting from accidents. The supreme court rejected State Farm’s reasoning; it observed that HIPAA does not contain the limitation urged by State Farm. The court noted that, under State Farm’s argument, a qualified protective order could rarely be requested.

The court also rejected all of State Farm’s arguments that emanated from the Illinois Insurance Code. In the court’s view, no provision of the state’s insurance code or administrative code requires insurers to use or disclose plaintiffs’ PHI after the conclusion of litigation.

In reaching its conclusions, the court scrutinized the Cook County standard protective order and found that it does not pass muster under the Privacy Rule and is preempted by it. In the absence of a provision prohibiting an insurer from using and disclosing PHI outside of litigation and requiring an insurer to return or destroy PHI at the conclusion of litigation, the court held that the Cook County order conflicts with the Privacy Rule’s requirements for a HIPAA qualified protective order. The court also found that the reverse preemption doctrine did not apply, because the HIPAA qualified protective orders that the circuit court had entered did not invalidate or impair the Insurance Code sections cited by State Farm. Accordingly, the plaintiffs’ qualified protective orders were properly entered under HIPAA and the Privacy Rule.