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Fire insurance decision could be bad news for developers

An Ontario decision on replacement cost coverage could mean bad news for B.C. developers, says Vancouver insurance lawyer Sean Lerner.

In Carter v. Intact Insurance Company, the Court of Appeal for Ontario ruled that the owners of a fire damaged property could not collect on their replacement cost coverage extension because their new plans for the property were not similar enough to the previous use.

The Ontario decision is the first time in recent years that an appeal court has weighed in on the issue, and in doing so, the court refused to follow a similar B.C. Supreme Court case that went against the insurer.

“It’s going to be very interesting to see how a B.C. court rules the next time the issue is litigated here, because you have two interpretations of very similar language that don’t appear to be reconcilable. It will come up eventually,” says Lerner, principal of Lerner Law Corporation.

The Ottawa site at the heart of the Ontario dispute was an income property that included 15 residential units and 13 commercial units located in several buildings ranging from one to three storeys high. After the 2011 fire, which caused significant damage, the owners decided to raze the site and start again with an 8.5-storey condominium building that would quadruple the square-footage available on the property. 

The appeal court decision means the owners will get just $3.9 million towards the estimated $30-million cost of the project, which represents the actual cash value of the property before it burned down. That’s well short of the $5.7-million replacement cost they claimed under the insurance policy.

"A lay person looking at this judgment might wonder about the result. The policyholder had replacement value coverage, and seized the opportunity to replace the property with something bigger and better,” Lerner tells AdvocateDaily.com. “All they were asking for was the cost to replace what was originally there, which was something the policy appeared to provide for.”

The Intact policy’s definition of replacement stated that it “includes repair, construction or re-construction with new property of like kind and quality.” The insureds argued that the insertion of the word “includes” showed that the insurance company contemplated the prospect of its policyholders choosing to build a completely different type of building while retaining entitlement to the replacement cost.

However, the appeal court sided with the insurer on the issue:

“The word ‘includes’ in the definition of ‘replacement’ means that the 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. That phrase, ‘of like kind and quality,’ modifies or anchors all methods of replacement,” wrote Ontario Appeal Court Justice John Laskin on behalf of a unanimous three-judge panel of the court.

“I conclude that the motion judge was correct in his interpretation of the appellants’ insurance policy with Intact. The appellants were entitled to replacement cost only if they replaced their insured property with a new property of like kind and quality. As they do not propose to do so, they were entitled only to the actual cash value of their insured property,” Laskin added.

A similar B.C. case dating back to 1990, Chemainus Properties Ltd. v. Continental Insurance Co., also involved the owners of a fire-damaged property. They decided to replace the destroyed building with an existing one on another site. The judge in that case granted the owners the replacement cost even though the replacement was not constructed with “materials of like kind and quality.”

Laskin ruled the issue was indistinguishable from the Ottawa case, but rejected the B.C. judge’s approach in Chemainus.

“I do not agree with his interpretation. I think it is at odds with the plain and ordinary meaning of the definition in the appellants’ policy. And although interpreting similar insurance provisions consistently is desirable, I do not feel bound to follow a trial decision, which was given a quarter of a century ago and has never received appellate approval,” he wrote.

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