The Ontario Court of Appeal recently released their decision in Carter v Intact Insurance Co. This is an important case for both property owners and insurers. The case confirms the approach that Canadian courts will take when assessing disputes between Insurers and property owners in regards to building replacement insurance.
The appellants in the Carter case owned an income property consisting of a mix of one, two and three storey buildings containing 15 residential units and 13 commercial units. Intact Insurance had insured the property, and the appellants had purchased additional replacement cost and building by-law coverage. The policy provided that replacement included repair, construction or reconstruction with new property of like kind and quality.
The appellant’s property sustained significant damage in a fire. Following the fire the appellants decided to demolish the remaining structures and build an eight and a half storey condominium as a replacement. They sought compensation under the replacement cost and building by-law coverages in their insurance policy, in the amount of $5,732,136.32. Intact refused to pay the replacement cost on the ground that the proposed condominium was not a replacement of the previous property. They also refused to pay for building code upgrades. Instead, Intact paid only the actual cash value of the damaged buildings which amounted to $3,900,000.
Actual Cash Value Insurance vs. Replacement Cost Insurance
The insurance industry generally markets two types of protection for residential and commercial properties: actual cash value coverage and replacement cost coverage. Actual cash value coverage insures the property to the extent of its actual cash value. Actual cash value of a property is almost always considerably lower than replacement cost because actual cash value takes into account reasonable depreciation. When an insured pays the additional premium for replacement cost coverage they are entitled to the full cost of repair or replacement without any deduction for depreciation.
The Ontario Superior Court of Justice and the Ontario Court of Appeal agreed with Intact Insurance and held that even though the appellants had purchased replacement cost insurance, they were not entitled to replacement cost because their condominium was not a “new property of like kind and quality”. The new property was not sufficiently similar to the property that was insured and existed prior to the fire. The new property was significantly larger, 193, 694 square feet compared to 51, 930 square feet, and was considerably different in design, one large condominium building compared to a mixture of one, two and three storey buildings.
Since the replacement building the appellants proposed was not of like kind and quality to the original buildings, the appellants were only entitled to the actual cash value of their insured property, which was considerably less. The Court made it clear that in order for property owners to receive the full cost of replacing their property they must build a new building that qualifies as a “replacement”. New buildings that are not of like kind and quality will not be considered a replacement.
What qualifies as a Replacement?
A new building will be considered a replacement if it is of “like kind and quality” to the damaged building it is replacing. Guidance on the determination of whether or not a building is of like kind and quality can be found in the Carter trial level decision. Phillips J. references obiter dicta comments made by Justice Coultas in Chemainus Properties Ltd. v. Continental Insurance Co. (1990), 43 C.C.L.I. 146 “Like kind and quality does not imply that every truss, or siding, or finish, or style of the building, for example must be identical. That would be absurd considering that 20 years separates the dates of their construction, and construction methods and aesthetic tastes change”. This proposition has been supported in a number of Canadian cases. It seems to be settled law that when building a replacement building, property owners are allowed some deviation between the replacement building and the original damaged building. They are not required to build a new building that is an exact copy of the old building. However, as the Carter case demonstrates, they are not able to build a significantly different building either.
Ultimately it is a judgment call that must be made in each specific situation by comparing the similarity of the old building and the new. If the new building is not sufficiently similar to the old building, Insurers are entitled to pay out only the actual cash value of the damaged property rather than the replacement cost.
Another option that is open to property owners is to purchase an existing building as the replacement building, rather than build a new replacement building. This method of replacement is also constrained by the requirement that the replacement building be of “like kind and quality”. In the Carter decision Laskin J. writes “replacement can be effected by a method other than repair, construction or reconstruction, for example, by purchasing an existing building to replace the one that was lost. But whatever the method of replacement, whether enumerated or not, the actual replacement must be of like kind and quality.”
Implications for Property Owners
Property owners need to appreciate that actual cash value coverage allows Insurers to deduct reasonable depreciation, and as such, the insurance payout in the event of a catastrophic loss of the property will likely be less than would be required to completely replace or repair the damaged building, or to purchase a similar replacement building. Property owners should seriously consider the extra protection afforded by replacement cost insurance.
If property owners carry replacement cost insurance and suffer a complete loss of the property they need to appreciate that the replacement cost insurance does not give them a blank cheque or the ability to build any sort of replacement building. As the Carter case demonstrates, property owners need to build or acquire a replacement building that is of like kind and quality to the damaged building if they want to receive the complete replacement cost. If they act in a manner similar to the plaintiffs in Carter, and build a significantly different building, then they will only be entitled to actual cash value of the damaged building, which is usually significantly less than the replacement cost.
Implications for Insurers
Insurers need to be proactive in explaining the difference between actual cash value coverage and replacement cost coverage to their clients. They need to understand the difference between the two forms of coverage so that they can successfully explain and promote the additional protection that comes with replacement cost coverage, in order to receive the additional premiums that come with this coverage.
When faced with a total loss situation, where the Insured carried replacement cost coverage, Insurers should be vigilant to ensure that the Insured is building or purchasing a replacement building that is of like kind and quality. If the Insured replaces the damaged property with a significantly different building, as occurred in Carter, then the Insurers are entitled to pay out only the actual cash value of the damaged building rather than the full replacement cost. This does not mean that Insurers can insist that the replacement building be exactly identical to the damaged building. As discussed previously, “like kind and quality” allows for some degree of differentiation between the damaged and replacement building.