COURT OF APPEAL FOR ONTARIO
CITATION: Carter v. Intact Insurance Company, 2016 ONCA 917
DATE: 20161206
DOCKET: C60843
Laskin, Pepall and Brown JJ.A.
BETWEEN
Helene Carter, Edmond Blais and Donald Givogue
Plaintiffs (Appellants)
and
Intact Insurance Company
Defendant (Respondent)
Kevin P. Nearing and Natalia Rodriguez, for the appellants
Anthony J. Bedard and Jasmine T. Akbarali, for the respondent
Heard: April 28, 2016
On appeal from the order of Justice Kevin B. Phillips of the Superior Court of Justice, dated July 7, 2015, with reasons reported at 2015 ONSC 4400, 52 C.C.L.I. (5th) 263.
Laskin J.A.:
A. Overview
[1] For 24 years, the appellants owned an income property at the corner of MacKay Street and Beechwood Avenue in Ottawa. The property consisted of a mix of one, two and three storey buildings, containing 15 residential units and 13 commercial units. The property was insured by the respondent Intact, from whom the appellants purchased replacement cost and building by-law coverage. Their insurance policy provided that “replacement includes repair, construction or reconstruction with new property of like kind and quality”.
[2] In March 2011, a fire caused substantial damage to the appellants’ buildings. The appellants decided to demolish the entire site in order to build an eight and a half storey condominium. They sought compensation under the replacement cost and building by-law coverages in their insurance policy.
[3] Intact refused to pay replacement cost on the ground that the proposed condominium was not a “replacement”, because it was not a “new property of like kind and quality”. For a similar reason, Intact also refused to pay for building code upgrades. Instead, Intact paid the appellants only the actual cash value of the damaged property.
[4] The appellants began to build their condominium and sued Intact for replacement cost and an amount for building code upgrades under their building by-law coverage. They then brought a motion under r. 21 of the Rules of Civil Procedure[^1] to determine the coverage issues. Before the motion judge, they argued that they were entitled to replacement cost no matter what they built, because “replacement”, as defined in the policy, did not require that their new property be of “like kind and quality”. Alternatively, they argued that their proposed condominium was of “like kind and quality”.
[5] The motion judge rejected both arguments. He interpreted the policy to mean that replacement cost is only available if the insured’s property is of like kind and quality. He found as a fact that the proposed condominium was not of like kind and quality. Thus, the appellants were entitled only to the actual cash value of their damaged property (which Intact has paid). Although the by-law coverage issue was before him, the motion judge did not address it in his reasons.
[6] The appellants do not appeal the motion judge’s factual finding that their proposed condominium is not of like kind and quality. They only raise two issues on appeal. First, did the motion judge err by holding that the proposed condominium was not a “replacement” entitling the appellants to replacement cost? Second, did the motion judge err by failing to hold that the appellants were entitled to an amount for building code upgrades?
[7] I would dismiss the appeal. I agree with the motion judge’s conclusion on the first issue, and though he did not expressly address the second issue, his factual findings reasonably supported Intact’s position on that issue.
B. Brief Background
(1) The amounts in issue
[8] The parties resolved the amounts in issue by using the appraisal and arbitration process under s. 128 of the Insurance Act.[^2] The arbitrator determined the following amounts:
• actual cash value: $3,900,000;
• replacement cost: $5,732,136.32; and
• building code upgrades: $511,379.17
[9] Intact has paid the appellants the actual cash value. Therefore, the appellants’ total claim in this litigation is $2,343,515.49 ($5,732,136.32 minus $3,900,000 plus $511,379.17).
[10] The appellants’ claim is under the policy limit, which was $7,614,750.
(2) The insured property and the proposed condominium
[11] The motion judge found that the appellants’ proposed condominium was not of like kind and quality to the insured property. As the following chart shows, that finding was well supported in the record. And, as I have said, it has not been appealed.
| Quality | Insured Property | Proposed Condominium |
|---|---|---|
| Size | 51,930 square feet | 193,694 square feet |
| Height | Mix of one, two and three storey buildings | Eight and a half stories |
| Basement area | 15,200 square feet | 32,000 square feet |
| Number of residential units | 15 | 129 |
| Parking Spaces | 42 (above ground) | 165 (underground) |
| Elevators | None | Two |
C. The Issues
(1) Did the motion judge err by holding that the proposed condominium was not a “replacement" entitling the appellants to replacement cost?
(a) Positions of the parties
[12] In support of their overall position that they are entitled to replacement cost, the appellants make, in essence, three arguments. First, the motion judge erred by holding that his interpretation of the policy was necessary to address moral hazard. Second, the motion judge erred by failing to give effect to the word “includes” in the definition of “replacement”. Third, the motion judge wrongly distinguished the decision of the British Columbia Supreme Court in Chemainus Properties Ltd. v. Continental Insurance Co. (1990), 1989 CanLII 10437 (BC SC), 43 C.C.L.I. 146, which the appellants say is consistent with their position.
[13] In response, Intact argues first, that to be entitled to replacement cost, the replacement must be of like kind and quality; second, that the motion judge’s interpretation is consistent with other provisions in the policy; and third, that the decision in Chemainus is distinguishable, or was wrongly decided and should not be followed.
(b) The policy
[14] The appellants’ insurance policy with Intact provided, as a starting point, for indemnity based on the actual cash value of the lost or damaged property. Clause 15 of the policy prescribed the “basis of valuation” for various categories of insured property. At the end of the list, sub-clause (f) set out the following basis of valuation for “all other insured property under this form and for which no more specific conditions have been set out”:
the actual cash value at the time and place of loss or damage, but not exceeding what it would then cost to repair or replace with material of like kind and quality.
[15] The appellants, however, purchased two extensions of coverage, which are at the heart of this appeal. The first extension – the replacement cost extension – amended the basis of valuation from actual cash value to replacement cost. Under this extension, replacement cost was subject to several conditions, of which the most important was condition 1(b): the insured would only be entitled to replacement cost “when ‘replacement’ has been effected”. In other words, the insured must actually replace the insured property to be entitled to replacement cost.
- The Insurer agrees to amend the Basis of Valuation from actual cash value to "replacement cost" subject to the following provisions:
(a) "replacement" shall be effected by the Insured with due diligence and dispatch,
(b) settlement on a "replacement cost" basis shall be made only when "replacement" has been effected by the Insured and in no event shall it exceed the amount actually and necessarily expended for such "replacement",
(c) any other insurance effected by or on behalf of the Insured in respect of the insured perils under the Policy on the property to which this extension is applicable shall be on the basis of "replacement cost",
(d) failing compliance by the Insured with any of the above provisions, settlement shall be made as if this extension had not been in effect.
[16] Clause 4 of the extension defined “replacement” and “replacement cost”:
- Definitions
(a) "replacement" includes repair, construction or re-construction with new property of like kind and quality, and
(b) "replacement cost" means 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.
[17] The interpretation of these definitions, especially the definition of “replacement” gives rise to the main issue on this appeal.
[18] The second extension provided coverage for building code upgrades. I will deal with this extension when I discuss the second issue on the appeal.
(c) Actual cash value, replacement cost and moral hazard
[19] The following summary is taken from the decision of the British Columbia Court of Appeal in Brkich & Brkich Enterprises Ltd. v. American Home Assurance Co.(1995), 1995 CanLII 1809 (BC CA), 8 B.C.L.R. (3d) 1, aff’d 1997 CanLII 339 (SCC), [1997] 1 S.C.R. 1149, the decision of Stinson J. in Willoughby v. Pilot Insurance Company, 2014 ONSC 95, 118 O.R. (3d) 604, and three secondary sources cited by the appellants: Leo John Jordan, "What Price Rebuilding? A Look at Replacement Cost Policies" (1990) 19 Brief 17; Jerome Trupin & Arthur L. Flitner, Commercial Property Insurance and Risk Management, 5th Ed (Pennsylvania: American Institute for the Chartered Property Casualty Underwriters, 1998); and Johnny Parker, "Replacement Cost Coverage: A Legal Primer" (1999) 34 Wake Forest L. Rev. 295.
[20] The insurance industry has marketed two types of protection for residential and commercial properties: actual cash value coverage and replacement cost coverage. Under actual cash value coverage, property is insured to the extent of its actual cash value. This coverage recognizes that the insurer is entitled to deduct reasonable depreciation from the value of the loss. Under replacement cost coverage, the insured is entitled to the full cost of repair or replacement without any deduction for depreciation.
[21] A main objective of property insurance is indemnity, and a policy providing for actual cash value coverage is a pure indemnity contract. Actual cash value recovery puts insureds in the position they were in before the loss. Since most property depreciates over time, actual cash value is equivalent to replacement cost less depreciation. So actual cash value recovery prevents insureds from profiting or benefiting from their loss.
[22] But actual cash value recovery poses a problem for insureds who want to build a similar structure to replace the insured property that was damaged or destroyed. Because of depreciation, these insureds will incur a cash shortfall, which they may not be able to afford, and which will thus prevent them from reconstructing their damaged structure.
[23] Replacement cost insurance solves this problem. It goes beyond the notion of indemnity. It recognizes that depreciation, or the deterioration of a property over time, is an insurable risk. Replacement cost insurance, in effect, insures depreciation: the difference between replacement cost and actual cash value. So, under replacement cost insurance, if insureds do indeed repair or replace their damaged property, they are entitled to recover from their insurer the full cost of the repairs or the replacement. They can replace “old” with “new”. In that sense, even though replacement cost insurance makes insureds better off and violates the indemnity principle, it is justifiable, because without it, many property owners would be unable to cover the shortfall caused by the depreciation of their damaged or destroyed property.
[24] But, allowing insureds to replace old with new raises a concern for the insurance industry. The concern is moral hazard: the possibility that insureds will intentionally destroy their property in order to profit from their insurance; or the possibility that insureds will be careless about preventing insured losses because they will be better off financially after a loss.
[25] To put a brake on moral hazard, insurers will typically only offer replacement cost coverage if insureds actually repair or replace their damaged or destroyed property. If they do not, they will receive only the actual cash value of their insured property. Insurers also limit replacement cost coverage to an amount defined in the insurance policy. These two conditions – insistence on actual repair or replacement and limiting replacement cost to a defined amount – are found in the appellants’ policy with Intact.
[26] With that background, I turn to the interpretation of the definition of “replacement” in the appellants’ insurance policy.
(d) The interpretation of insurance policies and the standard of review
[27] The guiding principles for interpreting insurance policies are well established, and were concisely summarized by Rothstein J. in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 21-24.
[28] An insurance policy is a contract, and the primary goal of contract interpretation is to give effect to the intention of the parties. If the policy provision in question is unambiguous, the court gives effect to the parties’ intention by giving effect to the provision’s plain and ordinary meaning. In doing so, and as interpretive aids, the court should take into account the provisions of the policy as a whole, the surrounding circumstances and the “commercial atmosphere” in which the insurance policy was contracted for, and the general purpose of insurance: see Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at para. 26.
[29] If the provision is ambiguous – that is, it is reasonably capable of more than one meaning – then the court applies the following rules: it should prefer an interpretation that is consistent with the reasonable expectations of the parties, as long as that interpretation can be supported by the text of the policy; it should avoid an interpretation that would give rise to an unrealistic result or that would not have been contemplated by the parties at the time the policy was contracted for; and it should strive for an interpretation that is consistent with similar provisions in other insurance policies.
[30] If the rules for resolving ambiguity are inadequate, then the court should interpret the provision contra proferentem, “against the offeror” – that is against the party who drafted the policy, the insurer. In applying the rule of contra proferentem, courts should construe coverage provisions broadly and exclusion provisions narrowly.
[31] In this case, as I will discuss, I am satisfied that the definition of “replacement” in the appellants’ policy is unambiguous and that the motion judge gave effect to its plain and ordinary meaning.
[32] In some cases of contract interpretation the standard of appellate review is relevant. Because the definition of “replacement” is likely a standard provision in property insurance policies, the standard of review is likely correctness, not deferential: see Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, 59 C.C.L.I. (5th) 173. But as I have concluded that the motion judge correctly interpreted the meaning of “replacement”, the standard of review in this appeal does not matter.
(e) The interpretation of the definition of “replacement”
[33] The appellants’ three main arguments for overturning the motion judge’s decision are: (i) he erred by saying that his interpretation was needed to address moral hazard; (ii) he erred by failing to give meaning to the word “includes” in the policy’s definition of “replacement”; and (iii) he erred by distinguishing Chemainus.
(i) Moral hazard
[34] The motion judge wrote, at para. 30 of his reasons, that “replacement insurance must have restrictions in order to minimize the moral hazard inherent in it as much as possible.” He held, at paras. 31 and 33, that requiring a replacement to be of like kind and quality minimized moral hazard.
I find that the insurance contract in question would have been entered into with an understanding that the basic tenets of insurance law would govern its interpretation. One of those tenets is the minimization of moral hazard when it comes to replacement insurance. In my view, the principal method by which moral hazard in this context is minimized is the expectation by both parties that lost property would be rebuilt with new property of like kind and quality.
Since the underlying principle of insurance is indemnity, replacement cost coverage should be construed in a fashion that is consistent with that concept. Betterment is to be avoided to the extent possible. I find this to be a rationale for a requirement that the replacement building be constructed with new property of like kind and quality. This restriction is an appropriate brake on the moral hazard risk.
[35] The appellants submit that the moral hazard inherent in replacement cost insurance was fully addressed by the requirement in their policy that the replacement actually be carried out and by the policy limit on replacement cost recovery. In support of their submission, they rely on an oft-cited article by Leo John Jordan, “What Price Rebuilding? A Look at Replacement Cost Policies”, referenced above. At p. 19 of his article, Mr. Jordan reviews standard language in a replacement cost insurance policy, which limits the insured’s recovery to the smallest of the following three measures:
(a) the amount of [the] policy applicable to the damaged or destroyed property;
(b) the replacement cost of the property or any part thereof identical with such property on the same premises and intended for the same occupancy and use; or
(c) the amount actually and necessarily expended in repairing or replacing said property or any part thereof.
[36] Mr. Jordan then discusses the second limitation, (b), and makes the point that an insured is entitled to replacement cost no matter what replacement the insured chooses. The effect of the limitation in (b), according to Mr. Jordan, is that the insured’s recovery is limited to what it would cost to replace a structure identical to the one lost, on the same premises.
This particular limitation does not require repair or replacement of an identical building on the same premises, but places that rebuilding amount as one of the measures of damage to apply in calculating liability under the replacement cost coverage. The effect of this limitation comes into play when the insured desires to rebuild either a different structure or on different premises. In those instances, the company’s liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying an additional amount from his or her own funds.
[37] In short, the appellants contend that requiring a replacement to be of like kind and quality is not necessary to put a brake on moral hazard. That brake is provided by the requirement that the insured carry out repair or reconstruction and by the policy limit on replacement cost recovery.
[38] The appellants’ submission on moral hazard may well have merit. But even if it does, the appellants must still show that the provisions of their policy entitle them to replacement cost even though they are replacing their insured property with a new property that is not of like kind and quality. In other words, this appeal turns on the interpretation of the definitions of “replacement” and “replacement cost” in the policy.
(ii) The definitions of “replacement” and “replacement cost”
[39] For convenience, I again set out these two key definitions in the appellants’ insurance policy:
(a) "replacement" includes repair, construction or re-construction with new property of like kind and quality, and
(b) "replacement cost" means 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.
[40] The motion judge concluded that to recover replacement cost, the “construction must be effected with new property of like kind and quality to what was there before.” The appellants submit that he erred in his interpretation of the definition of “replacement”.
[41] The appellants say that the “replacement” definition is the “how”, and the “replacement cost” definition is the “how much”. They say that the motion judge erred, because he did not give effect to the word “includes” in the policy’s definition of “replacement”. The word “includes”, they contend, contemplates that the appellants can choose to replace their damaged buildings by means other than repair, construction or reconstruction. They can replace their insured property with a totally different building, a condominium, and still be entitled to replacement cost. The appellants submit that the phrase “of like kind and quality” modifies the enumerated methods of replacement: repair, construction or reconstruction. It does not modify an unenumerated replacement, such as their condominium.
[42] The appellants add that though they are constructing a different and much larger building, that should be of no concern to Intact, because its liability is limited by the definition of “replacement cost” in the policy. The appellants are not seeking to recover the actual cost to build their condominium, only the replacement cost as defined in the policy.
[43] I do not accept the appellants’ submission. A “replacement” is needed to trigger entitlement to “replacement cost”. And the plain and ordinary meaning of the definition of “replacement” in the policy is that to be entitled to “replacement cost”, the replacement, no matter how it is effected, must be of like kind and quality.
[44] I agree with the appellants that 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.
[45] To give effect to the appellants’ interpretation would either be illogical, or would render the phrase “of like kind and quality” meaningless. It would be illogical to interpret the definition of “replacement” to mean that a replacement by repair, construction or reconstruction must be of like kind and quality, but a replacement by any other method need not be. And to interpret the definition of “replacement” as allowing any kind of replacement would make the modifying phrase “of like kind and quality” meaningless. The appellants’ interpretation would make sense only if the phrase “new property of like kind and quality” were eliminated and the definition simply read: “replacement includes repair, construction or reconstruction.”
[46] The motion judge’s interpretation is also consistent with another important clause in the replacement cost endorsement, and it better reflects the indemnity principle, which typically underlies insurance contracts.
[47] Clause 2 under the replacement cost endorsement stipulates that if new property of like kind and quality cannot be obtained, then new property “as similar as possible to that lost or damaged and which is capable of performing the same function shall be deemed to be new property of like kind and quality”. This clause reinforces my conclusion that the replacement must be of like kind and quality.
[48] Finally, as I said earlier, indemnity is a main objective of insurance and, to the extent possible, coverage provisions should be interpreted with that objective in mind. Replacement cost coverage does go beyond mere indemnification of an insured because it allows for a measure of betterment. But allowing replacement cost only where the replacement is of like kind and quality to the damaged or destroyed property better reflects the indemnity principle. Replacement cost would then give insureds enough money to rebuild something equivalent to the property that was damaged or destroyed.
[49] 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. This conclusion is sufficient to decide the appeal. For completeness, however, I will briefly address the decision in Chemainus.
(iii) Chemainus
[50] In Chemainus, a fire had destroyed the insured’s building. The insured had purchased replacement cost coverage. The replacement provision in the insured’s policy was similar, but not identical to the definition of “replacement” in the appeal before us. It read: “replacement includes repair, construction or reconstruction with materials of like kind and quality” (emphasis added). To replace its destroyed property, the insured decided to purchase an existing building on another site. The insured then demanded an amount equivalent to replacement cost, as provided for in the policy. When the insurer refused to pay, the insured sued.
[51] The trial judge found for the insured. He held that the replacement provision in the policy was not a definition. He resorted to the dictionary definition of “replace” – take the place of, or provide substitution for – and held that the existing building the insured had purchased was a replacement under the policy. At paras. 47 and 48 of his reasons, the trial judge rejected the insurer’s argument that the replacement building had to be constructed with materials “of like kind and quality”:
There was no requirement that the replacement building be constructed with materials of "like kind and quality". Had the insurer wished to import that limitation into the definition of replacement, it could have done so. It did provide that replacement includes "repair, construction or reconstruction with materials of like kind and quality", but the plaintiff did not do any of these things when it replaced and it was not compelled to.
The "replacement cost" provision in the endorsement has nothing to do with the concept of replacement. Clearly, replacement cost is not the cost of replacement. The replacement cost provision established financial parameters for indemnification. It was a formula that both parties could look to: one to see its exposure to indemnify, the other to see what it could expect to receive if it replaced. The policy gave the insured the right to choose how to effect replacement, but it provided the insurer with a limit to its liability, and the "cost replacement" provision defined the limit. If an insured wished to be a spendthrift when effecting replacement, the insurer was not at risk.
[52] Although the wording of the replacement provision in Chemainus differs from the wording of the definition of “replacement” in the present case, I agree with the appellants that this difference does not distinguish the two cases. I accept that the trial judge’s interpretation of the provision for replacement in Chemainus differs from mine. Respectfully, for the reasons I have already discussed, 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.
[53] I would not give effect to the appellants’ position on this first and main issue on the appeal.
(2) Did the motion judge err by failing to hold that the appellants were entitled to an amount for building code upgrades?
[54] The appellants had purchased an extension of coverage for building by-laws, in substance, an amount for building code upgrades required by their replacement structure. The appellants asked for this amount in their Notice of Motion, but the motion judge did not address their claim. Nonetheless, the parties agree that we can deal with the issue, as the material facts are not in dispute. The relevant portion of the extended coverage for building by-laws is as follows:
This insurance is, without increasing the amount of insurance, and only as a result of an insured peril, extended to indemnify the Insured for:
(c) any increase in the cost of repairing, replacing, constructing or reconstructing the "building" on the same site or on an adjacent site, of like height, floor area and style, and for like occupancy:
arising from the enforcement of the minimum requirements of any by-law, regulation, ordinance or law which
(i) regulates zoning or the demolition, repair or construction of damaged "buildings" and
(ii) is in force at the time of loss or damage.
[55] As is evident from the wording of clause (c), entitlement to an amount for building code upgrades parallels entitlement to replacement cost. And just as the appellants are not entitled to the latter, they are not entitled to the former. Their proposed condominium does not satisfy the requirements of clause (c).
[56] The appellants’ condominium is not of like height to their insured property: it is eight and a half stories high compared to one, two or three stories high. It is not of like floor area: the condominium is almost four times as large as the floor area of their insured property. It is not of like style, as it has many features, such as elevators and underground parking, which were not contained in the appellants’ insured property. And it is obviously not of like occupancy: the condominium will have 129 residential units; the insured property had only 15.
[57] The appellants are therefore not entitled to any amount for building code upgrades for their condominium. I would not give effect to the appellants’ position on this issue.
D. Conclusion
[58] I would dismiss the appeal. The appellants are not entitled to replacement cost, because their condominium is not a “new property of like kind and quality”. Similarly, they are not entitled to any amount for building code upgrades, because their condominium is not of like height, floor area, style or occupancy to their insured property. The appellants are entitled to the actual cash value of their insured property, which they have received.
[59] Intact is entitled to the costs of this appeal in the agreed on amount of $15,000 inclusive of disbursements and applicable taxes.
Released: December 6, 2016 (“J.L.”)
“John Laskin J.A.”
“I agree. S.E. Pepall J.A.”
“I agree. David Brown J.A.”
[^1]: R.R.O. 1990, Reg. 194.
[^2]: R.S.O. 1990, c. I.8.