Although this seems to be a concept that is basically quite simple and well defined in the insurance industry, the courts of Quebec and Ontario have recently been called upon to rule on the concept of replacement cost. Accordingly, we are providing you with an overview of the decisions in Gestion Ignièce inc. c. Les Souscripteurs du Lloyd’s[1] and Carter v. Intact Insurance Company[2].
Gestion Ignièce inc. c. Les Souscripteurs du Lloyd’s
On April 13, 2017, the Superior Court rendered a judgment in Gestion Ignièce inc. c. Les Souscripteurs du Lloyd’s, a remedy instituted by the plaintiffs to receive a replacement cost indemnity for the building they lost, at least in part, due to a fire. The policy that had been issued stipulated replacement cost coverage. The amount of the insurance had been set at $1,845,000.00, after a valuation report was obtained establishing the reconstruction value of the building.
The decision begins with a preamble that is of particular interest to insurers:
[translation] “The following illustrates it: a damage insurance policy is not a wicket where, once the covered risk materializes, an insured shows up to withdraw the maximum amount of coverage. Instead it is a contract that is largely framed by the law that assigns obligations to both the insurer and the insured, which each of them must perform when the loss occurs.”- Replacement cost endorsement
The Court concluded that it is inaccurate to argue, as the plaintiffs did, that a replacement cost contract implies that the insured will be indemnified for the price it would cost to rebuild the building today, irrespective of the amount of insurance, and regardless of whether or not reconstruction takes place.
Indeed, the plaintiffs were claiming close to $3,500,000.00 for the building, in addition to $300,000.00 for worry, trouble and inconvenience, while the amount of insurance had been clearly set at $1,845,000.00.
The Court summarized the application of the replacement cost endorsement as follows:
[translation] “It is difficult to be more clear: to receive the replacement cost, barring exceptional circumstances, it is up to the insured to proceed to repair or rebuild as soon as possible. Otherwise, it is the depreciated cost that the insurer must pay. That is the golden rule of the replacement cost endorsement.”Regarding the reconstruction of the building, the Court concluded, in accordance with the contract and consistent case law, that [translation] “the insured cannot avail itself of the full amount of the replacement cost coverage without proceeding to rebuild or repair the building affected by the occurrence.”
In this case, the steps taken by Gestion Ignièce Inc. to proceed with the reconstruction of the building were limited to retaining the services of a soil consultant. One year after the loss, it had done no work to secure or protect the site, notwithstanding the insurer’s suggestions.
- The burden of proof on the insured
The Court also held that the burden of proving that the building was a total loss lies upon the insured. Since there is no definition of “partial loss” or “total loss” in the policy or in Article 2493 C.C.Q., the distinction must be based on the particular facts of each case, whence the importance of factual evidence or of the insureds obtaining an expert report, in the event of a dispute.
In the case at hand, neither the report from the Fire Department, mentioning the total loss of the building, nor a letter from the City, ordering its demolition, were considered to be probative evidence of the total loss of the building. Although the claims adjuster had mentioned “total loss” in one of the letters he sent the insured, that statement could not be deemed to be an admission on the part of the insurer, since the claims adjuster had corrected it in a subsequent letter, sent 15 days later.
Moreover, the insurer’s proof was based on the detailed report of a building valuator finding that the building was a partial loss and that the foundations could be recovered, as well as part of the structure.
However, the Court mentioned in an aside that it was not because the exercise carried out by the insured followed an “atypical route” that its claim must be automatically rejected for that reason.
The loss of the right to indemnification only arises when the bad faith of the insured is established, in addition to the sustaining of prejudice by the insurer. Otherwise, it is appropriate to indemnify based on the depreciated cost, according to the available evidence. In this regard, Article 2471 C.C.Q. clearly stipulates that it is up to the insured to inform the insurer of the amount of the damage, to provide supporting documentation, and to attest that the information is true.
- Waiver by the insurer
The insured may however provide evidence that the insurer waived receipt of full proof of the loss, which waiver must be unequivocal. In this case, in respect of the partial loss of the building only, the Court concluded that the insurers had waived full proof of the damage.
The insurers themselves had acknowledged that the plaintiffs were entitled to a depreciated cost indemnity and had granted advances of more than $600,000.00 based on the valuations they had obtained.
Despite the laconic evidence, the Court therefore awarded the insured the depreciated cost of its claim, less the advances already paid out, as well as the amounts deposited by the insurers with the Quebec Ministry of Finance in advance of the hearing.
Carter v. Intact Insurance Company
Meanwhile in Ontario, in late 2016, the Court of Appeal also had to address the concept of replacement cost, this time in the framework of a dispute over the guarantee to replace with a new property of “like kind and quality.” On June 1, 2017, the Supreme Court of Canada dismissed the application for leave to appeal submitted by the insureds[3].
The property consisted of a group of buildings of between 1 and 3 stories high. Fifteen units were designated for residential use and three for commercial use. Following a fire, the property was demolished by the insureds, with the intent of erecting a single tower of slightly more than 8 stories.
Notwithstanding the issuance of a replacement cost endorsement, the insurer, Intact, refused to indemnify the insureds for the reconstruction of the property as contemplated, since this was not a “new property of like kind and quality.” The indemnity that Intact planned to pay matched the value of the property on the day of the occurrence. Also, although an endorsement was supposed to cover the improvements needed to satisfy the Building Code that was in effect at the time of reconstruction, Intact did not pay any compensation to bring the building up to Code.
The insureds claimed that the trial judge had erred in law in concluding that their project did not warrant payment of the replacement cost and that Intact did not have to pay any amount to cover the costs related to the new Building Code provisions.
One of the arguments raised by the insureds was that, even if they were to build a property that was much more spacious and different than the initial property, Intact’s obligations were limited to the definition of replacement costs contained in the policy. From that standpoint, their claim was limited to the equivalent of the reconstruction costs of their old property and obviously did not extend to the actual costs of rebuilding the new property that was proposed. They therefore saw no reason for refusal of the replacement costs.
The idea behind the concept of replacement cost is to enable an insured to rebuild an identical building in the event of loss, which is often impossible if the indemnity is limited to the depreciated value, since the insured must then have the financial means to cover the amount equal to the depreciation. It is that depreciation that thus becomes the risk insured by this endorsement.
The concept of replacement, contained in Section 4 of the replacement cost endorsement, includes “repair, construction or re-construction with new property of like kind and quality.” As for replacement costs, they were defined as being: “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 Court of Appeal of Ontario dismissed the appeal, concluding that the definition of replacement in the contract was not ambiguous and that it was consistent with the industry standard. It was therefore established that the insureds were not entitled to the replacement cost, unless they rebuilt a property similar in kind and quality to the one they owned before the occurrence. Since that was not their objective, they were only entitled to the value on the day of the damage to the insured property.
This conclusion by the Court of Appeal of Ontario seems to run counter to a 1990 decision rendered by the Supreme Court of British Columbia in Chemainus[4]. However, the Court of Appeal excluded that decision for the reason that, although the wording of the policies was similar, the decision was rendered over 25 years ago and was never analyzed and affirmed by an appeal court.
As for the question of bringing the property up to Code, the Court held that entitlement to that indemnity should follow the same reasoning, such that there must effectively be repair or replacement of the property by a construction of like kind and quality for the coverage to come into play.