COURT FILE NO.: 13-57035
DATE: 2015/07/07
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HELENE CARTER, EDMOND BLAIS and DONALD GIVOGUE
Plaintiffs/Moving Party
– and –
INTACT INSURANCE COMPANY
Defendant/Responding Party
Kevin P. Nearing, for the Plaintiffs/Moving Party
Anthony J. Bedard, for the Defendant/ Responding Party
HEARD: June 23, 2015 at Ottawa
DECISION ON MOTION
pHILLIPS j.
[1] This is a Rule 21 motion for summary judgment brought by agreement of the parties. Having had their property destroyed by fire, the Plaintiffs seek a declaration that they are entitled to the full replacement cost and building bylaw endorsements (to the policy limits) contained in the policy of insurance they purchased from the Defendant. The Defendant maintains that no such replacement costs are warranted because what is going to be built on the property is not of like kind and quality to what was originally there and is thus outside the confines of the policy.
The Facts
[2] On March 16, 2011, fire caused significant damage to an income property owned by the Plaintiffs at the corner of Beechwood Avenue and McKay Street in the City of Ottawa.
[3] The property was insured by a policy of insurance underwritten by the Defendant.
[4] The property owned by the Plaintiffs and insured by the Defendant at the time of the fire was an amalgam of three structures:
• Structure A was a two‑ storey structure built in approximately 1950 with a one‑storey section in the rear of the property built in 1960. The total square footage is 9,090 square feet plus basement used for storage, some retail and a small repair area of an equivalent square footage;
• Structure B was a three‑storey structure built in approximately 1990 with a gross floor area of 26,460 square feet and a basement of 8,830 square feet;
• Structure C was built in 1950 of timber frame and cast in place concrete foundation construction and consisted of a single storey building with 2,500 square feet of usable space.
[5] Collectively, the insured buildings had above ground usable square footage of 36,730 square feet. The total basement area was 15,200 square feet (about 25% finished). The total square footage of the property, including basement and above ground, was 51,930 square feet.
[6] The insured property did not have underground parking. Parking was limited to 42 outside spaces. There was only one underground basement level. There were no elevators.
[7] The overall construction quality of the property was considered “average” and good quality for the era in which the structures comprising the building were constructed.
[8] The insured property was a revenue producing property for the Plaintiffs. Revenue was generated through a mix of residential and commercial tenancies. There were 15 residential units and 13 commercial units for rental (mostly on the main level, although some on the second level of Structure B).
[9] As a result of Section 128 Insurance Act[^1] appraisal arbitration proceedings, the following values were established:
• the Actual Cash Value (“ACV”) of the property was determined to be $3,900,000;
• the “replacement cost” of the property was determined to be $5,732,136.32; and
• the Building Code upgrade cost was determined to be $511,379.17.
[10] The ACV has already been paid by the insurer. The amount in dispute therefore is the remaining $2,343,515.40.
[11] In Item 10(4), the policy records the agreement of the parties as to what would constitute replacement. Under a specific heading entitled “Definitions”, “replacement” and “replacement cost” are defined as follows:
(a) “replacement” includes repair, construction or reconstruction 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.
[12] The Plaintiffs want to build a new building on the property. In fact, plans are afoot to build an 8 ½ storey condominium development. It will sit on a footprint 10% to 15% larger than the buildings which existed prior to the fire and be 193,694 square feet in physical size, including the (finished) basement. The residential component of the condominium development will consist of 129 units. There will be a two‑level underground parking garage for 165 vehicles. There will be two elevators servicing all levels.
[13] The building cost for the proposed condominium is estimated to be approximately $30 million.
The Position of the Parties
[14] The Plaintiffs submit they are entitled to the full replacement cost as established through the arbitration process, as well as the Building Code upgrade amount established through the same method. The plaintiffs argue that the definition of “replacement” in the policy (outlined above) is open-ended and when read correctly imposes no restrictions with respect to what can be built to replace their burned down property. In support of this contention, they point out that the definition of “replacement” in the policy indicates only that it “includes” certain concepts. As such, the phrase “repair, construction or reconstruction with new property of like kind and quality” is merely an iteration of some examples of what “replacement” can mean rather than a restrictive definition. As it is put at paragraph 32 of the Plaintiffs’ factum:
Intact chose to use the word “includes” in the definition of the word “replacement”. It did not specifically require that there be actual replacement of like kind and quality. In fact, it did not place any restriction on the means or nature of the replacement. The only requirement is that replacement takes place”.
[15] As I understand it, the idea is that just because replacement includes construction with new property of like kind and quality does not mean that it can only mean that. Any ambiguity in that regard ought to operate against the insurer who drafted the contract.
[16] In the alternative, the plaintiffs submit that even if the “replacement” construction must be done with new property of like kind and quality to what was there before, the proposed condominium development meets those requirements. It is argued that in a suitably general way, they are in the process of replacing a mixed‑use commercial/residential building with a mixed‑use commercial/residential building. The fact that they are obviously going to exceed the policy limits in doing so is of no concern to the insurer whose exposure is limited by those parameters.
[17] The defendant argues that the plain and ordinary meaning of the policy establishes that replacement requires construction of like kind and quality. The defendant simply disagrees that there is any ambiguity in the policy with respect to that proposition. As the defendant sees it, the plaintiffs have three options: first, to simply take the actual cash value of the buildings, sell the land and walk away; second, take the actual cash value and redevelop the land in some way disconnected from what was there before; third, engage in construction with new property of like kind and quality and thereby trigger payment of the replacement cost putting themselves back into the same position they were in before. Finally, the defendant argues that the proposed condominium project is simply not construction with new property of like kind and quality.
Analysis
[18] The disposition of this motion requires answers to two questions:
(i) Does the phrase “includes construction with new property of like kind and quality” define what constitutes “replacement” in the context of this policy?
(ii) If so, is the proposed “replacement” (i.e. the condominium development) going to occur “with property of like kind and quality” such that replacement cost coverage is payable?
Issue #1: Does the phrase “construction with new property of like kind and quality” define what constitutes “replacement” in the context of this policy?
[19] The Plaintiffs rely primarily on the decision of the British Columbia Supreme Court in Chemainus Properties Ltd. v. Continental Insurance Company[^2] for support for the proposition that the phrase “of like kind and quality” is not a requirement of replacement in the policy at bar. As it was put by Justice Coultas in that decision:
Although the words “replacement” and “replace” are used many times throughout the Policy they are not defined.
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 re-construction 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.
[20] In my view, Chemainus can be distinguished on its facts from the case at bar. Importantly, in that case, the dispute involved the insured having purchased another building to replace one destroyed by fire. I agree that purchasing a building is not among the enumerated inclusions forming the definition of replacement. As such, the purchase of a building appears to have been found to constitute “replacement” via the open‑ended nature of the definition – “includes”, after all, is a set-up to a non-exhaustive list. I cannot help but conclude, however, that purchasing a ready‑made replacement building and constructing one from scratch are meaningfully different activities. The former has practical appeal in that it allows for immediate and complete assessment of the degree to which the building matches the one destroyed, while the latter gives rise to a whole host of issues which require a more principled approach. To my mind, the Chemanius scenario does not assist with resolution of the issues before this Court. There are significant differences between replacement of old with old and replacement of old with new.
[21] Fundamentally, the task before the Court is to determine the intention of the parties when this contract was entered into.
[22] The interpretation of contracts of insurance is guided by several well recognized principles. In Brissette Estate v. Westbury Life Insurance Co., 1992 CanLII 32 (SCC), [1992] 3 S.C.R. 87 (at para. 4) the following statement appears:
In interpreting an insurance contract the rules of construction relating to contracts are to be applied as follows:
(1) The court must search for an interpretation from the whole of the contract which promotes the true intent of the parties at the time of entry into the contract.
(2) Where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the parties will be selected.
(3) Ambiguities will be construed against the insurer.
(4) An interpretation which will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided. [Citations omitted.]
[23] More recently in Non-Marine Underwriters, Lloyd's of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, the Supreme Court noted (at para. 70) that "coverage provisions should be construed broadly and exclusion clauses narrowly" and further that "… one must always be alert to the unequal bargaining power at work in insurance contracts, and interpret such policies accordingly." The court again cited with approval the following statement of Estey J. in Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888 at pages 901-2:
[L]iteral meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favor of an interpretation of the policy which promotes a sensible commercial result.... Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.
[24] Most recently, in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, the relevant principles were summarized as follows (at paras. 22 and following):
22 The primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole....
23 Where the language of the insurance policy is ambiguous, the courts rely on general rules of contract construction.... For example, courts should prefer interpretations that are consistent with the reasonable expectations of the parties..., so long as such an interpretation can be supported by the text of the policy. Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded.... These rules of construction are applied to resolve ambiguity. They do not operate to create ambiguity where there is none in the first place.
24 When these rules of construction fail to resolve the ambiguity, courts will construe the policy contra proferentem -- against the insurer.... One corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly. [Citations omitted.]
[25] The particular approach to follow in interpreting an endorsement to a policy, was addressed by Lang J.A. in Pilot Insurance Co. v. Sutherland, 2007 ONCA 492 (at para. 21):
[I]n my view, an endorsement is generally not understood to be a self-contained policy.... An endorsement changes or varies or amends the underlying policy. While it may be comprehensive on the subject of the particular coverage provided in the endorsement, it is built on the foundation of the policy and does not have an independent existence.
[26] Along with interpreting the policy wording, the Court must keep in mind that the foundation of every insurance policy includes the basic tenets of the law of insurance. A good articulation of those foundations is provided in Castellain v. Preston (1883), 11 Q.B.D. 380 at 386 by Lord Justice Brett:
I feel obliged to revert to the very foundation of every rule which has been promulgated and acted on by the courts with regard to insurance law. The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the insured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified.
[27] In keeping with this theme, the Supreme Court of Canada, in affirming the British Columbia Court of Appeal decision in Brkick & Brkick Enterprises Ltd. v. American Home Assurance Co.[^3], adopts an analysis of the purpose of replacement cost endorsements as follows:
In conclusion, it appears to me that the essence of replacement cost insurance and its historical development as relevant to this appeal, can be summarized briefly. Insurance for only the actual cash value of damaged property is often insufficient for many insureds, who would be unable to rebuild to maintain use with only depreciated value. Insuring depreciation is a departure from indemnity, as the insured may be placed in a better position following the loss, than he was before. The reason is that depreciation is already lost to the insured before an insured loss occurs, but the depreciation may be recovered as insurance proceeds on the occurrence of such a loss. The potential to recover lost depreciation increases moral hazard, because it allows the insured to benefit from an insured loss.
[28] A replacement cost endorsement is a departure from the concept of indemnity, which, as outlined above, is the principle underlying all insurance contracts. Pure indemnity insurance only pays the actual cash value of the property at the time of a loss, in other words, the depreciated value of a building. Actual cash value, however, may well not be sufficient to restore the property's pre‑loss use. To meet this perceived deficiency, the insurance industry offers replacement cost insurance in which the insurer agrees, in effect, to pay the difference between actual cash value and full replacement cost. What is insured, therefore, (on top of the value of the underlying property) is depreciation. This coverage thus permits the insured to receive an amount necessary to rebuild the structure in a new condition without deducting for depreciation, and enables the insured to be restored to his/her pre‑loss use of the property.
[29] The concept is summarized in para. 44 of Brkich & Brkich Enterprises Ltd. v. American Home Assurance Co. (1995), 1995 CanLII 1809 (BC CA), 127 D.L.R. (4th) 115 (B.C. C.A.) at para. 44:
Insurance for only the actual cash value of damaged property is often insufficient for many insureds, who would be unable to rebuild to maintain use with only depreciated value. Insuring depreciation is a departure from indemnity, as the insured may be placed in a better position following the loss, than he was in before. The reason is that depreciation is already lost to the insured before an insured loss occurs, but the depreciation may be recovered as insurance proceeds on the occurrence of such a loss. The potential to recover lost depreciation increases moral hazard, because it allows the insured to benefit from an insured loss. The coverage is usually offered as an optional supplement to actual cash value coverage….
[30] Replacement insurance carries significant moral hazard. As insurance against depreciation, that is a diminishment in value that has already occurred at the time of the loss, it represents a method by which an insured can end up better off than before. Such an outcome, occurring when an insured gets a new building in place of an old one, is a necessary evil since few if any insured people would be in a position to rebuild without the depreciated value being included in the insurance proceeds. As a necessary evil, however, replacement insurance must have restrictions in order to minimize the moral hazard inherent in it as much as possible. Speaking to the concept of "moral hazard", the court in Brkich commented (at para. 29) as follows:
Replacement cost insurance raises concerns of increased moral hazard because it creates the potential for an insured to obtain more than mere indemnity for the damaged property. To address this concern, insurers willing to offer replacement cost insurance have typically limited their obligation to pay more than actual cash value to circumstances where reconstruction was carried out, ...
[31] 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.
[32] I wish to make clear that I am not imputing any improper motive or conduct to the plaintiffs here. The plaintiffs are engaged in the property management and development business and there is nothing morally wrong with what they are trying to do. One would expect any business enterprise to try to maximize its profitability. However, the fact that moral hazard does not apply to the insured’s present conduct does not diminish the fact that it was a feature of the contract as contemplated ab initio. Concern over moral hazard underpins the insurance contract on the whole and coverage must presently be considered with that originally shared objective in mind.
[33] 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. In my view, this constraint was tacitly included in the policy by the parties from the beginning and should inform the interpretation of the contract now. To allow the insured to presently receive compensation for value which was lost by the time of the fire and to essentially do with that compensation as they wish would be to allow them to use this policy in a way that was beyond the intention of the parties.
[34] I conclude that with respect to this contract, construction must be effected with new property of like kind and quality to what was there before.
Issue #2: Is the proposed “replacement” (i.e. the condominium development) going to occur “with new property of like kind and quality” such that replacement cost coverage is payable?
[35] A helpful guide for what is meant by the phrase “of like kind and quality” is found in the obiter dicta of Justice Coultas in the Chemainus decision when he considers whether the proposed replacement in that case was of property “like kind and quality”. In this regard, he stated:
Like kind and quality does not imply that every truss, or siding, or finish, or style of the building, for example must be identical. That would be absurd considering that 20 years separates the dates of their construction, and construction methods and aesthetic tastes change…
[36] He then went on to adopt comments from Justice Johnson in Berenbaum v. Halifax Insurance Company (1966), 57 WWR 140, Saskatchewan QB, to inform him of what the phrase “of like kind and quality” entailed, specifically:
The cost of erecting a building which would be similar to the destroyed building and the following characteristics. It would have the same amount of usable area; It would have substantially the same utility; Its heating, lighting, plumbing and electrical or other facilities would be equivalent; Its style, if lending any intrinsic value, would be followed and to assure the foregoing its construction and finish would be comparable in the context of today’s building practices.
[37] The issue of similarity between the building insured prior to the loss and the proposed replacement was considered in the case of Andriash v. Canadian Northern Shield Insurance Co.[^4] In this case, the insured was renovating and occupying a barn as his principal residence while at the same time building a log house on the same property. The barn was destroyed by fire and the insured sought to be paid under the policy the amount that would be required to replace the barn and use those funds towards the cost of completing the log house. The insurer denied and litigation ensued. The court dismissed the insured’s claim. The policy wording in the Andriash case drove the result. That policy wording is less clearly worded than the replacement cost provisions of the Intact policy. Specifically the policy wording in the Andriash case was as follows:
Optional Loss Settlement Clause: In the event of loss or damage to the building(s) at the option of the insured, the insurer agrees to make settlement on the basis of the cost of repairs to or the replacement cost of the building(s) (whichever is the lesser) with material of like kind and quality without deduction for depreciation subject to the Policy exclusions and the following provisions:
(i) …
(ii) that replacement must be on the same site, and
(iii) …
[38] In finding against the insured, Justice Errico stated:
What the Plaintiffs propose is the application of the funds that would be required to replace the principal residence towards the continued construction of an entirely different structure that was partially completed at the time the policy of insurance was entered into. It cannot be said that was what the parties contemplated when the contract was entered into. What is contemplated by the policy is that the insured would be put back in the same position of having the building which was the subject matter of the loss replaced with a similar building. The policy does not contemplate the application of funds under the replacement provisions of the policy towards the construction costs of an entirely different structure notwithstanding that structure may be on the same site and may also be a residence.
[39] Similarly, the issue was considered in the case of Morton v. Canadian Northern Shield Insurance Company and Allenga Chong Insurance Agencies Ltd.[^5] This case has some similarities in terms of factual analysis to that under consideration in the within motion. In Morton, the insured owned an investment home which was rented to tenants. It was a single family structure. Following a fire that destroyed the building, he sought to replace the building with a triplex at more expense and with larger square footage. He wanted to apply the replacement cost money towards the construction of the triplex. The insurer denied and litigation ensued. The court found against the insured. The policy wording again drove the result. Although the policy wording is different than the wording of the Intact EPO4 policy wording, the result again illustrates the significance of a size comparison between the damaged building and the new building when deciding if the new building meets the test of “replacement”. The policy wording in Morton provided:
If you repair or replace the damage or destroyed building on the same location, with a building of the same occupancy constructed with materials of similar quality within a reasonable time….
[40] The court in Morton considered the Chemainus decision as standing for the proposition that the insured is allowed some deviation between the replacement building and the old building but the court went on to state, however:
A building which has three separate dwelling units and a total area 271.2% larger than the single family dwelling it replaces is not a building of the same occupancy.
[41] When it interpreted the policy, in citing Finch J.A. for the Court of Appeal in Brkick the court in Morton considered the rationale for replacement coverage clauses which require actual reconstruction as follows:
The purpose of that limitation, obviously, is to prevent an insured from directly profiting through the receipt of cash funds beyond the actual cash value of the loss, thus forcing the insured to rebuild in order to recover amounts withheld as depreciation.
[42] Ultimately, it is a judgment call. I conclude that in this matter, the redevelopment of the property by constructing a significant condominium development of the size, utility and design proposed is not sufficiently similar in the characteristics of the property which was insured and existed prior to the fire. The changes are more than changes necessitated by developments in building practices or styles over time. There are very considerable differences in the size of the structures as well as the utility, as demonstrated by the significant increase in value and revenue producing capability of the condominium development compared to the property at the time of the fire. The proposed redevelopment does not meet the definition of replacement through construction with property of “like kind and quality” as provided for in this policy.
[43] Brief written submissions as to costs may be submitted within 30 days.
Mr. Justice Kevin B. Phillips
Released: July 7, 2015
COURT FILE NO.: 13-57035
DATE: 2015/07/07
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HELENE CARTER, EDMOND BLAIS and DONALD GIVOGUE
Plaintiffs/Moving Party
– and –
INTACT INSURANCE COMPANY
Defendant/Responding Party
DECISION ON mOTION
Phillips J.
Released: July 7, 2015
[^1]: R.S.O. 1990, c. I.8.
[^2]: 1989 CanLII 10437 (BC SC), [1990] B.C.J. No. 154.
[^3]: 1997 CanLII 339 (SCC), [1997] 1 S.C.R. 1149.
[^4]: [1987] B.C.J. No. 12.
[^5]: 1998 CanLII 3887 (BC SC).