Court denies replacement value coverage on fire claim after owners plan to build larger structure on same Ottawa site

In a fire insurance claim, the courts recognize that “the need to rebuild premises which more closely resembled the original” is critical in triggering coverage for replacement value rather than actual cash value, Dutton Brock LLP suggested in a bulletin released Tuesday.

On Dec. 6, the Court of Appeal for Ontario released a ruling in favour of Intact Insurance, which wrote a policy on an Ottawa property damaged in 2011 by fire. The owners – Helene Carter, Edmond Blais and Donald Givogue – took Intact to court after the insurer paid $3.9 million for actual cash value rather than the $5.73 million replacement value determined by arbitration.

The case is indexed as Carter v. Intact Insurance Company.

In addition to agreeing to only pay actual cash value, Intact also declined to pay for building code upgrades, determined during arbitration to be worth in excess of $500,000.

The existing buildings – the tallest of which was two storeys – had a combined total of 15 residential units and 13 commercial units for rent, Mr. Justice Kevin Phillips of the Ontario Superior Court of Justice wrote in 2015.

On the site of the fire, the owners were planning to build an 8-1/2-storey condo building with 129 units, two-level underground parking garage and elevators, with 193,694 square feet in physical size, at an estimated cost of $30 million.

“Collectively, the insured buildings had above ground usable square footage of 36,730 square feet,” Justice Phillips wrote, adding they had no underground parking garage and no elevators.

The insureds argued that “though they are constructing a different and much larger building, that should be of no concern to Intact, because its liability is limited by the definition of ‘replacement cost’ in the policy,” wrote Mr. Justice John Laskin of the Court of Appeal for Ontario.

In the definition section of the policy written by Intact, “‘replacement’ includes repair, construction or reconstruction with new property of like kind and quality,” while “‘replacement cost’ means whichever is the least of the cost of replacing, repairing, constructing or re-constructing the property on the same site with new property of like kind and quality and for like occupancy without deduction for depreciation.”

The insureds argued, among other things, that “just because replacement includes construction with new property of like kind and quality does not mean that it can only mean that,” Justice Phillips wrote.

In ruling in favour of Intact, Judge Phillips wrote that 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.”

He also ruled that the 8-1/2 storey condo proposed at the time was not of “like kind and quality” to the damaged buildings.

The Court of Appeal for Ontario agreed, in a ruling released Dec. 6, 2016.

“I am satisfied that the definition of ‘replacement’ in the appellants’ policy is unambiguous and that the motion judge gave effect to its plain and ordinary meaning,” Mr. Justice John Laskin of the court of Appeal for Ontario wrote, in its unanimous ruling. “Clause 2 under the replacement cost endorsement stipulates that if new property of like kind and quality cannot be obtained, then new property ‘as similar as possible to that lost or damaged and which is capable of performing the same function shall be deemed to be new property of like kind and quality,'” Justice Laskin added. “This clause reinforces my conclusion that the replacement must be of like kind and quality.”

Concurring were Madam Justice Sarah Pepall and Mr. Justice David Brown.

“The fact that the definition of ‘replacement’ in the policy could have theoretically included building a brand-new building (such as owners’ condominium in this case) completely ignore the plain meaning of the terms ‘like kind and quality'” Dutton Brock wrote in its bulletin issued Dec. 20. “The need to rebuild premises which more closely resembled the original was fundamental to attract replacement coverage.”

The Court of Appeal for Ontario also “recognized that the appropriate standard of review was correctness which affords a lesser degree of deference to the motion judge because they were looking at a standard provision in a property insurance policy,” Dutton Brock noted.

Justice Laskin noted that the standard of review actually did not matter in the Carter case because the Court of Appeal noted that the Ontario Superior Court of Justice correctly interpreted the meaning of replacement.

But in Carter v. Intact, the standard of review would likely be correctness because “the definition of ‘replacement’ is likely a standard provision in property insurance policies,” Justice Laskin added, citing the Supreme Court of Canada ruling, released Sept. 15, in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.

“Parties to an insurance contract may negotiate over matters like the cost of premiums, but the actual conditions of the insurance coverage are generally determined by the standard form contract,” Justice Richard Wagner of the Supreme Court of Canada wrote in Ledcor. In that case, the Supreme Court of Canada restored a decision of the Court of Queen’s Bench of Alberta against several insurers – Northbridge, Royal & Sun Alliance Insurance Company of Canada, Chartis Insurance Company of Canada, Commonwealth Insurance Company, GCAN Insurance Company and American Home Assurance Company – which wrote an all-risks policy for a construction project. The claim arose when windows were damaged during cleaning. The insurers argued that a faulty workmanship clause kicked in and were ultimately unsuccessful.

In Ledcor, the Supreme Court of Canada cited a 2014 ruling made in Sattva Capital Corp. v. Creston Moly Corp., which was not an insurance dispute but was over an allegation of breach of contract. Sattva Capital and Creston Moly  disagree over what date should be used to determine how many shares of Creston Moly should be paid to Sattva for a fee that a contract stipulated would be paid in shares rather than cash.

“The interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction,” Justice Marshall Rothstein wrote in Sattva, adding the “overriding concern is to determine the intent of the parties and the scope of their understanding.”

The Supreme Court of Canada, in Sattva, ruled the standard of review on appeal of a breach of contract ruling was reasonableness rather than correctness. But in Ledcor, the court recognized an exception to that rule.

For standard form contracts, “the surrounding circumstances generally play less of a role in the interpretation process, and where they are relevant, they tend not to be specific to the particular parties,” Justice Wagner wrote in 2016 in Ledcor. “It would be undesirable for courts to interpret identical or very similar standard form provisions inconsistently, without good reason.”