This is Part 2 of the property loss review that began in the Feb-Mar issue of Claims Canada.
Carter et al V.
Intact Insurance Company,
Ontario Court of Appeal,
December 6, 2016
On March 16, 2011 a fire caused significant damage to an income property in Ottawa. There were originally three structures on the property, which were blended together over time. Several of the buildings were 1950-vintage with the most current structure going up in 1990. The tallest building was two storeys.
The complex provided a mix of use combining residential apartments with some commercial/retail space. In total, the building has usable square footage of 36,730 sq. ft. There was neither underground parking nor any elevators. This income property was owned by three owners for 24 years.
The building complex was insured for $7,614,750. There was a replacement cost endorsement (RCE) on the policy and there was additional coverage for building code upgrades.
After the loss the policyholder made the decision that they were going to rebuild on the same site. But, their new structure was going to be an eight-and-a-half storey condominium complex. This was going to cost $30 million. The total square footage of the new complex was about 194,000 sq. ft., which included a two-level underground parking garage and elevators.
As the adjustment of the loss unfolded there was a dispute as to the “amount of loss”. An election was made to take the matter to “Appraisal” under Section 128 of the Insurance Act. This resulted in a tribunal decision that:
- The building replacement cost was $5.73 million.
- The actual cash value of the loss was agreed at $3.9 million.
- The process also reached an agreement on Building Code upgrade costs of about $511,000.
The insurer paid the ACV sum to the policyholder after the tribunal was concluded. They took the position that the insured had not complied with the terms of the RCE to rebuild with “like kind and quality”. They also felt there was no obligation to contribute the building code upgrade costs.
On June 23, 2015, Justice Kevin Phillips in Ottawa heard evidence for a Rule 21 Motion for summary judgment. The policyholder wanted a ruling that their insurer would be compelled to pay out their policy limit and the building code allowance as a contribution towards the overall cost they were going to expend to put up their new complex.
Justice Phillips had a number of key issues to decide including:
- Was there ambiguity in the language of this particular insurance policy when looking to determine what exactly “replacement cost” meant?
- At the inception of the policy, what was the true intent of both parties if this type of loss situation presented itself?
- In coming to a decision, he was mindful of the fact…“An interpretation which will result in either a windfall to the insurer or an unanticipated recovery for the insured is to be avoided”. (Brissette Estate V. Westbury Life Insurance Company, 1992 CanLII 32 (SCC),  3 S.C.R. 87)
The decision of Justice Phillips contains an excellent review of case law relating to the process one should go through to examine and interpret insurance policy language. In this instance, was there ambiguous language at play?
The Phillip’s decision also provides historical context to replacement cost endorsement and how it was designed to essentially allow for the insured to buy up their “depreciation” by paying a higher premium. This was a departure from pure indemnity policies, which were designed to put the insured in the exact position they were in just prior to the loss occurring. But it was noted in a number of the cases reviewed how the potential to recover depreciation increased the moral hazard of the risk.
Justice Phillips concluded his decision with this comment:
“Ultimately, it is a judgment call. I conclude that in this matter, the redevelopment of the property by constructing a significant condominium development of the size, utility and design proposed is not sufficiently similar in the characteristics of the property, which was insured and existed prior to the fire. The changes are more than changes necessitated by developments in building practices and styles over time. There are considerable differences in the size of structures as well as the utility, as demonstrated by the significant increase in value and revenue producing capability of the condominium development compared to the property at the time of the fire. The proposed redevelopment does not meet the definition of replacement through construction with property of “like kind and quality” as provided for in this policy.” (Emphasis added)
Having made a decision that the policyholder was not entitled to receive the benefits of the replacement cost endorsement the trial judge did not rule on whether or not the Building Code requirements were to be awarded. He stayed silent on that point.
It was against this backdrop that the matter went to the Ontario Court of Appeal.
Justice John I. Laskin wrote the unanimous decision for the three-member group from the Court of Appeal.
Justice Laskin noted that the insurance industry does sell policies that indemnify the insured on an ‘actual cash value’ basis. These policies provide pure indemnity insurance. They are designed to put the insured back into their exact shoes just prior to the loss. The insured does not profit from these policies. However, insurers also sell policies that include ‘replacement cost’ coverage. The insured is entitled to the full cost of repairs or replacement without the deduction of depreciation.
Justice Laskin follows the logic expressed by Justice Phillips in the lower court by noting that when replacement cost is invoked there is the potential for a moral hazard increasing. An insured might commit an intentional act or be overly careless because a loss might provide an enhancement to them. On this point, Justice Laskin said:
“In my view, the principal method by which moral hazard in this context is minimized is the expectation by both parties that lost property would be rebuilt with new property of like kind and quality. Since the underlying principle of insurance is indemnity, replacement cost coverage should be construed in a fashion that is consistent with that concept. Betterment is to be avoided to the extent possible. I find this rationale for a requirement that the replacement building to be constructed with new property of like kind and quality. This restriction is an appropriate brake on the moral hazard risk.” (Emphasis added)
He goes on to say that the appeal really turned on interpreting their policy definitions of what is “replacement” and “replacement cost” in the policy. Justice Laskin goes through a detailed analysis of these issues.
“A “replacement” is needed to trigger entitlement to “replacement cost”. And the plain and ordinary meaning of the definition of “replacement” in the policy is that to be entitled to “replacement cost”, the replacement, no matter how it is affected, must be of like kind and quality.
Of interest is that he goes on to say that his reading and interpretation of the wording means that:
“…. the word “includes” in the definition of “replacement” means that the replacement can be effected by a method other than repair, construction or reconstruction, for example, by purchasing an existing building to replace one that is lost. But, whatever the method of replacement, whether enumerated or not, the actual replacement must be of like kind and quality. That phrase, “like kind and quality” modifies or anchors all methods of replacement.” (Emphasis added)
Justice Laskin gave credit to Justice Phillips in his interpretation of the replacement cost endorsement as it…“better reflects the indemnity principle, which typically underlies insurance contracts.” He goes on to say:
“But allowing replacement cost only where the replacement is of like kind and quality to the damaged or destroyed property better reflects the indemnity principle. Replacement cost would then give insureds enough money to rebuild something equivalent to the property that was damaged or destroyed.”
The final point Justice Laskin covered was the cost of over $500,000 for reconstruction of the old building to current standards. His view was that you must first determine coverage for the replacement cost endorsement. In this instance he felt the new condominium was not the same height, floor area, style or occupancy therefore the insured was not only not entitled to replacement cost but also not entitled to receive the by-law upgrade costs
This is a very significant case for many reasons:
- There is a historical context provided to the replacement cost endorsement.
- The introduction of the “moral hazard” notion to justify the restrictions put on the replacement cost endorsement is an interesting point.
- The significant emphasis being put on “material of like kind and quality” should not be lost on anyone.
- As always, in cases like this, arguments arise over the policy definitions. Is the wording clear? Is there ambiguity? What was the intention of the insurer in writing this language? What did the insured think he was buying / what was he covered for? What reasonable expectations might be applied to the wording?
There was a clear gap between building a $30 million new structure versus spending $5.7 million to rebuild a fire-damaged structure. But one has to wonder what might be the case if the differences were not so dramatic?
The original replacement cost endorsements were added to provide an extra layer of coverage in return for an increased premium. One wonders if the results of this Court of Appeal decision won’t open the door for underwriters to look at the design of their product and perhaps design a replacement cost endorsement that might provide policy limit payments in this same situation—of course, for an increased premium.
Nejim et al V.
Intact Insurance Company,
Superior Court of Justice- Ontario- J. George,
September 20, 2016
On January 7, 2014 a pipe burst causing significant water damage in a rental property owned by the insured. There were two issues at play:
- Was the loss covered, as the premises were vacant at the time of the loss?
- Did the insurer create an estoppel when they stepped in after the loss to effect emergency repairs?
This matter was decided upon without a trial. There were a number of documents and affidavits submitted to the judge. The insureds represented themselves in this matter.
This particular house had been owned by the insureds. They decided to buy another home and after renovating it they moved out in the fall of 2013. The evidence showed they were attending the house on a regular basis. They also had a neighbor who was regularly inspecting the home. But, they had moved out virtually all of their furniture. There was no doubt no one was living in the home at least 30 days prior to the loss. They had a tenant lined up to move in January 1st, 2014 but that deal fell through.
It was only two hours after a neighbor had inspected the premises on January 7, 2014 that a water line broke in the house.
The insureds admitted that they had no intention to move back into the insured property.
The trial judge approached the coverage situation in logical steps.
- Did the policy of insurance cover the loss?
- But, does the exclusion clause apply?
There was no question there was coverage for this water escape.
The fact the insured was inspecting the home on a regular basis “… did not amount to occupancy.” There was no reason to look at the language of the policy exclusion to see if the contra preferentum principle needed to be applied. The language was clear. The facts were clear. There was no coverage for this loss. (Progressive Homes Ltd. v. Lombard General Insurance Canada, 2010 S.C.C. 33 (CanLII).)
There was an additional issue raised in this trial. The insurer had dispatched a contracting company to effect emergency repairs after the loss had been reported. The insured argued:
- The insurer had created an estoppel by responding and acting to mitigate the loss.
- The contractor had caused further damage in the manner in which they executed their repairs.
The judge ruled:
- The insurer had acted in good faith in mitigating some of the damage while they investigated the loss.
- There was no estoppel (Scotsburn Co-operative Services Ltd. v. W.T. Goodwin Ltd., 1985 CanLII 57 (SCC),  1 S.C.R. 54) and Williams v. Paul Revere Life Insurance Co., 1997 CanLII 1418 (ON CA), 1997 CarswellOnt 2450 (CA))
- He disagreed with the argument about the contractor’s work and felt that “perhaps” the insured might have a cause of action against the contracting firm but NOT against the insurer.
The approach taken by the parties to submit affidavit evidence and deal with the case in this manner certainly would have been an efficient, cost-effective way to deal with the coverage issue on this loss.
You will note the “process” the judge followed to determine the application of the exclusion clause. You will note how it follows the same pathway as the Ledcor Construction Ltd. V.Northbridge Insurance et al, Supreme Court of Canada, September 15, 2016 that we covered in the previous issue of Claims Canada.
The insurance industry does an excellent job of responding to the vast majority of their property claims. But there are always claims where there is a legitimate difference of opinion on the “amount of loss”. It is puzzling that the “Appraisal” process built into the provincial Insurance Acts is not utilized more proactively to affect a cost effective, speedy solution. •
Glenn Gibson, ICD.D, CIP, FCIAA, FCLA, CFE is President & CEO of The GTG Group.