Pereira v. Hamilton Township Farmers' Mutual Fire Insurance Company, 2006 CanLII 12284 (ON CA)

DATE: 20060419

COURT OF APPEAL FOR ONTARIO

DOHERTY, BORINS and LAFORME JJ.A.

DOCKET: C40457

B E T W E E N :

ADELIA PEREIRA

Earl A. Cherniak Q.C., Kirk F. Stevens

Plaintiff

for Hamilton Township Farmers’

(Respondent)

Mutual Fire Insurance Company

• and -

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Alfred M. Kwinter and Jason D. Singer for Adelia Pereira, Frank Mazza,

1018202 Ontario Limited,

Defendant (Appellant)

Brian Fitzpatrick and Nina Fitzpatrick

A N D B E T W E E N :

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Plaintiff by Counterclaim (Appellant)

• and -

ADELIA PEREIRA, MARCO PEREIRA, MARIO PEREIRA, FRANK MAZZA and 1018202 ONTARIO LIMITED

Defendants by Counterclaim (Respondents)

A N D B E T W E E N :

DOCKET: C40458

B E T W E E N :

FRANK MAZZA

Plaintiff (Respondent)

• and -

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Defendant (Appellant)

A N D B E T W E E N :

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Plaintiff by Counterclaim (Appellant)

• and -

ADELIA PEREIRA, MARCO PEREIRA, MARIO PEREIRA, FRANK MAZZA and 1018202 ONTARIO LIMITED

Defendants by Counterclaim (Respondents)

A N D B E T W E E N :

DOCKET: C40459

B E T W E E N :

1018202 ONTARIO LIMITED, BRIAN FITZPATRICK and NINA FITZPATRICK

Plaintiffs (Respondents)

• and -

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Defendant (Appellant)

A N D B E T W E E N :

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Plaintiff by Counterclaim (Appellant)

• and -

ADELIA PEREIRA, MARCO PEREIRA, MARIO PEREIRA, FRANK MAZZA and 1018202 ONTARIO LIMITED

Defendants by Counterclaim (Respondents)

A N D B E T W E E N :

DOCKET: C42372

B E T W E E N :

FRANK MAZZA

Plaintiff (Appellant)

• and -

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Defendant (Respondent)

A N D B E T W E E N :

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Plaintiff by Counterclaim (Respondent)

• and -

ADELIA PEREIRA, MARCO PEREIRA, MARIO PEREIRA, FRANK MAZZA and 1018202 ONTARIO LIMITED

Defendants by Counterclaim (Appellants)

A N D B E T W E E N :

DOCKET: C42373

B E T W E E N :

1018202 ONTARIO LIMITED, BRIAN FITZPATRICK and NINA FITZPATRICK

Plaintiffs (Appellants)

• and -

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Defendant (Respondent)

A N D B E T W E E N :

HAMILTON TOWNSHIP FARMERS’ MUTUAL FIRE INSURANCE COMPANY

Plaintiff by Counterclaim (Respondent)

• and -

ADELIA PEREIRA, MARCO PEREIRA, MARIO PEREIRA, FRANK MAZZA and 1018202 ONTARIO LIMITED

Defendants by Counterclaim (Appellants)

HEARD: October 19 and 20, 2005

On appeal from the judgment of Justice C. Anne Tucker of the Superior Court of Justice dated July 16, 2003, sitting with a jury.

BORINS J.A.:

I

1This is an appeal by Hamilton Township Farmers’ Mutual Insurance Company (“the insurer” or “the appellant”) from the judgment of Tucker J. dated July 16, 2003, entered in conformity with the jury’s answers to 12 questions in three actions that were tried together. The actions are in respect of insurance claims arising from a fire on August 13, 1993 that destroyed an industrial building and two residential units located on its second storey. The insurer also appeals from the trial judge’s ruling of August 12, 2004 in which she awarded the plaintiffs a risk premium of $250,000 in respect of solicitor’s fees. Further, the insurer appeals from the trial judge’s ruling of September 15, 2004, together with her ruling of August 12, 2004 (reported at [2004] O.J. No. 3335) requiring it to pay as part of the respondents’ disbursements the contingency fee of National Fire Adjusters in the amount of $31,281.25. National Fire Adjusters had entered into an agreement with the respondents to be paid a percentage of amounts “recovered” from the insurer. Two of the insured, Frank Mazza (“Mazza”) and 1018202 Ontario Limited (“1018202”) cross‑appeal from the trial judge’s ruling refusing their request to amend their statement of claim to assert a claim for damages for breach of contract to conform with the jury’s award of $1,200,000 for loss of income.

2The plaintiffs in the first action were 1018202, the owner of the insured building, its president, Brian Fitzpatrick, and his wife Nina, a director of the company. In the second action, the plaintiff was Mazza, a principal of 1018202 and an occupant of one of the residential apartments. The plaintiff in the third action was Adelia Pereira (“Pereira”) who, with her sons Mario and Marco, occupied the other apartment. As part of the commercial coverage provided for 1018202, the insurer had issued “tenant packages” to Mazza and Pereira for the contents of their apartments (for ease of reference, I will refer to 1018202, the Fitzpatricks, Mazza, and Pereira collectively as “the respondents”).

3The judgments award damages and costs, exclusive of interest, in favour of the plaintiffs as follows:

(a) damages of $274,617 for failing to indemnify 1018202 for the loss of its building and losses related to its business;¹

(b) damages of $19,000 to Mazza for the loss of the contents of his apartment and for his expenses;

(c) damages of $31,920 to Pereira for the loss of the contents of her apartment and for her expenses;

(d) damages for loss of income to 1018202 in the amount of $150,000, which is the limit provided by the insurance policy, but which were assessed by the jury at $1,200,000;

(e) punitive damages in the amount of $2,000,000 to Mazza, as assessed by the jury;

(f) punitive damages in the amount of $500,000 to Pereira, as assessed by the jury; and,

(g) costs in the total amount of $802,368.87, inclusive of disbursements and GST, which includes $250,000 as a premium for risk assumed by the plaintiffs’ counsel and the $31,281.25 contingency fee of National Fire Adjusters Inc., the public adjuster hired by the plaintiffs to prepare and advance their insurance claim.

4In her ruling of August 12, 2004, in addition to dealing with costs and interest, the trial judge:

(a) dismissed 1018202’s motion to amend the statement of claim in the first action to increase the claim for loss of profits from $150,000, which is the limit under the insurance policy, to claim damages for breach of contract in the amount of $1,200,000, which is the amount assessed by the jury for loss of income; and,

(b) granted leave to Mazza and Pereira to amend their claims for punitive damages to claim $2,000,000 and $500,000, respectively, to conform with the jury’s award of punitive damages in these amounts.²

As I have indicated, 1018202 and Mazza have appealed ruling (a). The insurer has appealed ruling (b).

5The insurer appeals on the following grounds.

(1) That the jury was misdirected in respect of Statutory Condition 1, which concerns misrepresentations by an applicant for insurance.

(2) That the jury was misdirected in respect of the “shut down” exclusion in the insurance policy.

(3) That, pursuant to Statutory Condition 7, wilfully false statements in the insureds’ Proof of Loss forms vitiated the claims of the insureds on behalf of whom the statements were made.

(4) That there was no evidence that 1018202 had sustained a business or income loss in its mushroom growing business.

(5) That there was no basis on which the jury could award punitive damages in favour of Mazza and Pereira.

(6) In the alternative, that the quantum of punitive damages awarded by the jury was irrational and excessive.

61018202 and Mazza cross‑appeal from the trial judge’s refusal to amend their statement of claim to assert a claim for damages for breach of contract in the amount of $1,200,000 to conform with the jury’s award for loss of profit on the ground that their statement of claim is broad enough to support such an award.

7The insurer seeks leave to appeal two elements of the costs award. The insurer claims, first, that the trial judge erred in awarding the plaintiffs’ lawyer a risk premium of $250,000.³ The second allegation is that the trial judge erred in holding that the contingency fee of $31,281.25 paid by the plaintiffs to National Fire Adjusters was a proper disbursement and, therefore, payable by the insurer.

8For the reasons that follow, I would allow the appeal and order a new trial. In my view, the trial judge misdirected the jury in respect of the misrepresentation defence. The appellant has not, however, persuaded me that a properly-instructed jury would inevitably have found in its favour and that this court should therefore substitute a verdict in favour of the appellant. Nor am I persuaded that the misdirection occasioned no substantial wrong or miscarriage of justice which would render harmless the trial judge’s error. Consequently, a new trial is required. The errors in the instructions on the misrepresentation were compounded by further misdirection and non-direction in respect of the shut down exclusion clause. To the extent necessary, I also rely on these errors in ordering a new trial.

9While it is not strictly necessary to do so, I will comment on the other grounds of appeal and on the cross-appeal. The upshot of this discussion is that I see no basis in the claim that the respondents committed fraud in the Proof of Loss forms, that there is no basis for an award of loss of income, and that while it is open to the respondents to again seek punitive damages at the new trial, the quantum of punitive damages awarded by the jury is irrationally high. I therefore suggest that at the new trial, to avoid the possibility of another irrational award of punitive damages, the parties should attempt to agree on a range of punitive damages for the trial judge to leave with the jury.

10This leaves only the respondents’ cross-appeal, which also becomes a moot issue in light of the order for a new trial. The respondents are to be commended for their audacity, but the cross-appeal is completely lacking in substance.

Factual Background

11On August 13, 1993, a fire destroyed the respondents’ commercial building in Flamborough, Ontario. The building had been used as a mushroom growing facility prior to 1991 and was insured by the appellant under a standard commercial loss policy, which included coverage for loss resulting from fire. After having banked premiums for that policy each month since the insurance was placed, the appellant denied the respondents’ claims. To understand the positions taken by each side at trial and on appeal, it is necessary to review in some detail the events that occurred before the fire.

12The building in issue was generally referred to by the parties as a mushroom “farm”, despite the fact that it was not a farm as one typically understands the word but was, rather, an unexceptional commercial building. On the first floor of the building were 12 growing rooms and some other specialized areas used in the growing of mushrooms. The second storey contained a lunchroom and two residential apartments. The respondent Pereira lived in one apartment with her two sons, Marco and Mario. The other apartment was occupied by Mazza and his mother. The entire building was essentially destroyed by the fire.

13The farm’s ownership history is murky and I shall only go as far back as is necessary. Pereira began leasing the farm in April 1990 for $5,000 per month. According to Pereira, the farm generated revenue from the sale of mushrooms of between $25,000 and $30,000 per month between June and November of 1990. However, it is clear that the farm’s finances were shaky. On Pereira’s testimony, this was in part due to the loss of one crop to freezing after her propane supplier failed to deliver the propane she needed. Regardless, there was evidence from Pereira that in late 1990 the Royal Bank instructed her to begin paying rent directly to it because the owner’s mortgage was in arrears. Pereira, herself struggling financially, approached Mazza for help.

14Early in 1991, Mazza incorporated a numbered company and, through it, purchased the farm from the owners. The total purchase price was approximately $435,000, inclusive of the chattels. After taking over the financially strained farm, Mazza enlisted the assistance of the Farm Debt Review Board (“FDRB”). The FDRB helped Mazza stay the farm’s creditors, including Royal Bank, from enforcing their security. This was in July 1991. From that time forward, no mushrooms were grown or sold by the farm due to continued financial difficulties.

15The FDRB stay ended in late 1991, and in March of 1992 the Royal Bank sued Mazza and the numbered company on the mortgage. This began a period of financial manoeuvring by Mazza directed at obtaining clear title to the farm. In November 1992, Mazza reached a settlement with the Royal Bank. The bank obtained a consent judgment against Mazza’s numbered company for $455,808.20 and Mazza agreed either to give vacant possession or to pay the bank $175,000 in return for the bank not enforcing Mazza’s guarantee.

16In January 1993, Mazza’s lawyer approached the bank with a potential buyer for the farm. The bank accepted the offer on January 18, 1993, with the deal set to close on February 10, 1993. The purchaser’s offer was made in trust for a company to be incorporated, which turned out to be the respondent 1018202. What the bank did not know was that 1018202 was run by Fitzpatrick (a close friend of Mazza’s), and that Mazza was the true principal. The deal closed as scheduled on February 10, 1993.

17During this period of financial cat-and-mouse, the farm did not produce any mushrooms. Mazza and Pereira testified that no effort was being put into running it as they did not know whether Mazza would eventually emerge with control of the farm. However, during this time some steps were taken toward eventually operating the farm, including one that is important to this appeal: on May 12 1992, Mazza’s insurance broker, Doug Clarke (“Clarke”), visited the farm with Ed Gregory (“Gregory”). Gregory worked for the appellant and was eventually responsible for placing coverage on the farm. This was about nine months before 1018202 obtained title to the property.

18When Gregory visited the farm, he and Clarke were given a tour of the operations by Mazza and Pereira. The mushroom growing process was explained to Gregory. Gregory then prepared a “Loss Control Narrative Report” dated May 13, 1992, in which he noted that Pereira had all of the licences necessary for handling the chemicals required to grow mushrooms, that all of the farm’s stock would be shipped to a Montreal distributor, and that the farm was at that time shut down for renovations and repairs. Gregory’s report indicated that Mazza and Pereira expected to be back in production within 30 days.

19The nature of the representations made during this meeting were in issue at trial and on appeal. Gregory’s evidence was that Mazza and Pereira had told him that they expected to be back in production in 30 days. He acknowledged on cross-examination that he did not know how long the farm had been out of production and that he did not ask for this information. Mazza testified that he had no idea where Gregory would get the idea that, in May 1992, the farm was 30 days from growing mushrooms.

20Regardless of the state of the business as of the May 1992 attendance by Gregory, insurance would not be required until Mazza had regained control of the farm which, as noted above, did not occur until February 10, 1993. On that date, Clarke telephoned H.T. Roughley Ltd. (“Roughley”), the insurer’s agent in Mazza’s area. Clarke spoke with Kim Thompson (“Thompson”) of Roughley, who then contacted Gregory to determine whether the appellant would insure the farm.

21Thompson testified that Clarke had told her that the respondents had “just finally got back into business” and that insurance was required. Thompson passed the details of this discussion on to Gregory, and forwarded to Gregory a copy of his own Loss Control Narrative Report from May 1992. The appellant then agreed to insure the farm based on the representation obtained by Thompson from Clarke and on Gregory’s May 1992 report. Coverage commenced on February 10, 1993. It is the policies entered into at that time under which the respondents claimed after the fire and in respect of which the appellant denied coverage.

22It is not in dispute that no mushrooms were grown between February 10, 1993 and August 13, 1993, the date of the fire. Where the parties disagree (vehemently) is on the question of how the events occurring during that period should be characterized. The appellant says that the activity (or lack thereof) on the farm demonstrates that it was completely shut down, with Mazza performing only minor repairs to the general premises consistent with maintaining the value of the property. The respondents point to evidence that they say indicates that the farm was being prepared to grow mushrooms and shows the farm to have been “in business.” It is helpful to review the evidence put forward by each side to support its position.

23The appellant insurer relies primarily on the fact that the farm never grew a single mushroom in the period from February 1993 to August 1993. Importantly, says the appellant, the compost that would be required to grow mushrooms had not even been ordered as of the date of the fire. In addition, the farm had no employees in 1993 and the respondents produced no operating or bank records for the relevant months.

24In his testimony, Mazza pointed to a litany of tasks undertaken that were designed to ready the farm, including replacing the roof, changing the pumps and boilers, emptying the growing rooms and disposing of the old compost, repairing the roof vents that serviced the growing rooms, repairing the air compressor that serviced the “spawn room” and directing Pereira and her sons to fix the old mushroom trays and to build new ones. Mazza also stated that he had found a mushroom buyer in Montreal. Pereira, her sons, and Fitzpatrick corroborated Mazza’s testimony about the work being done on the farm to ready it for growing a mushroom crop.

25The respondents also provided expert opinion evidence from Dr. Ronald Pitblado of the University of Guelph. Dr. Pitblado stated that Mazza was building the proper drainage system for growing mushrooms and that the steps being taken were consistent with having a crop ready for the Christmas 1993 market (which the respondents maintained was their production target). Ultimately, Dr. Pitblado’s expert opinion was that the “facility was being prepared to grow mushrooms.”

26This review presents the competing evidence relied on by each side relating to the time period leading up to the fire. I come now to the fire and its investigation.

27The fire started shortly after 2:00 a.m. on Friday, August 13, 1993. At the time, nobody was on the premises. The local fire department arrived at 2:31 a.m., with Captain Brad Patton (“Patton”) the first on the scene. At the time of arrival, Patton found Mazza’s apartment “fully involved” in the fire and that the fire was spreading downwards from the second floor to the mushroom-growing facility on the first floor.

28The appellant investigated and concluded that the fire had been deliberately set. This conclusion was based on evidence that, at least for the appellant, established each arm of the “arson triangle”: physical evidence of arson; motive; and, opportunity. The physical evidence of arson was produced by Patton and Barry Powell, the fire investigator hired by the appellant. While Patton’s first report stated that the cause of the fire was undetermined, he later decided that it was a case of arson. This determination was based on the size of the fire, the smell of gasoline that he detected when he arrived, and the burn patterns indicating multiple points of origin. When Powell investigated on August 19, 1993, he also found evidence that, in his view, supported a finding of arson. This included the burn patterns, which indicated that the fire had burned down from the floor, and evidence that a liquid accelerant had been poured.

29As for motive, the appellant suggested that Mazza was under financial pressure, part of which was being applied by Fitzpatrick (who had put up his home as security for a loan to obtain the money necessary for 1018202 to purchase the farm). The farm was producing no income and the insurance policy limits were substantial. Finally, the appellant suggested that some of the interested parties had the opportunity to set the fire.

30The respondents countered with expert evidence of their own. Dennis Merkley, a former member of the Fire Marshall’s Office, testified that in his opinion, the cause of the fire was undetermined. The respondents also raised questions about Powell’s expertise and impartiality. Both Fitzpatrick and Mazza gave evidence that they had steady incomes at the time of the fire and that no financial pressure was being applied by Fitzpatrick. The respondents denied having any involvement in the fire.

31While the insurer was investigating, the respondents were taking steps to have their claims paid. With the help of his lawyer (who was not trial or appeal counsel), Mazza submitted a Proof of Loss form (a statutory declaration as to loss required by the Insurance Act) in which he claimed for the loss of personal effects. This form was not properly filled out. The respondents eventually hired Robert Watson, a public adjuster with National Fire Adjusters, to assist them in pursuing their claim. A public adjuster is someone who is licensed by the province of Ontario to represent members of the public in first-party insurance claims.

32Watson helped the respondents fill out and file the Proof of Loss forms in respect of their personal belongings, the equipment, and the building itself. Although the building and equipment were covered for only actual cash value (“ACV”), Watson filled out the higher replacement value cost on the forms and left the ACV column blank. His evidence was that he did so not because he was trying to claim the replacement cost, but rather because he was simply putting out a number on which negotiations could proceed; an opening salvo, as it were. He stated that this was a relatively standard practice on his part.

33This practice by Watson led him to file a Proof of Loss in respect of the building in which the respondents claimed $1,200,000 (the maximum amount of coverage provided by the policy). The parties could not agree on the appropriate value for the building and many other items lost in the fire, and so proceeded to the statutory arbitration process. At arbitration, the replacement cost of the building was found to be $201,000. The discrepancy between this figure and the amount claimed led the appellant to allege that the respondents had made fraudulent statements in the Proof of Loss forms, and was one of the reasons that the appellant denied the claims. Formal denial of the claims was communicated to the respondents about ten months after the fire in June 1994. Appellant’s counsel wrote to Watson to inform him that the claim was being denied for several reasons, most importantly that there was evidence of arson, that there had been a material change of risk, and that fraudulent statements had been made in the Proof of Loss forms.

34The respondents then brought the actions that give rise to this appeal. At trial, the insurer relied on six defences, which are briefly set out below.

1. Arson

35I have already outlined the evidence relied on for this defence.

2. Misrepresentation in the insurance application

36This argument was based on the respondents’ statement that they were “back in business”, made by the respondents’ insurance agent to the insurer’s agent on February 10, 1993 when coverage was placed. Section 148 of the Insurance Act implies certain statutory conditions into all fire insurance contracts in Ontario. The insurer asked the jury to conclude that the “back in business” statement was a misrepresentation that breached Statutory Condition 1, which provides:

If a person applying for insurance falsely describes the property to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate any circumstance that is material to be made known to the insurer in order to enable it to judge the risk to be undertaken, the contract is void as to any property in relation to which the misrepresentation or omission is material.

If the jury were to find that the “back in business” statement was a misrepresentation, the claim would be vitiated by operation of this condition.

3. The “shut down” exclusion

37The insurance policy includes what was referred to as a “shut down exclusion.” That provision reads as follows:

PROPERTY EXCLUDED

This Form does not insure loss of or damage to:

(b) property at locations which to the knowledge of the insured, are vacant, unoccupied or shut down for more than thirty (30) consecutive days;

The insurer’s position was that the farm had been shut down for at least the entire period between February 10, 1993 and August 13, 1993 and that any damage to the property was therefore not covered.

4. Fraud in the Proof of Loss forms

38The Proof of Loss forms, as noted above, are statutory declarations and are subject to the provisions of the Insurance Act. Statutory Condition 6 in the Insurance Act sets out what must be included in the Proof of Loss forms. Statutory Condition 7 provides that:

Any fraud or wilfully false statement in a statutory declaration in relation to any of the above particulars, [i.e., those listed in Statutory Condition 6] vitiates the claim of the person making the declaration.

The insurer argued that the Proof of Loss forms filed by Watson sought coverage on a replacement value basis, when in fact the policy provided for coverage on an ACV basis. This, the insurer said, represented a fraudulent or willfully false statement by the insured.

5. Material change in risk

39The insurer also claimed that Mazza had been operating an auto body repair shop on the premises and that this represented a material change in risk. In advancing this position, the insurer relied on the fact that several cars were found at the farm in varying states of repair and on a single invoice found at the scene in the name of “Mazza Auto Body.”

40Every witness who testified for the respondents, including Mazza, stated that there was no auto body repair shop. Mazza explained the presence of the cars by saying that he did some repair work for friends and family as favours, and identified each of the cars as belonging to members of that group of people.

6. Absence of insurable interest in equipment

41As a partial defence, the insurer argued that the equipment was not covered by the policy as there was no evidence that ownership of the equipment had been transferred to 1018202 when Mazza re-acquired the farm in February 1993.

42The insurer also argued that there was no evidence to support the claim for loss of income. In this regard, the respondents cross‑appeal, submitting that the jury’s award of $1,200,000 for loss of income should be given effect.

43Each of the defences described above was rejected by the jury. In addition, the jury assessed damages for loss of income at $1,200,000, though the respondents obtained judgment for only $150,000 because that was the limit in the insurance policy. The evidence on which the jury based its award for loss of income is difficult to understand, particularly as the farm was not actually producing any mushrooms at any time after the policy came into force. The appellant claimed that on Mazza and Pereira’s evidence, the farm would not be ready to produce mushrooms in time for the Christmas 1993 market and it would not have generated any revenue in 1993. The respondents’ expert, Dr. Pitblado, testified that the farm could potentially reach a profit of $277,059 per year when fully operational. Even on Dr. Pitblado’s evidence, the $1,200,000 figure is not supportable.

44The jury also awarded punitive damages to Mazza and Pereira, in the amount of $2,000,000 and $500,000, respectively. An award of that magnitude can only be taken as demonstrating that the jury sided with the respondents in every possible respect.

45Without the benefit of reasons, as we would have if the trial had been conducted by judge alone, I cannot identify with certainty the basis for these awards by the jury. However, it is helpful to review some of the evidence that was put forward on which the punitive damages awards could have been based. I have organized this evidence into three groups: evidence demonstrating that the appellant prejudged the merits of the claims; evidence that the appellant conducted a biased investigation; and, evidence suggesting that at least some of the defences relied on were without merit.

46A letter from appellant’s counsel to the appellant’s adjusters dated August 25, 1993 (just twelve days after the fire) indicated that the matter was “likely to be litigated.” This statement could be taken as an indication that the appellant was not giving the respondents’ claims a fair assessment. Of course, insurance claims are often contentious and a more innocent characterization of the statement could also be accepted by a reasonable trier of fact. Similarly, within one hour of arriving at the scene, the appellant’s fire expert (Powell) concluded that the fire was deliberately set, and it is arguable that thereafter he did not pursue his investigation with any vigour, save for his efforts to find evidence to support this hasty conclusion. These are just two examples of evidence that the respondents point to as suggesting that the appellant prejudged the claims.

47There is also evidence that could be seen as demonstrating that the appellant’s investigation was biased. For example, Powell testified that the fact that the eight samples he took from the building to have analyzed for accelerant produced no conclusive evidence of accelerant did not affect his opinion “one iota” that the fire was deliberately set. Reports prepared by Powell and the appellant’s adjusters evince a similar attitude. Powell stated in one report that Pereira was “known to the local police”, but failed to mention that she was familiar with the police because she often chatted with them at a local coffee shop.

48Some of the defences relied on by the appellant at trial were, on a generous view, less than worthy of the time and attention they received at trial. The appellant’s claims manager admitted that during the ten years between the fire and trial, the appellant had uncovered no evidence that even a single transaction for auto body repair work had ever taken place. The material change in risk defence was nonetheless maintained through to the end of trial. The claim that 1018202 had no insurable interest in the equipment was similarly devoid of a factual foundation.

49The jury obviously considered the arson defence to be spurious. The fact that the physical evidence of arson largely came from Powell, whose expertise and impartiality were open to question, supports the jury’s rejection of the arson defence. In addition, there was no actual evidence of the financial motive that the insurer relied on, save for perhaps a large insurance payout should the claim succeed. Both Mazza and Fitzpatrick testified that Mazza was not experiencing any financial difficulty. This is corroborated by the fact that Mazza continued making mortgage payments after the fire even though he had not received any payment from the insurer, and by Fitzpatrick’s testimony.

50The jury answered each of the 12 questions asked of it in favour of the respondents. It would appear that the jury was sufficiently incensed with the appellant that it awarded very significant compensatory damages and punitive damages in concluding that the appellant was contractually bound by the insurance policy to indemnify the respondents for their losses. Having reviewed the facts underlying the jury’s verdicts, I now turn to the individual grounds of appeal stated in paragraph 5.

Standard of Review

51An appellate court reviewing a trial judge’s charge will not hold the instructions to a standard of perfection: Pietkiewicz v. Sault Ste. Marie District Roman Catholic Separate School Board (2004), 71 O.R. (3d) 803 at para. 19 (C.A.). The reviewing court is concerned less with whether the law was perfectly stated and more with whether the jury would have properly understood the law at the end of the charge.

(1) Misdirection in respect of Statutory Condition 1

52Question number four asked the jury whether the insurer had proved that:

[i]n applying for insurance, Frank Mazza falsely described to the prejudice of [the insurer] or misrepresented or fraudulently omitted to communicate any circumstance that is material to be made known to [the insurer] in order to enable it to judge the risk to be undertaken so as to render the insurance contract void.

53The alleged misrepresentation concerns the statement made on February 10, 1993 by Clarke to Kim Thompson, the Roughley employee, that the respondents had “just finally got back into business.” This statement was then passed on to Gregory. At trial, the appellant claimed that the respondents were not in business at that time, or any time thereafter. Accordingly, the statement amounted to a misrepresentation in the application for insurance and, pursuant to Statutory Condition 1 (see paragraph 36, supra), vitiated the contract.

54The appellant claims that the trial judge’s instructions on this issue would have left the jury with the following impressions, each of which is wrong in law: that an element of dishonesty was required to find a misrepresentation; that the insurer had an obligation to investigate any representation; and, that the statement by Clarke was not necessarily attributable to the respondents. The appellant contended that none of these possibilities accurately reflect the law of misrepresentations in applications for insurance.

55The instructions on the misrepresentation defence are not long, and I will reproduce them virtually in their entirety here:

Misrepresentation can be innocent or fraudulent. The first can void a contract if it is a term of the contract while fraudulent misrepresentation is a representation of the facts without any belief in the truth with the intent that any party to whom it is made will act upon it. The representation must be made to the insurance company, they must be false in fact and they must involve a person who is doing the misrepresentation knowing that they are false. As a result of the misrepresentation a contract is made. An innocent misrepresentation would be similar to where the party making it was unaware that what he said was untrue.

The position of the defendant insurer is that in May of 1992, Frank Mazza falsely described the mushroom farm as an ongoing mushroom operation, information of which was included in a loss narrative report, completed by Mr. Gregory, the underwriter, and used as a basis for the defendant to offer insurance. Given the obligation on the part of the insured to advise the insurer about the risk, it is their position on the evidence that there was a misrepresentation…

Further, their argument is that this misrepresentation continued when the broker for Mr. Mazza advised Farmers’ Mutual the following spring in 1993 that they were back in business, again making a false statement in their argument.

Further, the plaintiff’s position is that if a factor is relevant to the insurer, it is important that the person understands the risk. If it is therefore important and they need to ask questions or at least advise the insured about what is relevant. In this case they did not do so.

The defendant insurance company states that this obligation rests with Mr. Clarke, the broker for the insured, and in law it is the insured that has the duty to fully inform the insurance company.

The plaintiff further takes the position that it is the failure of Mr. Gregory to complete a proper field investigation that resulted in the misunderstanding or misinformation of the insurance company [emphasis added].

56I agree that the trial judge made the three errors alleged by the appellant, and I will deal with each of them in turn. I will also address what I consider to be two related errors.

57The first error advanced by the appellant is that the instructions may have left the jury with the impression that some element of dishonesty or intention to mislead was required before a misrepresentation would be established. Not only is this wrong in law, but it also confused the issue that the jury had to decide.

58The discussion of fraudulent omissions was unnecessary because it was no part of the appellant’s case that the respondents had made a fraudulent misrepresentation, either by omission or positive statement. It was also wrong in law, because Statutory Condition 1 is engaged by innocent misrepresentations (where, as here, the representation alleged is a positive statement). No element of fraud or deceit need be shown in such circumstances: see Lyons v. Gore Mutual Insurance Co. (2000), 51 O.R. (3d) 528 at 536-540 (S.C.J.).

59Question four presented a misrepresentation and a fraudulent omission as two distinct possibilities. The trial judge’s charge significantly conflated the two. This represents the first error in this section of the instructions.

60Second, the appellant argued that the trial judge erred in allowing the respondents’ suggestion that there might be an obligation on the insurer to conduct a “proper” field investigation to go to the jury. I agree. This position is wrong in law, and the trial judge should have instructed the jury accordingly.

61The respondents say that such a duty does exist, and rely on Ipapo Estate v. Citadel Life Insurance Co. (1989), 57 Man. R. (2d) 272 (C.A.) for the proposition that an insurance company has a duty to investigate representations made in the application for insurance where the circumstances disclose a need to do so. Except for the limited exceptions reflected in the jurisprudence on this issue and identified below, I reject this submission.

62In Silva v. Sizoo, [1997] O.J. No. 4910 (S.C.J.), Lane J., in his usual careful and thorough manner, canvassed the jurisprudence on this issue and at para. 97 drew the following conclusion, which I take to be a correct statement of the law:

“In summary, these cases show that the rule that insureds are bound to disclose all material facts on pain of having the policy avoided is alive and well. It is, as it always has been, subject to some exceptions. An insured need not disclose what the insurer actually knows, nor that which is so notorious in the industry or place concerned that any competent underwriter in the field would know it. There is a duty on an insurer not to close his eyes to the obvious, to that which is tantamount to notice; and not to refrain from asking because he prefers not to know the answer to a question which stares him in the face. There may be others, I do not pretend to be exhaustive. But there is no general duty owed by an underwriter to an applicant for coverage to conduct a reasonable investigation or otherwise to act as a reasonably competent underwriter. “Plaintiff may not shift the burden of truthfulness which was upon the insured into a burden of distrust and additional inquiry on the part of the defendant” [emphasis added, citations omitted].

63Here, there were no circumstances that disclosed a need to make further inquiry. Gregory had been to visit the farm nine months prior to placing coverage. The respondents had at that time explained to him how the farm would operate when in business. On February 10, 1993 the respondents’ agent stated that the farm had “just finally got back in business.” The appellant was entitled to rely on this statement, particularly because it came from an insurance agent, who would have known that the status of the farm was important. The respondents cannot be heard to say ‘I may have been wrong, but you should have checked’. The failure to close off this possibility for the jury is the second error in the instructions.

64In a similar vein, the trial judge also put to the jury the respondents’ position that Mazza did not know that the status of the business was relevant and that the insurer had a duty to inform the applicant about what information was or was not relevant and material during the application process. This position was also wrong in law and on the facts. As such, it should not have been part of the instruction to the jury.

65The duty of utmost good faith between parties to an insurance contract requires the applicant to disclose all material facts to the insurer. A fact will be material where, if properly disclosed, it would influence a reasonable insurer either to decline the risk or to accept a different risk, e.g., to charge a higher premium: Ontario Metal Products Co. v. Mutual Life Insurance Co. of New York, [1925] 1 D.L.R. 583 (J.C. P.C.); Brown and Menezes, Insurance Law in Canada, 2nd ed. (Toronto: Carswell, 1991) at 93.

66Here, there is no doubt that the fact was material, and that Mazza was aware of that it was material. The insurance contract contained the shut down exclusion reproduced at paragraph 37, supra. This demonstrates that the state of the business was material to the appellant. Mazza had been through the insurance contract with his agent Clarke. In addition, it was Clarke who made the “back in business” statement. As an insurance broker, Clarke would have understood that the state of the business was material to the appellant.

67The third error alleged by the appellant is that the trial judge failed to instruct the jury that the statement by Clarke was attributed by law to the respondents. Again, I accept the appellant’s argument. Question four (reproduced above), asks whether Frank Mazza made any misrepresentations in his application for insurance. The jury should have been instructed, as a matter of law, that any statement by Mazza’s agent (Clarke) was attributable to Mazza.

68The final error that I would identify is that the trial judge failed to provide a clear picture to the jury of what they must determine in order to decide the misrepresentation issue. The issues were: whether the representation “back in business” was made; whether, if made, it was attributable to the respondents; whether the statement was false in fact; and, whether the representation was material to the insurer’s decision to provide coverage.

69This oversight reflects a broad problem with the jury charge: the trial judge’s instructions did not respect the proper roles of judge and jury. The instructions consistently left the jury to decide competing legal propositions put forward by the parties. Questions of law fall solely within the purview of the judge; they cannot be left for the jury to determine: Martin v. Deutch, [1943] O.R. 683 at 694 (C.A.), rev’d on other grounds, 1943 9 (SCC), [1943] S.C.R. 366; see also R. v. Finta (1992), 73 C.C.C. (3d) 65 at 154-55 and 173 (Ont. C.A.), aff’d 1994 129 (SCC), [1994] 1 S.C.R. 701.

70By way of example, I point to the issue of whether an insurer has an obligation to investigate the representations made by an applicant for insurance. The general rule, as I have explained, is that there is no such obligation. As is often the case in the common law, there are exceptions. These exceptions can potentially complicate matters. It was incumbent upon the trial judge to distill the law and explain it to the jury in a clear, understandable manner. A reading of the instructions in this case demonstrates that this jury was ill-equipped to serve its important function as trier of fact.

71I have identified the errors with the trial judge’s instructions on Statutory Condition 1. I must now consider the effect of the errors.

The Appropriate Remedy

72The appellant sought to establish that a properly instructed jury could only come to the conclusion that there had been a misrepresentation and that a verdict in favour of the appellant should therefore be substituted for the result at trial. In the alternative, it was suggested that the jury could have reached a different verdict if they had been properly instructed, and that a new trial was therefore required.

73The governing legislative provision is found in s. 134 of the Courts of Justice Act, R.S.O. 1990, c. C.43, which sets out the powers of a court to which an appeal is taken. Section 134(1)(a) empowers the court to make any order or decision that could or ought to have been made by the court below. Section 134(1)(b) provides the court with the power to order a new trial. Subsection 134(6) qualifies this power as follows:

A court to which an appeal is taken shall not direct a new trial unless some substantial wrong or miscarriage of justice has occurred.

74It must therefore be determined whether the misdirection in respect to Statutory Condition 1 occasioned a “substantial wrong or miscarriage of justice.”

75To obtain a new trial, it will generally not be sufficient for an appellant to demonstrate simply that it was open to the jury on the evidence to reach a different result. Something more than that is required. An appellant may demonstrate that the case was not fairly put to the jury, as, for example, where the charge leaves the jury with a misapprehension as to the applicable legal principles: Brochu v. Pond (2002), 62 O.R. (3d) 722 (C.A.).

76An appellant may also show that the charge was “materially deficient” (Brochu, supra at para. 68) or that the law was not clearly stated on a critical issue: see Mizzi v. Hopkins (2003), 64 O.R. (3d) 365 at para. 42 (C.A.). This follows from the trial judge’s duty to provide the jury with a clear and complete explanation of the law sufficient to allow the jury to discharge its responsibility as judge of the facts.

77In this case, trial counsel for the appellant (who was not counsel for the appellant on appeal) failed to object to the charge on any of the points now advanced on appeal. This tells strongly against the appellant’s request for a new trial: Marshall v. Watson Wyatt & Co. (2002), 209 D.L.R. (4th) 411 at para. 15 (Ont. C.A.). However, the failure to object will not be fatal where the error bears directly on the jury’s central task: Mizzi, supra at para. 50.

78At the end of the trial judge’s instructions on the misrepresentation defence, the jury could well have believed that it had no fewer than five separate avenues by which to find in favour of the plaintiffs:

• there was no fraudulent intent in making the “back in business” statement;
• the insurer had failed to conduct a proper field investigation;
• the statement was made by Clarke, not Mazza;
• the insurer had failed to tell Mazza that the status of the business was material to the risk being assumed; or,
• the statement was true, because the farm was in fact “back in business.”

79On the trial judge’s instructions, the jury could have found against the insurer on the issues relating to Statutory Condition 1 by following any one of these five avenues. As I have indicated, the first four possibilities were not available in law. It seems likely that the jury may well have proceeded along one of these four paths, as each presented a straightforward route to a finding against the insurer that did not require the jury to examine the conflicting and controversial evidence relating to whether the respondents were back in business on February 10, 1993. I say this because the jury was obviously totally unimpressed by the appellant insurer, as is clear from the answers to the questions and the quantum of punitive damages awarded. A clear and complete instruction would have communicated to the jury that the only live issue between the parties in respect to Question 4 was whether the representation was true.

80Even if I assume that the jury decided the Statutory Condition 1 issues by following the only correct legal route available and believed the respondents’ evidence, it still cannot be said that a properly instructed jury would have decided the case in the respondents’ favour. The truth of the representation had to be determined as of when it was made. The respondents’ evidence of steps taken after February 10, 1993 to prepare the farm for growing mushrooms could lead a properly instructed jury to conclude that the respondents’ were not in business as of the date the insurance was placed.

81I liken the effect of the errors in this case to that in Pietkiewicz, supra. The plaintiff in that case sued the defendant for defamation. One issue that arose at trial was whether the alleged defamatory statements referred to one set of earlier statements by the plaintiff, or another. On appeal, this court held that the trial judge’s charge restricted the jury’s proper consideration of this important issue. The result of the deficient instruction was described by the court at paras. 20-21:

The substantial wrong that occurred here is that the context in which the trial judge placed the words complained of, for the purpose of the jury determining their truth, unfairly portrayed the potential meaning of those words. That in turn unfairly restricted the jury's assessment of whether the words complained of were true.

In essence, the jurors were not given the opportunity to perform the judicial duty assigned to them. This is not one of those cases where we can conclude that this error was harmless and did not cause prejudice to the appellant [emphasis added].

82The situation here mirrors that in Pietkiewicz, supra. There, the jury’s consideration of an important issue was unduly restricted. Here, the jury was put in the opposite position: it was left with far too many options in light of the governing law. In both cases, the critical result is that the jury was deprived of the ability to perform “the judicial duty assigned to them.”

83In addition to these problems, the trial judge’s instructions, as I have noted, failed to set out for the jury the points that it had to determine in order to resolve the misrepresentation issue. The failure to provide this framework to the jury, in conjunction with the failure to resolve the other legal issues for them, renders the charge “materially deficient.” The issue was very simple – whether or not the representation was true. Unfortunately, as I have explained, the trial judge’s instructions unnecessarily confused and complicated the jury’s determination of this issue.

84These errors were clearly significant. The instructions provided the jury with many easy ways that they could do an end run around Statutory Condition 1, without having to consider the competing evidence relating to the status of the mushroom farm as of February 10, 1993. The instructions led to a substantial wrong or miscarriage of justice. This, of course, precludes the application of s. 134(1)(a) of the Courts of Justice Act. Accordingly, a new trial must be ordered.

(2) The Shut Down Exclusion Clause

85Much of the above analysis also applies to the appellant’s position that there was also misdirection in respect to the shut down exclusion clause. Specifically, the distinct functions of judge and jury, the appropriate standard of review for a trial judge’s charge, and trial counsel’s failure to object to the instructions are relevant here. The shut down exclusion clause, reproduced at paragraph 37, excluded from coverage loss of or damage to property at locations that had been “shut down” for more than thirty consecutive days.

86Here again, the language of the charge must be examined in order to address the appellant’s complaint. After reviewing the evidence that the appellant said established that the farm had been shut down, and before summarizing the respondents’ position, the trial judge made the following comments to the jury:

Mr. Kwinter [counsel for the respondents] talked to you briefly about the contra proferentem rule, so I will explain it to you. The basic gist of this rule is that if you draft a document it will, if found to be ambiguous, be interpreted against you. Accordingly, if you find that in this context on this policy the word “shutdown” is ambiguous, you may interpret it against the writer, which in this case would be the insurance policy [sic].

87The appellant’s argument before this court was that the trial judge ought to have resolved any issue concerning the construction of the shut down clause, including the issue of whether the term was ambiguous and whether the contra proferentem rule should apply. This would leave the jury to apply the legally appropriate construction to the evidence given by the parties of the farm’s operations.

88The appellant is correct in arguing that the instructions on this defence were in error. The interpretation of a contract is a question of law: Algoma Steel Corp. v. Allendale Mutual Insurance Co. (1990), 72 O.R. (2d) 782 at 785 (C.A.), leave to appeal to S.C.C. refused, [1991] 1 S.C.R. v. It is for the judge to determine and resolve the proper interpretation for the jury. The application of contra proferentem is a principle of contractual interpretation: Stelco Inc. v. Royal Insurance Co. of Canada (1997), 34 O.R. (3d) 263 at 274-75 (C.A.). As such, it is also a question of law.

89Whether the term “shut down” is ambiguous is not a question that could be put to the jury. The same can be said of the potential application of the contra proferentem rule. The trial judge erred in law in instructing the jury as she did. She should, as a matter of law, have interpreted the phrase “shut down for more than thirty (30) consecutive days” contained in the exclusion clause, instructed the jury on that interpretation, and told the jury that it was to decide on the evidence whether the farming operation was in fact shut down.

90The instructions that were provided would have given the jury little help in its decision on the shut down defence. Having been told that they could interpret the contract against the insurance company, the jury may simply have done so without giving due consideration to the competing evidence.

91I have already found that a new trial is required because of the misdirection and non-direction in respect of the misrepresentation defence. Though not strictly necessary, I rely on the errors in respect to the shut down exclusion clause to support this finding.

(3) Fraud in the Proof of Loss Statements

92As noted in paragraph 38, supra, the appellant alleged at trial that the respondents’ insurance adjuster, Watson, committed fraud when he used replacement value in the Proof of Loss forms while the policy only provided coverage on an ACV basis. On appeal, it was put to this court that the trial judge erred in her instructions on this defence. Specifically, the appellant says that the trial judge erred in putting to the jury the respondents’ position that the amount claimed simply represented a starting point in the negotiations, rather than the amount actually sought. This, the appellant urges, is wrong in law and, therefore, should not have been put to the jury.

93I turn to the Proof of Loss statement itself, which is alleged to be fraudulent. The amount claimed in respect of the building was $1,200,000. In contrast, the statutory appraisal process resulted in an ACV figure for the building of approximately $200,000. The appellant argues that Watson claimed the greater sum even though he knew that the actual cash value of a building that was thirty years old would be subject to a substantial discount from its replacement cost to account for depreciation.

94Watson’s testimony was that he knew the policy provided only for ACV coverage for the building (the tenants’ policies, in contrast, provided replacement cost coverage for the contents of the apartments). His explanation for using the replacement cost was that the amount claimed was simply an opening salvo in negotiating how much the respondents would receive under the policy. According to Watson, this was a relatively standard practice for him when he was acting for insured parties in negotiations with insurance companies.

95Watson stated in both direct and cross-examination that he did not at any time intend to mislead, deceive, or defraud the appellant. Rather, he was simply acting on behalf of his client in an effort to secure payment under the policy. One may question the manner in which this type of insurance negotiation is conducted. However, Watson’s claim that he did not have any fraudulent intent finds some support in the evidence. The Proof of Loss form contains a column in which the insured is to write the actual cash value of the lost property. In this instance, Watson intentionally left that column blank. He did not misleadingly state that the replacement cost was the actual cash value, but rather claimed the maximum amount possible. His decision to leave the actual cash value column blank could be taken as corroborating his assertion that he had no fraudulent intent.

96All of this provides the background for the trial judge’s charge, which the appellant says is in error. I will reproduce the relevant portion of the instructions on this defence:

The defendants must establish…that the plaintiffs wilfully or purposely gave a false statement or a fraudulent statement. Given the statutory conditions, if you so find, the claim of the plaintiff is vitiated or lost. I need not explain fraud to you in great detail as you all have common knowledge of the same, but in effect it is to use deceit to obtain a benefit or try to gain a benefit.

In terms of the numbered company’s claim as to the total loss of approximately $1,500,000 it is the defendant’s position that the amount claimed is replacement cost, which was given while it was an actual cash value policy, and this makes the amount claimed a fraudulent statement sufficient to vitiate the claim.

The plaintiff’s position, and he states that the public adjuster, Mr. Watson, gave evidence that he always inserts such a value, knowing that the insurance company never pays more than is claimed and the actual cash value is not a science, as there are a number of ways to arrive at it, one being replacement cost less depreciation. It is also their position that the matter would be determined on an appraisal with full information and therefore there is no detriment to the insured. Accordingly, the plaintiff’s position is that this was not a false statement but the best and highest estimate with which to begin discussions.

97The appellant’s ability to succeed on this ground of appeal rests on the proposition that where the insured makes a statement in the Proof of Loss form that he or she knows to be false, this results in a breach of Statutory Condition 7 and the claim is vitiated. On this argument, it is no answer to say that the insured never intended to mislead the insurer. Unfortunately for the appellant, that is not the law.

98As a general statement of law, fraud requires some form of intention to mislead or deceive: see Gregory v. Jolley (2001), 201 D.L.R. (4th) 729 at para. 15 (Ont. C.A.), application for leave to appeal dismissed, [2001] S.C.C.A. No. 460. This requirement applies to the Proof of Loss forms and Statutory Condition 7.

99In Credit Foncier v. Halifax Insurance Company (1985), 67 N.S.R. (2d) 142 (C.A.), the Nova Scotia Court of Appeal dealt with a claim of fraud in a Proof of Loss statement. The insurer relied upon a statutory condition that is effectively the same as Statutory Condition 7 in the present appeal. While the court in that case upheld the trial judge’s ruling that fraud had been committed, Morrison J.A. (for the Court) stated the following at p. 152:

I am compelled to say, however, that in a case such as this where a claim made by Proof of Loss is excessive, that there must be strong evidence to support any finding of fraud. I doubt that there are many Proofs of Loss filed in insurance claims that are exactly accurate. Some leeway must be made in allowing for puffery or establishing a negotiating position. When it is determined that the claimant is indeed indulging only in puffery or in attempting to establish a negotiating position fraud should not be imputed to the claimant. As pointed out in the Short v. Guardian Insurance case, supra, the burden on the insurance company to establish fraud is a heavy one and great care should be taken by the court before finding any claimant guilty of fraud as a result of the contents of the Proof of Loss form alone [emphasis added].

100While the trial judge’s instructions were not as clear as one might hope, the statement of the law that can be discerned from the charge is correct. Fraudulent intent is required to establish a breach of Statutory Condition 7. It was therefore open to the jury to reject this defence if it believed that the respondents were not intending to mislead or deceive the appellant in the Proof of Loss.

101Watson’s testimony provides an evidentiary basis on which the jury could reach this conclusion. It is clear from the jury’s answer to Question 3 that the jury accepted Watson’s evidence that the Proof of Loss, although a statutory declaration made under oath, was used simply an opening salvo in the negotiation process. As I have said, it was open to the jury to do so, and this finding is not subject to attack on appeal. The trial judge did not err in her instructions to the jury, and this ground of appeal is accordingly rejected.

(4) Loss of Profits Award

102Question number 9 required to the jury to “assess the claim of the insured 1018202 Ontario Limited for lost profit.” The jury answered with a figure of $1,200,000.00. No reasoning was asked for in the question, and none was provided. As I will explain, this amount is totally unsupported by the evidence. In its answer to this question, the jury must be seen to have acted perversely. The appellant must therefore succeed on this ground of appeal, with the result that I would set aside paragraph 7 of the judgment awarding 1018202 damages for loss of income of $150,000.

103The trial judge’s charge on this question began with a caution to the jury that the plaintiff bore the onus of proving its damages on a balance of probabilities. The trial judge continued as follows:

The plaintiff claims lost profit and bases his quantum of claim on the assessment of Doctor Pitblado. Doctor Pitblado gave testimony that profit could be made based on the information with which he was provided from Adelia Pereira and Frank Mazza at $277,000 a year. As Mr. Kwinter pointed out to you, the limit of the coverage on the insurance policy was $150,000. You may, if you deem it appropriate, assess more than that, but the company is not obligated to pay a greater amount than that level of coverage.

The plaintiff’s position is that the farm was almost ready to operate and it may have had profits, although he acknowledges it may not have had profits as well.

The defendant’s position is that the farm was in a downward spiral, had lost money and that both Doctor Rinker and Mr. Agro [on behalf of the defendant] gave testimony that improvements and investments were required to increase the yield and in these circumstances there was no reasonable expectation of profit.

You must review the evidence in this area and make your determination on all the facts and assess, if appropriate, an amount that you feel is warranted in these circumstances.

104As noted by the trial judge in her summary, the respondents relied at trial on the evidence of Dr. Pitblado to support their claim for loss of profits. Dr. Pitblado did suggest that the farm was capable of producing an annual profit of $277,000 when fully operational. Relying on this opinion, the respondents’ position (as summarized by the trial judge) was that the farm may have had profits, and it may not have.

105Dr. Pitblado was testifying as an expert in mushroom farming, not an expert in accounting or financial analysis. Although it appears that the appellant did not object to Dr. Pitblado’s opinion, his estimate of the profits to be made should not be seen as cloaked with the authority that would be given to the expert opinion of an accountant. In addition, the estimate of profits was entirely speculative. The figure Dr. Pitblado gave was based on the profits that might be achieved if the farm was operating at full capacity.

106In stark contrast to this speculation from Dr. Pitblado stands the evidence that the farm had not produced a single mushroom since before Mazza re-acquired it in February 1993. As the appellant argued on appeal, the compost required to grow mushrooms had not been ordered as of the date of the fire. The farm had not realized one cent of income at any relevant time.

107In the face of this circumstance, there was simply no basis on which the jury could award the respondents any amount for loss of income. Regardless of whether the farm had been destroyed by the fire, on the record before this court there was no likelihood that it would produce income, resulting in a profit, in the foreseeable future. In assessing the claim for loss of profits at $1,200,000.00, the jury perverted the evidence adduced at trial. Indeed, in awarding the respondents $1,200,000, the jury may have been condemning the appellant for its rejection of the respondents’ claims. When such a result occurs, an appellate court is justified in setting aside the unreasonable aspect of the judgment: McCannell v. McLean, [1937] S.C.R. 341 at 343. I would give effect to this ground of appeal and set aside the award for loss of income.

108The respondents’ cross-appeal concerning the loss of income award can be conveniently dealt with at this point. The respondents, unsatisfied with the $150,000 award that I have found was itself an unjustified boon, boldly asked this court to allow them to amend their statement of claim by increasing the amount claimed in respect of breach of the insurance contract to $1,200,000.00. As I have concluded that there was no evidence to support any award for loss of income, it is clear that this cross-appeal is without merit and is dismissed.

(5) Entitlement to Punitive Damages

109An award of punitive damages can only be made where the trier of fact concludes that the defendant has committed an independent actionable wrong and that the defendant’s conduct has been reprehensible, high-handed or malicious, such that it departs to a marked degree from ordinary standards of decent behaviour. These two requirements for an award of punitive damages were stipulated by the majority of the Supreme Court of Canada in Whiten v. Pilot Insurance Co. (2000), 2002 SCC 18, 209 D.L.R. (4th) 257 at paras. 78 and 94 (S.C.C.). The jury, which was adequately instructed on punitive damages, can be assumed to have found that each element of an entitlement to punitive damages was present in this case. The appellant attacked both findings.

110There are facts here on which a properly instructed jury could conclude that an award of punitive damages was warranted. One could argue that the insurer prejudged the merits of the claim and conducted a somewhat biased investigation. Such factors have in the past been relied upon to support punitive damages awards: see Continental Insurance Co. v. Almassa International Inc. (2003), 46 C.C.L.I. (3d) 206 at para. 197 (Ont. S.C.J.) and Khazzaka v. Commercial Union Assurance Co. of Canada (2002), 66 O.R. (3d) 390 at paras. 6-11 (C.A.). It is also true that some of the defences advanced appear to have been baseless (specifically, the material change of risk and the lack of insurable interest defences). In light of this evidence, the question of punitive damages is likely to be a live issue at the new trial.

(6) Quantum of Punitive Damages

111The quantum of punitive damages awarded by this jury, however, is another matter entirely, and it is appropriate to comment on this for the benefit of the parties and the judge at the new trial. The total award of $2,500,000 is, in my view, grossly excessive. It was also irrational.

112The amount here exceeded by a factor of 2.5 the $1,000,000 award in Whiten, which Justice Binnie said was at the “upper end” of the permissible range. More important than this numeric comparison, the conduct here was not nearly as egregious as was that in Whiten. I have also arrived at my conclusion by considering the sum of the other damages awarded, which amounted to nearly $500,000.

113In this case, the appellant did not go quite so far as to shop for an expert willing to report that the fire was incendiary (see Whiten, supra at paras. 8-11). Nor did the insurer ignore conclusions drawn by independent third parties such as the fire department (see Khazzaka, supra at para. 7). There is no suggestion that evidence was concocted. In these circumstances, an award that far exceeds the amounts in Whiten ($1,000,000) and Khazzaka ($200,000) is simply not supportable, on any view of the evidence. In Khazzaka, this court found that the jury’s award of $200,000 was not excessive.

114Counsel and the trial judge at the new trial would do well to avoid a repetition of such a result. They would be well advised to offer a range to the jury of the quantum of punitive damages that might be appropriate, if indeed the jury decides to award punitive damages at all.

115It would not be appropriate for me to suggest a range of punitive damages to be considered by the jury. However, assuming that similar circumstances are before the jury at the new trial, it should be clear from what I have said that they do not come close to justifying a punitive damage award at the upper limit of $1,000,000 suggested by Whiten. I would add that the suggestion that a range be provided does not indicate that, in my view, punitive damages are necessarily appropriate or should be awarded. That will obviously be up to the jury at the new trial. The view that I provide is offered as guidance to assist the parties in achieving a result that falls with the ambit of established legal principles.

Costs

116In the face of the order for a new trial, it is unnecessary to deal with the issues raised by the appellant in respect to the costs awarded by the trial judge. It will be for the trial judge at the new trial to make an order as to costs from the first trial.

Conclusion

117A new trial is an unfortunate but unavoidable result of this appeal. The appellant has satisfied me that the errors in the instructions with respect to the misrepresentation defence are so serious that a substantial wrong has occurred. The errors in respect of the shut down exclusion clause compound the problem and assure me that the only appropriate result is to order a new trial pursuant to s. 134 of the Courts of Justice Act.

118With that result, the other grounds of appeal become somewhat academic. It is likely that many of these issues will be re-litigated at the new trial. By way of guidance, however, I offer the following. First, it was open to the jury to conclude that there was no fraud in respect of the Proof of Loss forms. Second, the appellant is correct when it says that there was no basis for the lost profit award. The evidence provided by the respondents simply does not support any award under this claim. In an effort to reduce the burdens created by a new trial, I would hope that the parties will be able to agree to accept the jury’s verdict in respect to the first issue and the absence of any evidence with respect to the second issue and decide not to re-litigate these issues. Third, while punitive damages may be in issue at the new trial, the parties would be wise to attempt to agree on an appropriate range to be left with the jury. The amounts awarded by the jury in this case are grossly excessive, to say the least.

119Accordingly, I would allow the appeal, set aside the judgment and order that there be a new trial. The costs of the trial are to be decided by the judge conducting the new trial. Counsel did not address the issue of costs, nor did they provide the court with a bill of costs. Counsel for the appellant is to provide the court with their bill of costs and submissions within 14 days from the release of these reasons for judgment. Counsel for the respondents will have 14 days thereafter to provide the court with their bill of costs and responding submissions. Submissions are not to exceed ten double‑spaced pages.

RELEASED: April 19, 2006 (“DD”)

Footnotes

1. 1These damages, and those awarded to Mazza and Pereira, were awarded pursuant to an appraisal before trial by an arbitrator, as required by Statutory Condition 11 of the insurance policies and the Insurance Act, R.S.O. 1990, c.I.-8, s. 128.
2. 2At the opening of trial, the trial judge permitted Mazza and Pereira to amend their claim for total punitive damages from $100,000 to $1,000,000
3. 3The insurer presented no argument in respect of this ground of appeal, other than to rely on the submissions in its factum, as the issue is pending before the Supreme Court of Canada in Walker v. Ritchie (2005), 197 O.A.C. 81 (C.A.). Leave to appeal has been granted by the Supreme Court of Canada on whether it is appropriate to award the lawyer of a successful party a premium for the risk of non‑payment of fees and disbursements that is payable by the unsuccessful party in the litigation, over and above the legal fees and disbursements otherwise awarded to the successful party: [2005] S.C.C.A. No. 297