Canadian Underwriter

Supreme Court of Canada will not hear appeal from insureds seeking replacement cost instead of actual cash value in fire claim

June 2, 2017   by Canadian Underwriter

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A disputed property insurance claim arising from a fire in Ottawa, in which the claimants asked for replacement value but the insurer would only pay actual cash value, will not be heard by the Supreme Court of Canada, the court announced Thursday.

In a ruling released Dec. 6, 2016, the Court of Appeal for Ontario ruled in favour of Intact, which wrote a policy that included replacement cost. The fire occurred March 8, 2011 at Beechwood Avenue and McKay Street, about a kilometre southeast of Rideau Hall. After the fire, the owners wanted to construct new, larger buildings and claim from the insurer the replacement cost of the original buildings.

The building owners unsuccessfully sued Intact for $2.43 million, which was the difference between the actual cash value that Intact paid and the replacement value they were claiming plus building-code upgrades. The court agreed that Intact did not owe the insureds the cost of building code upgrades and only owed them actual cash value.

The Court of Appeal for Ontario upheld a 2015 Ontario Superior Court of Justice decision. The owners were Helene Carter, Edmond Blais and Donald Givogue. In February, 2017, Carter applied for leave to appeal to the Supreme Court of Canada, which announced June 1 that leave to appeal is denied.

Carter, Blais and Givogue had planned to construct new buildings on the site.

The fire, which occurred in 2011, damaged three buildings: one-storey timber frame structure built in 1950, a two-storey structure built in 1950 (with a one-storey section to the rear added in 1960) and a three-storey structure built in 1990.

The total above-ground usable area was 36,730 square feet, Justice Kevin Phillips of the Ontario Superior Court of Justice wrote in his 2015 ruling in favour of Intact. He noted that on the same property after the fire, the owners wanted 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.

The owners wanted to claim $5.73 million replacement value determined by arbitration. The actual cash value was pegged at $3.9 million.

The insurance policy defined replacement cost as “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 plaintiffs had argued they were “in the process of replacing a mixed-use commercial/residential building with a mixed-use commercial/residential building” and that the insurer’s exposure was only limited by the policy limits.

But Justice Phillips disagreed.

Among the cases cited were the Supreme Court of Canada ruling, released in 1979, in Consolidated-Bathurst v. Mutual Boiler.

Consolidated-Bathurst operated a paper and wood products plant in New Richmond, Quebec, on the south shore of the Gaspe Peninsula, across Chaleur Bay from Bathurst, N.B. Mutual Boiler wrote a policy insuring Consolidated-Bathurst for loss or damage to property caused by accidents to “objects,” which in the policy included pressure valves and certain piping, among others.

Among the things excluded from the definition of accident were “depletion, deterioration, corrosion, or erosion of material.”

Consolidated-Bathurst was later bought by Smurfit-Stone Container Corporation, which closed the New Richmond plant and sought court protection from creditors in 2009.

In 1968, a failure in heat exchangers caused a shutdown at the New Richmond plant. The parties agreed the loss was $158,289.24 but Mutual Boiler and Machinery Insurance Company claimed the event was excluded from coverage. A Quebec court agreed, a decision upheld on appeal to the province’s appeal court. The decision was overturned in the Supreme Court of Canada’s divided ruling released in 1979.

The trial judge found that damage was caused by corrosion, which the trial judge found was “not of a sudden and accidental nature.” Consolidated Bathurst argued that the definition of accident in the insurance policy includes “events which succeed and which may be due to the event of corrosion,” Justice Willard Estey of the Supreme Court of Canada on behalf of the majority.

Had the court accepted the insurer’s argument, “that loss suffered by the insured by reason of the failure of a machine due to wear and tear and the consequential downtime of the plant was excluded by the definition of accident, then the insured would have purchased, by its premiums, no coverage for what may well be the most likely source of loss, or certainly a risk pervasive through much of the plant,” Justice Estey wrote in the Supreme Court of Canada’s 1979 ruling. Interpreting the policy in the manner put forth by the insurer “would necessarily result in a substantial nullification of coverage under the contract,” he added.

Justice Estey noted that “the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract.”

In its 2016 ruling in favour of Intact, the Court of Appeal for Ontario noted that the “primary goal of contract interpretation is to give effect to the intention of the parties.”

If a clause in an insurance policy is unambiguous, “the court gives effect to the parties’ intention by giving effect to the provision’s plain and ordinary meaning,” Justice John Laskin wrote in the Court of Appeal for Ontario’s unanimous ruling. “In doing so, and as interpretive aids, the court should take into account the provisions of the policy as a whole, the surrounding circumstances and the ‘commercial atmosphere” in which the insurance policy was contracted for, and the general purpose of insurance.”

One purpose is indemnity, but in a property policy, “replacement cost endorsement is a departure from the concept of indemnity,” Justice Phillips wrote in his ruling in 2015.

A policy covering replacement costs “permits the insured to receive an amount necessary to rebuild the structure in a new condition without deducting for depreciation, and enables the insured to be restored to his/her pre-loss use of the property,” Justice Phillips added. “To allow the insured to presently receive compensation for value which was lost by the time of the fire and to essentially do with that compensation as they wish would be to allow them to use this policy in a way that was beyond the intention of the parties.”

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