Canadian Underwriter

Property Loss Update (October 01, 2010)

September 30, 2010   by Glenn Gibson

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Some very important cases have come out of the appeal courts in Nova Scotia and Alberta. While the Ontario courts drive significant litigation action, we have terrific legal minds across the country and it’s important to view their arguments before the courts.

There are a few cases that help provide further guidance for conducting an appraisal session pursuant to the policy conditions. This mechanism has been in place for decades, but in recent years more policyholders, public adjusters, law firms and insurers are beginning to utilize this process to arrive at fair outcomes in a timely fashion. Part of the process may involve the need to appoint an umpire. Going to appraisal to resolve a dispute on the amount of loss is very effective.

Matty v. Wawanesa Mutual Insurance Company, Queen’s Bench, Alberta, Justice W.P. Sullivan, May 14, 2009

On Nov. 15, 2007, a homeowner had a sewer backup and reported the claim to the insurer. Eventually they reached a point of disagreement on the scope of damage: What should be cleaned versus replaced?

Pursuant to the Insurance Act, both the policyholder and insurer appointed an appraiser to act for their respective interests. The two appraisers reached a point where they could not agree on damages. This, then, required that both appraisers appoint an umpire to deal with this matter. Both sides proposed an umpire: The insurer’s appraiser brought forward the name of a person who had an extensive background in the insurance industry; the policyholder’s appraiser proposed a lawyer who had extensive experience in alternate dispute resolutions (ADR). Arguments were raised that the ADR specialist had too close a connection to the insurer involved and the lawyer proposed lacked the expertise to determine what property the sewer backup had damaged.

Because both appraisers could not agree on the choice of an umpire, the matter was brought before Justice Sullivan. On the day of the hearing, both appraisers took one further step in nominating a new umpire. Both had similar backgrounds to the original umpires being offered and resulted in no decision being reached.

In his written decision, Sullivan highlights several key points:

1. The decision of an umpire in this process is in the nature of a binding arbitration award. It cannot be set aside unless there is evidence of “. . . fraud, collusion or bias.”

2. The intention of the process is to encourage a quick settlement.

3. The process should facilitate the use of an appraiser or umpire to determine the value of a loss.

4. Appointing an umpire was much like qualifying an expert at trial. He relied on the Canadian Oxford Dictionary definition of an expert as someone who has “specialized knowledge or skill in a subject.”

In appointing an umpire, both appraisers should determine the issue at hand and then select someone with sufficient expertise in that field to act as an umpire.

In looking at the case at hand, Sullivan chose not to name an umpire from the four names that were before him, providing guidance that the umpire should “have sufficient experience in home rehabilitation or home reclamation.” Further, the umpire should be “capable of acting impartially.” He sent the two sides away and indicated he would see them again if they couldn’t agree on someone. They reached an agreement outside the courtroom.

Case summary

This is an interesting decision. The trial judge seemed to feel there was really one issue to deal with: should something be cleaned or replaced in a sewer backup? So, he felt the chosen umpire should be someone with specific experience in this area. In many situations like this, the judge usually picks the umpire from a list that both sides bring forward, but in this situation he chose to send both appraisers away to choose a new umpire.

265 Commercial Street Ltd. v. ING Insurance Co. et al, Nova Scotia Supreme Court, Justice F. Edwards, Dec. 14, 2009

On Oct. 21, 2001, a major fire damaged a commercial property in North Sydney, N.S. The initial damage claim was slightly more than $132,000, but during the litigation process this was lowered to about $76,000. The policyholder and insurer could not come to an agreement on damages, so an election was made for appraisal. Each side appointed an appraiser, but they could not come to an agreement on the choice of an umpire. The insurer proposed an umpire who had extensive construction and appraisal experience. He personally had done no work for ING, but his employer had done some limited work for the insurer in the past. The policyholder initially proposed a candidate who had no construction experience and was not familiar with the appraisal process. Eventually, they proposed a second choice as umpire who had extensive construction experience but was also unfamiliar with the appraisal process.

The trial judge referenced several cases in making his decision, including:

ShinkarukEnterprisesLtd. v. Commonwealth, Saskatchewan Court of Appeal, 1990. SlJ. No. 317, 71 D.L.R. (4th) 681.

Matti v. Wawanesa, Alberta S.C., 2009.

McPeak v. Herald Insurance Co., Alberta Q.B., 1991. A.J. No. 222.

Justice Edwards identified the issue was the “value of the physical damage to the property . . . ” It made sense the umpire should be someone who has both experience in the appraisal process and knowledge of construction standards. When examining the appointment of an umpire, the judge felt a court had to consider the test of whether a “reasonable apprehension of bias” might exist or not. He did not agree with the insurer that the test was whether or not there was an “actual bias or partiality.”

In applying this test to the umpire proposed by the insurer, the judge did not feel there was a reasonable apprehension of bias. He pointed out this proposed umpire worked for a firm that had only handled three claims for ING in the previous 18 months. This limited association was deemed insufficient to suggest any bias might exist.

In the end, the court appointed the candidate proposed by the insurer as the umpire.

Case summary

When both appraisers cannot agree on an umpire, they can go before a judge to seek a decision. In this case, the judge looked at the two proposed umpires and picked one. In the previous case discussed (Matti v. Wawanesa), the judge gave guidance to the appraisers to go back and pick an umpire.


Appraisal has been part of our statutory conditions for decades. It has taken a long time for it to be effectively utilized to settle matters in dispute. In the early 1990s, public adjusters in Ontario were triggering this mechanism to settle claims. There were a number of umpires who quickly emerged and did a very good job in bringing matters forward quickly to a solution. There were many tricky areas to be managed, but virtually all of these problems were solved without any form of litigation.

Insurers have now seen that they can also trigger this mechanism to effectively save on costs and settle claims in dispute quickly. This has resulted in more appraisals being conducted across all provinces. These following two cases provide some guidance on steps that should be taken when seeking to appoint an umpire, a decision that is crucial to ensure a fair process and outcome.

Kings Mutual v. Ackermann et. al, Nova Scotia Court of Appeal, March 24, 2010

On Sept. 28-29, 2003, Hurricane Juan hit Nova Scotia. The Ackermanns had a dairy barn they claimed was damaged in the storm. They reported a claim to their insurer, who directed an independent adjuster to act on their behalf. In short order, a structural engineer was engaged by the adjuster to inspect the barn. This engineer gave his opinion that the barn “had not been affected by the passing of Hurricane Juan.”

The policyholder engaged his own structural engineer who expressed an opinion that the barn had been damaged by the hurricane, adding he felt
the barn may not be safe for continued usage.

The barn was insured for $265,000 and a claim was filed for the limits. The insurer subsequently denied the claim and litigation ensued, which culminated in an eight-day jury trial in front of Justice Arthur J. LeBlanc. The case ended badly for the insurer with a full judgment of policy limits and a punitive damage award of $55,000.

The insurer appealed the verdict on only one issue: Did the jury err in awarding punitive damages against the insurer?

The Nova Scotia Appeal Court paid particular attention to the Whiten v. Pilot Insurance Co. decision. The court noted several key things:

• Would a reasonable jury, properly instructed, conclude that an award of this amount was “rationally required to punish the defendant’s misconduct”?

• The Appeal Court has “supervisory powers over punitive damages.” The Court is to consider if the award is a “product of reason and rationality.”

• The focus is on whether the court’s own sense of reason is offended “rather than on whether its conscience is shocked.”

• Punitive damages should only be awarded in rare and exceptional circumstances “where a party’s actions are deserving of punishment, deterrence or denunciation.”

In considering this, the court also reviewed guidance provided in Fidler v. Sun Life Assurance Co. of Canada. Incorrectly denying a claim that is eventually deemed to be legitimate does not necessarily mean the insurer breached its duty to act in utmost good faith. But, each case has to be judged on its own facts and punitive damages can be awarded if the claim file is handled overwhelmingly inadequately.

The insurer argued on appeal that the actions in handling the file had not been “overwhelmingly inadequate.” They felt their actions showed:

1. They did not ignore evidence surrounding the barn.

2. They did not display tunnel vision in how they handled the file.

3. There was no evidence that they intended from the get-go to deny coverage.

4. Their opinion was supported by an engineer.

5. There was no evidence they were trying to take advantage of the economic vulnerability of the policyholder or gain bargaining leverage by denying the claim.

The Appeal Court disagreed and reviewed key pieces of evidence involving witnesses who had inspected the barn pre-and-post loss. They all gave evidence of windstorm damage. The insurer, as part of a follow-up investigation, never interviewed these witnesses. There were also issues relating to reports for inspections on the barn property that had taken place before and after the windstorm. These reports showed vastly different facts about the condition of the barn before and after the windstorm.

It was agreed the judge had properly instructed the jury on punitive damages. The appeal court felt its review of the record showed a “reasonable jury could reach an award of punitive damages”

and that this was a “rational response on the jury’s part to its findings.”

The punitive damage award was allowed to stand by the appeal court.

Case summary

Cases can get better or worse at trial when evidence is introduced through the witness box. But what can a professional loss adjuster take from this case?

• When another party introduces evidence, make sure you validate this information through your own investigation.

• Be careful what you say in your file notes, reports or letters. All communication should be done with this thought in mind: How might this look in a court of law?

• Loss investigations should reflect open minds both through actions and documentation.

• There should be a full disclosure of information flowing from insurer to adjuster.

Pietrangelo v. Gore Mutual et. Al, Ontario Superior Court, E. Ducharme, Feb. 22, 2010

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 fare 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.” The insurer had introduced four new exclusions, including this one, in the spring of 2003. The relevant exclusion read that the insurer did not insure direct or indirect loss or damage to property, “used in whole or in part for the manufacture… of marijuana or any product derived from or containing marijuana.”

The plaintiffs in this action owned three rental properties. In June 2001, their broker submitted an application with the insurer for insurance on all three properties. The insurer accepted all three risks, but arranged to do an inspection of the properties. This led to some repair work and a further agreement to renew coverage at the expiry date. The insurer sent a bulletin to all brokers in March 2003 announcing significant changes to its policy wordings. This was followed by a letter to all policyholders that bore the title, “IMPORTANT NOTICE.”

At trial, the plaintiffs stated they did not receive this notice. One of the key witnesses for the insurer was its personal lines product manager. He testified that when the insurer changes the existing policy, the company mails out not only the billing notice, but also the new policy wordings and residential policy declarations. He also explained the insurer’s “sophisticated computer method” of ensuring mail delivery including its return to sender process. This manager went on to give very strong evidence regarding the insurer’s internal payment and renewal systems. The judge was impressed with all the evidence offered. He commented that, “Mr. Bardon’s evidence was so detailed and persuasive that I accept it as credible, honest and accurate and I conclude from it that Gore Mutual satisfied the onus to prove that it mailed the new 2003 Policy to the plaintiffs and that the plaintiffs received the 2003 mailing.”

When reviewing the evidence provided at trial by the plaintiffs, the trial judge was clearly not as impressed. The plaintiffs had difficulty recollecting important details and showed inattention and an indifferent approach to record keeping. Having found that the plaintiffs received notice of the new exclusion, the judge reviewed the circumstances of the fire and related them to the policy exclusion. The judge concluded there was “no doubt” that on the date of loss the tenant was “processing and manufacturing a product derived from and containing marijuana.”

The trial judge then examined the principles surrounding how to interpret insurance contracts. What was the policy intent behind the exclusion? Was it clearly articulated? The plaintiffs advanced arguments that the wording of the exclusion was not clear and the contra preferendum rule should apply. There is a good analysis of this rule in the judgment, but the result was that the activities that surrounded this loss were clearly excluded and there was ” . . . no ambiguity lurking in the language; nothing to even hint at more than one reasonable explanation.”

The final point argued by the plaintiffs was the “reasonable expectations and true intentions of the parties.” This concept is also very well articulated in the judgment. The judge felt, however, that although the plaintiffs had no knowledge of the activities of their tenant, the insurer should not be expected to pay for the damages as the “Marijuana Exclusion” had a reasonable underlying economic rationale. The judge commented that, “If the effect of this ruling is that, in the future, landlords will be at greater risk for a specified class of losses in which they are innocent, if it means that landlords must become more diligent still in winnow
ing out those potential tenants who are a threat to abuse their tenancies, then so be it shall have to be.”

As you can anticipate from these remarks, the trial judge denied the plaintiff’s claim for damages. This included reviewing a potential claim for punitive and aggravated damages. He felt the insurer had not breached its duty to act in good faith and there was “no evidence of misconduct whatsoever.”

Case summary

Going into the witness box to give evidence is a very traumatic event for most people. Clearly, the insurer’s manager presented very strong evidence, including his explanations surrounding the insurer’s internal administration system.

358296 Alberta Ltd. v. Phoenix Marble Ltd. Alberta Court of Appeal, May 14, 2008

A fire destroyed a commercial building complex, with one of the tenants admitting negligence in the handling and storage of flammable chemicals used in its manufacturing operations. This is an appeal from a trial held in the fall of 2006, where the judge refused to allow the subrogation claim of the building owner and other tenants to proceed.

The Appeal Court examined a commercial lease that had been signed by all the tenants. The lease required the tenants to contribute their share towards the total premium cost to cover building insurance, tenant improvements and equipment. The landlord also required the tenants buy their own separate general liability policy with minimum limits of $2 million. Among other things, there was an obligation in the landlord’s lease that the tenants were required to, “reimburse the landlord for costs incurred by the landlord in making good any damage directly or indirectly wholly or partially caused to the premises, building, or lands or any part thereof including equipment and amenities thereof as a result of any act, carelessness, neglect, use or misuse on the part of the tenant.”

This memorandum of judgment by the appeal court examines the lease in detail and makes reference to the leading cases in Canada on this subject, particularly the decision of the Supreme Court in Ross Southward Tire Ltd. V. Pyrotech Products Ltd.

This judgment provides an excellent review of this particular contract language. A few key points were raised:

1. The clear intention of both parties was that the landlord was obligated to buy fire insurance on the building, improvements and equipment.

2. The defendant tenant was required to contribute to the premium cost of the building policy.

3. The tenants’ obligation to acquire “liability insurance” was to protect the landlord and themselves from third party claims.

The Appeal Court agreed with the trial judge that there were no subrogation rights by the landlord against the tenant who caused the fire. It should be noted that this responsible party had paid the insured and uninsured losses of the co-tenants prior to this subrogation action.

Case summary

This type of loss situation happens quite often as there are many different types of commercial leases. There are efforts by the landlord to have tenants contribute to their fixed costs such as insurance premiums and efforts to transfer risk. These efforts may very well preclude the ability of the landlord to subrogate against a tenant who may be negligent in causing a loss. Each case has to be carefully examined, beginning with obtaining all documentation relating to the original lease agreement.

Beasley v. Barrand Ontario Superior Court, J. Moore, Apr. 9, 2010

Amendments to rule 53.03 came into force in Ontario on Jan. 1, 2010. This has resulted in directions regarding expert evidence. Any party who intends to call an expert witness at trial must, according to a specific timeline, serve every other party to the legal action with a signed copy of the expert’s report. This report must contain information that includes:

• Personal and professional details on the expert, including area of expertise.

• Any instructions that were provided to the expert that relate to the proceeding.

• The nature of the opinion being sought and each issue in the proceeding to which the opinion relates.

• The opinion of the expert on each issue. Where there is a range of opinions, there should be a summary of the range and the reasons for the expert’s opinion within that range.

• Any opinion expressed should include the facts considered, research completed and a list of every document used by the expert to form an opinion.

• Each expert is required to sign Form 53, which is an acknowledgment of the expert’s duty to the court.

The action in this case results from a motor vehicle accident that happened in September 2002. Before a jury was selected, the trial judge heard arguments on whether or not certain expert evidence could be called to provide opinion evidence at trial. The defendants sought to call three medical experts who had completed physical examinations of the plaintiff a short time after the accident. The reports authored by these three medical specialists did not comply with Rule 53.03. This judgment goes through a detailed analysis of the reports at issue with the arguments raised by both sides.

The important result of this decision is that Justice Moore provided guidance on the purpose of the rule changes. In particular, he said, “In my view, the rule advances the law that has been developing in recent years toward reigning in the growing use of and reliance upon the evidence of experts at trial.”

The judge reinforced that any expert who is qualified by the court is there to lend assistance to the court. Any expert

must be and certainly appear to be acting independently of whoever retained them. They must demonstrate objectivity and impartiality in analyses and opinions. An expert is there to express opinions on areas about which the court is not knowledgeable and provide a thorough, balanced and technically sound analysis.

Reference was made in this decision to the report of the Honourable Coulter Osborne when he led a review of Civil Justice Reform in Ontario. His report made a number of points that are worthy of bringing forward:

• The increased use of experts is a factor in increasing the cost of litigation and the cause of delays because of trial adjournments.

• A trial can result in a battle of competing experts. This can result in a legal merry-go-round.

• There is a common complaint that experts are no more than hired guns who tailor their reports and evidence to suit their client’s needs.

These factors and others led to Osborne’s recommendations that in turn inspired changes to Rule 53.03.

In the case at hand, Moore was cognizant of his role as a gatekeeper of the evidence that is allowed in a trial. This includes one of the important reasons for the rule changes: to “eliminate the practice of tendering opinion evidence of questionable value at trial.”

Case summary

This is a very important decision, as it is one of the first to show how trial judges are going to implement changes to the rules relating to the usage of expert evidence in a trial. This is another step towards ensuring that anyone who is seeking to provide an expert opinion must be fully aware of their obligation to give an independent opinion that will assist a court. They are not a hired gun, nor do they represent an opinion for hire.


When a loss occurs and a claim is reported to an insurer, there has been a great deal of attention paid to helping a policyholder as quickly and efficiently as possible. But, bear in mind, the insurance policy is a contract. It spells out the risks the insurer is willing to accept for a specific premium. The contract also outlines what is covered by the policy and what is not. This can, on occasion, create a dispute between both parties. This article should stimulate thought on utilizing the appraisal features of the insura
nce contract to every-one’s benefit.

As further food for thought, you have one chance to do the job right. Don’t cut corners. When faced with conflict, seek to ensure that you are hiring the right experts to assist you. Keep in mind the purpose of an expert: to provide an unbiased opinion that might eventually be needed to assist a court of law.

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

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