Canadian Underwriter

Why this home insurer wasn’t allowed to use a replacement cost overpayment to set off a contents claim

March 17, 2022   by David Gambrill

Rural family home fully engulfed in flames.

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A home insurer lost its bid to set off a contents claim using the difference between the Guaranteed Replacement Cost (GRC) and the depreciated value of a home that was rebuilt after a fire.

The Ontario Superior Court allowed this part of an appeal against TD Meloche Monnex because the insurer had not included in its pleadings at trial that it intended to use the difference between the GRC and the actual cash value (minus depreciation) of the home as an offset to the contents award.

“There is no dispute that this issue was not raised by TD before the commencement of trial and, in our view, this resulted in unfairness to the [homeowner],” Ontario Superior Court Justice Thomas Heeney ruled in a decision released Mar. 11. “Had it been raised earlier, there are many ways in which it might have affected his litigation strategy.

“Obviously, it would have been the subject-matter of oral and documentary discovery. The [homeowner] may have retained an expert to provide opinion evidence as to the appropriate amount of depreciation to be allowed. In that regard, the percentage to be applied, if any, was a live issue in this case, since the house in question had been heavily renovated, which would tend to reverse much of the natural impact of ageing and wear and tear. Counsel would have had the opportunity to conduct legal research, and thereby equip himself to argue this issue at trial.”

TD succeeded in defending against all other aspects of the claim, including the value of art work with no expert opinion beyond that of an auctioneer, and the homeowner’s expenses for living away from the home. The court found that since the homeowner had decided to build a bigger home after the fire, the insurer should not be on the hook for the living expenses claimed because they reflected the longer time to rebuild a bigger house.

Edward Watt, the homeowner, insured his home and contents with TD from fire up to a policy limit of $1 million. A fire in March 2012 burned down his home and destroyed the contents. He negotiated with his insurer for two years following the fire in an attempt to settle the value of the home and contents, as well as other losses claimed, such as additional living expenses.

TD retained Win-Mar Construction to do an estimate of the cost to rebuild the house. The insurer offered to rebuild the house for $494,678, if Watt agreed. Instead, Watt, a contractor, opted to rebuild a much larger new home, increasing it from 2,100 square feet to 3,200 sq. ft.

TD paid him $493,857 towards the reconstruction cost, which, in the insurer’s view, represented the amount it would have cost to rebuild a substantially similar residence to the one that was destroyed.

At trial, a judge awarded Watt $74,936 for the loss of his household contents, artwork and comic book collection. The judge also concluded TD had overpaid for the loss of the house, since it paid replacement cost instead of actual cash value. The judge allowed TD to set off the overpayment amount of $49,467 (representing 10% depreciation on Win-Mar’s quote), resulting in a net contents judgement in favour of Watt for $25,468.

Watt appealed, arguing the trial judge erred in agreeing to the $49,467 set off. The Superior Court agreed, finding that if TD intended to do this, it should have said so in its trial pleadings from the beginning.

“The credit claimed by TD arises from the difference between the ‘Guaranteed Reconstruction Cost’ and the ‘Actual Cash Value’ [of the home], as defined by the policy,” the Ontario Superior Court noted. “The policy provides that the insurer will pay the actual cost of reconstruction, subject to the condition that ‘repairs or reconstruction must be effected on the same premises with materials of similar quality.’ If that condition is not met, the insurer is obligated only to pay the ‘Actual Cash Value,’ which is defined as the cost of replacement less any depreciation.”

The trial judge found TD’s offer of $493,857 was intended to cover the cost of a rebuilt home of similar size and quality, not for a larger home, thus triggering the depreciation costs (and hence the overpayment, which did not include the depreciation costs).

But the Superior Court found the trial judge had erred in allowing the overpayment to be set off against the contents claim, since that was never raised before the end of the case, nor was it ever in the insurer’s pleadings. Thus, Watt never had a chance to argue against the depreciation amount or the set-off at trial.


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