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Property Loss Update


August 1, 2011   by Glenn Gibson


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A recent MIT study was focused on determining what motivates employees who are doing complex, deep-thinking, creative tasks. One might think this type of employee would respond very well in a ‘pay for performance’ culture. The study disproved this theory. It suggested it is important to pay an employee enough money so they are not thinking about money when doing their job, so they are totally focused on the job at hand.  But the key motivators are:

  • Autonomy: It’s important to have self-direction.
  • Mastery: People want to get better at improving their skills.
  • Purpose: Making a contribution to something is important.

Consider this and reflect on what we do as professional loss adjusters. We are incredibly self-directed. We work hard to improve our skills to do our jobs better. And, our purpose is: “We help people.” Yet, as a profession, we do not get the recognition we deserve for the accomplishments we achieve. In recent months, there are no stronger examples of this than the response shown to catastrophic events in Chile, New Zealand, Australia, Japan, the United States of America and Canada.

This survey highlights that while you need to ensure that you are paying people enough money to do their jobs but it is not the fundamental driver of what motivates us. When you buy insurance you are buying a promise that in some of the darkest moments you may face in your life your insurer will be there to help you. Loss adjusters deliver on that promise every day. And you do a great job!

Jones v. Kaney
Supreme Court of the United Kingdom
Mar. 30, 2011

This was a majority decision (5-2 vote) of the top court in the United Kingdom. The decision involves whether or not “immunity from suit” will continue to be granted to “experts” who testify in a legal matter.

If a judge decides a witness can be qualified as an expert, the individual is allowed to express their opinion to assist the court in understanding something that is usually complicated. In expressing their opinion, the expert must be able to freely speak their mind. What impact would there be if there was a fear they could be sued over their opinions?

Lord Phillips, in writing for the majority on this case, said, “The case that immunity is necessary to prevent a chilling effect on the supply of expert witnesses is not made out.”

The decision made reference to the expert’s prime duty to be a ‘friend of the court’ to explain complicated matters. Their evidence must not reflect any bias no matter who was paying their expert fees. The top court in Britain felt that removing their immunity from lawsuits would make experts sharpen their awareness of the risks involved in expressing initial opinions too strongly in favour of a client’s position only to retreat at a later date when other opinions are expressed.

The view overseas is that this decision will not result in a raft of lawsuits against experts. Most experts fully understand the dual responsibility they have with respect to their clients and to the courts.

Case summary

Professional Engineers Ontario published guidelines to their members in the fall of 2010, which outline the scope and duties of an expert witness. The guidelines also include suggestions on how to prepare and offer testimony in a legal procedure. It is an excellent resource.

A. Hansen, M. Rae et al v. D. Bellefeuille
Queen’s Bench for Saskatchewan, J. Scheibel
Jan. 12, 2011

On Dec. 9, 2004 a fire destroyed the plaintiff’s home. The damages totalled over $286,000 and the matter before the court was to decide upon a subrogation action against a contracting firm.

The contractor was hired by the plaintiff to refinish floors in their home. This particular contractor was a friend with the homeowner having built the house for them in 1999. When a problem surfaced with the floors in 2004, this contractor agreed to refinish them and arranged to do it when the family was on a holiday. No price was discussed or agreed upon, but it was clear there would be a payment made.

Several coats of Varathane were applied to the floors in the days leading up to the fire. Evidence was introduced at the trial of a warning on this product it was to be used “only in a well-ventilated area.” The contractor knew the product gave off vapours and that it was potentially flammable. Evidence at trial included the fact that 11 hours before the fire was discovered, Varathane had been applied and all of the windows in the home were “shut and the house was sealed up.”

At trial, the contractor’s lawyer attempted to have a floor refinisher qualified as an expert witness. The plaintiff’s lawyer challenged this. Cross-examination of this witness was effective because the trial judge only allowed this individual to give evidence on his practice in refinishing floors.

The trial then moved on to fire experts who had been hired by both sides in this lawsuit.  All who testified were also qualified engineers.

Fire expert Richard Kooren of Origin & Cause Inc. was engaged to investigate the cause of this fire by the plaintiff’s insurers. He was at the scene two-days post fire. He met with the local fire chief on his arrival. He completed a detailed scene examination, including numerous photographs. He concluded the fire was caused by the ignition of vapours from the Varathane finish with the likely source of ignition being the refrigerator.

Engineer Mazen Habash, of the same firm, reinforced Kooren’s evidence at trial. He had investigated over 1,900 forensic incidents in his career. His trial evidence was focused on whether or not the type of refrigerator in this home could have provided an ignition source for the vapours from the Varathane. His conclusion was that this refrigerator “could” have been the ignition source.

The defendant contractor’s expert concluded there was “insufficient information upon which to substantiate a specific fire cause.” He opined the ignition of Varthane vapours was not the cause of the fire.  He based this on his examination of the “circumstance, ventilation conditions and timeline.”

In the battle of the experts, the trial judge noted all experts seemed to agree on the origin area of the fire. The fire started on the west side of the home and spread east.  But, the defense expert offered up other potential causes for this fire including baseboard heaters, light fixtures and perhaps the refrigerator. And then went on to suggest it could have been electrical, fans, spontaneous ignition etc.

This decision reflects considerable analysis by the trial judge on the evidence of the expert witnesses and other evidence provided by the discoverer of the fire. In the fact of conflicting expert evidence, it is up to the trier of fact to determine what weight is to be given to any expert testimony after a careful review of all evidence (Toneguzzo-Norvel v. Burnaby Hospital and Housen v. Nikolaisen).

The judge stated that:

“I attach very significant weight to his [Kooren’s] written report and his oral evidence in part because his on site examination of the fire scene and in part because his conclusions are, in my view, the only realistic and logical explanation as to the cause and origin of the fire.”

Both sides made written submissions to this litigation before the trial judge delivered this judgment. The defendants argued that at trial certain portions of expert Kooren’s evidence were not referred to in his initial investigation report where he had reached his conclusions on the origin and cause of the fire. This related to information about the flash point of the Varathane product.

The judge reviewed the case law on this point and dismissed the application. The defense lawyers had not challenged this point during the trial and they had cross-examined the expert witness on this key point. They were aware well befor
e the trial that this type of evidence was going to be led.

On a balance of probabilities, the trial judge determined the fire was a result of the negligence of the contractor and how he used this particular product.

Case summary

Considerable weight was placed on the evidence of the fire expert who attended the scene. But, this had to be combined with the ability to get into the witness box and handle a strong cross-examination.

It should also be noted this fire was in 2004. In today’s environment one would think that with spoliation issues afoot that this type of fire scene would have had all parties to potential subrogation notified to allow for equal inspection of the scene.

Pietrangelo v. Gore Mutual et al
Ontario Court of Appeal
Feb. 23, 2011

On Jan. 30, 2006 the tenant of a rental house in Amherstburg, Ont. decided to use a production technique he learned on the Internet to convert a half pound of marijuana into oil. Unfortunately, the plan did not work well and this tenant and a friend were badly burned in the ensuing explosion and fire. The dwelling did not fair well either, as it was subsequently ordered by the municipality to be destroyed.

The insurer investigated the claim and ultimately declined to pay it on the basis of the “Marijuana Exclusion.”
Justice E.W. Ducharme issued the Superior Court decision on Feb. 22, 2010 that upheld the insurer’s right to deny the claim based on the policy exclusion.

On appeal, the plaintiff lawyer’s argued in part that:
1.    The policy language was ambiguous.
2.    The exclusion was “unjust or unreasonable.”
3.    The “intent” of the exclusion was related to “marijuana grow houses”.

The Appeal Court, in a unanimous decision, dismissed all three arguments.  It was interesting to see their comment that: “There are certain risks, which insurers are entitled not to cover for legitimate business reasons relating to the ability to assess risk and set premiums.”

Cabell et al v. Personal Insurance Company
Ontario Court of Appeal
Nov. 5, 2010

This was an appeal from Justice M. Penny’s decision in the Superior Court of Justice on March 30, 2010.

The case involved damage to an outdoor, in-ground swimming pool that was damaged as a result of hydrostatic uplift pressure.  The increase of this pressure was due to a build up of groundwater, which caused the pool to lift out of the ground. The displacement of the pool caused significant damage.

The policy of insurance included the outdoor pool but there was an exclusion stating, in part:

We do not insure…
(11)… settling, expansion, contracting, moving, bulging,     buckling or cracking of any insured property, except resulting damage to building glass.
(18) Loss or damage… to outdoor swimming pools…

But the policyholders did buy an endorsement, which amended the policy to include certain coverage for the outdoor swimming pool. This was written on an “all risk” basis, but the policy stipulated that “all other terms, conditions and exclusions of this policy remain unchanged, including the exclusions. . . . ”  And, the policy goes on to re-name the applicable exclusions.

The original trial judge ruled the pool endorsement was not an independent part of the policy. So, the common exclusions should apply except to any extent those exclusions would be specifically amended in the endorsement. On that basis, the loss was not covered by the policy.

The Appeal Court noted several principles in interpreting insurance contracts:
1.    Any policy clause should be interpreted “broadly in favour of the insured.”  
2.    An exclusion clause limiting coverage “will be strictly interpreted.”
3.    Any ambiguity in the policy “will be construed against the insurer applying contra proferentem doctrine.”

When dealing with a policy endorsement they agreed it generally does not operate independent of the policy. However, if the limitation of apparent coverage in the endorsement is ambiguous, then the limitation should be spelled out clearly in the endorsement itself. If the insurer has an intention to not cover something-say so, clearly.

The Appeal Court then moved into analyzing what was the true intent of the parties when the contract was first agreed upon? The foundation for this analysis is found in a Supreme Court of Canada decision [Consolidated Bathurst] where S.C.C. Justice J. Estey, speaking for the majority said:

“. . . Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties.”

The Appeal Court felt that the nullification of coverage doctrine is something that applies even in the absence of ambiguity. This means even if the exclusion is clear and unambiguous, you must keep in mind the main purpose of the insurance coverage and whether to not cover a loss might be contrary to the “reasonable expectations of the ordinary person as to the coverage purchased.”

The Appeal court reviewed the policy language and the arguments the plaintiff raised that the policy language was ambiguous and unclear. While the court agreed there were some points to be raised on ambiguity, they didn’t rule on that issue because they felt the solution was really in analyzing the doctrine of “reasonable expectations.” When viewing this, they considered what was being covered for purchasing the endorsement to cover their swimming pool. Given the way the exclusions were laid out, it seemed to them they were only buying coverage for “marring or scratching from the impact of a land vehicle, aircraft, satellite, spacecraft, riot, vandalism, hail, windstorm and theft, none of which seem very likely candidates for damage to an in-ground pool.”  In essence, the application of the common exclusion (#11) would virtually nullify any coverage. To conclude, “Such a result could not have been within the reasonable expectation of the parties.”

So, the Appeal Court established coverage for this loss.

Case summary

This is a very important case. What did the insured think they were buying? The exclusions represent the fine print. The exclusions seemed clear, but the top court in Ontario provided a broad application to it.

Winnipeg Health Authority et al v. Temple Insurance Company
Court of Queen’s Bench of Manitoba, J. McCawley

Apr. 11, 2011

This all started with a windstorm loss on May 11, 2004 that apparently resulted in loss or damage that was not detected until two years later on Apr. 17, 2006. The damage repairs were undertaken by the plaintiff hospital between May 2006 and February 2007. The hospital felt it had been given the green light by the insurer to execute the repairs.

This was a motion requiring the defendant insurer to nominate an “appraiser” and proceed to appraisal under the Insurance Act.

The plaintiff hospital commenced a legal action for coverage and indemnity under a builder’s risk policy. The insurer was taking the position the hospital was not entitled to indemnity because the loss was excluded by the terms of the policy. They also were arguing they had issues with the quantum of the loss.

Of note was section 23 of their policy, which was entitled, “Arbitration.” This section goes on to spell out the appraisal process as the method to resolve a dispute relating to loss or damage.

The plaintiffs also go on to r
ely upon section 21 of the Insurance Act, which provides for appraisal to determine specified matters in the event of disagreement.

What is interesting to note is that in this case the authority to request an appraisal is only at the election of the insured. This would be done pursuant to the terms of the Insurance Act.

The whole point to the appraisal process was noted in this case to, “. . . encourage the expeditious resolution of questions of value, to encourage settlement and to expedite trial process by providing a valuation based on the expertise of an appraiser or umpire.”

The damage issue at hand involves valuing property damage to equipment in a mechanical penthouse. The judge felt the amount of loss fell within s.23 of the policy entitled arbitration. Further authorities for moving things into this process fell within the provincial Insurance Act.

The insurer argued the insured had to elect this process “within a reasonable time of the loss date and before a proceeding on the same issue advances to a point where the object of the provision is no longer attainable.”

The trial judge agreed one had to be prudent about the timing of allowing the appraisal process. However he did not see this as an issue in this particular case. This is in spite of the fact that the process was not triggered until six-and-a-half years after the loss date.  He did not feel the insurer was prejudiced in any way by the hospital invoking s. 23.

The insurer was ordered to participate in an appraisal process to resolve issues of damage.

Case summary

This judgment shows the willingness of our courts to put matters such as this into a process where a determination can be made quickly and efficiently.

Bajuk v. York Fire & Casualty
Ontario Superior Court of Justice, PB Hambly
May 10, 2011

A fire destroyed a house and its contents. There was a dispute as to the amount of loss and the matter proceeded to appraisal where an appraisal award was determined. The insured petitioned the court for a summary judgment based on paying the full replacement cost limit on the house, the actual cash value of the contents and the additional living expenses.

The house in question had been rebuilt and the judge ordered payment of the balance of the replacement cost limit and the additional living expense claim. But, in considering the contents claim he made reference to:

“Glenn Gibson, in an article entitled, The Appraisal Process, in Claims Canada Magazine, 2011, v.4 #6 states the following:
The umpire must ensure the process stays within the limits of his or her authority and does not drift into area that should be addressed by a court of law. For example, an appraiser for the insured might ask the umpire to agree some goods were destroyed in a fire. The appraiser for the insurer argues the goods were not in the premises destroyed. An umpire can drive the process to reach a conclusion as to the value of the loss, but cannot conclude that the property was on the site when the fire happened. Any such inclusion has to be left to a court of law.”

In a summary judgment situation like this, the trial judge felt there was insufficient evidence in front of him to determine if content items were actually in the house at the time of the fire. Any attempt on his part to do so would be purely guesswork. The issue as to the value of the contents lost is in the fire was therefore something that would require a trial.

Case summary

This is an interesting next step following an appraisal process. The appraisal process can determine the amount of loss – it can go no further. However, I have seen situations where there can be appraisal session, which produces a damage result and then a flip-over to move to an arbitration process. This would have to be done by mutual consent of both parties and could expand into a more formal process where evidence is heard. But, it does produce a speedy, efficient cost-effective solution.

Conclusions

It is interesting to observe on the two Ontario Court of Appeal decisions how quickly the appeal court dealt with these matters after the lower court decision. Without question the efficiency of our top court in Ontario is quite impressive.

Earlier this year I published a third iteration of my original 1992 article where I tried to provide a simple explanation for how the appraisal process works. I was pleasantly surprised, and pleased, to see an esteemed member of our bench use the contents of that article to support his judgment. That certainly makes it worthwhile to do the research and writing that is required to publish this type of article.

On a final note, in my early days of getting involved in the appraisal process I had a number of matters that were led by Gerry Cleary as the umpire. He had retired after a distinguished career as a professional loss adjuster. He brought great leadership to every situation. He was creative and always eminently fair in how he worked each situation through to a conclusion. Gerry passed away very recently. He helped solve many problems for a lot of people in a sterling career. He will be deeply missed.

Glenn Gibson is the global chief strategy officer with Crawford & Company


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