Court File and Parties
COURT FILE NO.: CV-14-516920 REFERENCE HEARD: 20160304, 20160530, 20160831, 20170117 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Healthcare Insurance Reciprocal of Canada, HIROC Management Limited and Factory Mutual Insurance Company, Applicants AND: Royal and Sun Alliance Insurance Company of Canada, Respondents
BEFORE: Master B. McAfee
COUNSEL: Rory Barnable, Counsel for the Applicants Robert J. Clayton, Counsel for the Respondents
HEARD: March 4, 2016, May 30, 2016, August 31, 2016 and January 17, 2017
REASONS FOR DECISION
The Reference
[1] Pursuant to the consent order of Justice Spence dated March 31, 2015, a reference was ordered in the within application brought by the applicants Health Care Insurance Reciprocal of Canada (HIROC), HIROC Management Limited (HML) and Factory Mutual Insurance Company (FM) (collectively the applicants) against Royal and Sun Alliance Insurance Company (RSA) as respondent.
[2] Paragraph 3 of the order of Justice Spence states:
- THIS COURT FURTHER DECLARES the RSA Policy must provide all boiler and machinery insurance coverage for all boiler and machinery loss and water damage arising from the November 30, 2013 loss, as agreed within 30 days, failing which direction to reference pursuant to Rule 54 with report back to this Court.
[3] The parties agree that adjusting loss is not an issue on this reference. The parties agree that the applicants bear the onus on this reference.
The Application
[4] The within application was brought to determine the coverage response of the property policies of insurance of the applicants and the boiler and machinery policy of insurance of RSA to a claim submitted by the Children’s Hospital of Eastern Ontario (CHEO).
[5] Pursuant to paragraph 1 of the consent order of Justice Spence, the RSA policy is the primary responding policy for all boiler and machinery loss and water damage. Pursuant to paragraph 2 of the order, the HIROC policy operates only as excess to the RSA policy for all boiler and machinery loss and water damage.
[6] The amount of the loss submitted to the applicants by CHEO has been paid by the applicants. The applicants now seek to recover that amount from RSA.
The Loss of November 30, 2013
[7] The cause of the loss is not in dispute. On November 30, 2013, CHEO had a planned power outage for the purpose of performing maintenance required by the local electrical authority. Due to an unanticipated freezing period during the planned outage, cold air entered certain variable air volume (VAV) boxes, which contained water coils. The water coils froze and then cracked. The VAV boxes and water coils form part of the heating and air conditioning system. When power was restored, the water coils thawed and multiple leaks resulted inside the CHEO property in R11 level 4 labs in room numbers R4103, R4106 and R4118. These leaks caused water damage to the CHEO property and various types of CHEO equipment, necessitating repair and/or replacement.
Evidence
[8] The applicants filed the affidavit of Marnie MacPhee sworn January 16, 2015, and the supplementary affidavit of Marnie MacPhee sworn December 17, 2015. On the second day of the reference, on consent, the applicants filed the affidavit of Marc Bachs, sworn May 18, 2016.
[9] RSA filed the affidavit of Michael Murrant sworn November 27, 2015.
[10] Ms. MacPhee and Mr. Murrant were cross-examined on their respective affidavits.
[11] The positions of the parties are summarized in a chart entitled “Combined Master Schedule of Loss” provided to the court on the second day of the reference. During the hearing, the applicants withdrew their claim for item nos. 31 and 42.
The Policies
[12] At all material times the CHEO property was the subject of the following insurance policies:
a. the RSA policy, policy number CIP-BM-4161132-179; b. the HIROC policy, policy number B107029-179; and c. the FM policy, policy number SU846.
[13] The RSA policy provides boiler and machinery insurance.
[14] The HIROC policy provides property insurance to HML and its member subscribers who are listed as named insureds, one of whom is CHEO.
[15] FM provides HML and its member subscribers, including CHEO, with the FM policy as primary layer excess for claims exceeding $500,000.00.
[16] The RSA policy provides as follows:
Section II – Property Valuation
The Company agrees that loss to property of the Insured shall mean the amount expended by the Insured to repair or replace such property, subject to the following provisions:
(i) The Company’s liability for any repair or replacement shall be limited to the lesser of the following:
(1) The cost at the time of the Accident to repair said property; or
(2) The cost at the time of the Accident to replace said property with property of like kind, capacity, size and quality;
(ii) In the event that repair or replacement is by property of a better kind, capacity, size of quality, the liability of the Company shall not exceed the amount that would have been paid if repair or replacement had been made by property of like kind, capacity, size and quality;
(iii) The Company shall not be liable for the cost of repairing or replacing any part or parts of an Object in excess of the cost of repairing or replacing the entire Object;
(iv) If any damaged property is not repaired or replaced, the Company’s liability as respects such property shall be limited to the Actual Cash Value of the damaged property. Actual Cash Value being the cost of replacing the damaged property with property of similar kind, capacity, size and quality less reasonable depreciation.
[17] The valuation clause found in the HIROC and FM policies provides as follows:
5. Valuation
Adjustment of the physical loss amount under this Policy will be computed as of the date of loss at the place of the loss, and for no more than the interest of the Insured.
Unless stated otherwise in an Additional Coverage, adjustment of physical loss to property will be subject to the following:
A. On stock in process, the value of raw materials and labour expended plus the proper proportion of overhead charges.
B. On finished goods manufactured by the Insured, the replacement cost.
C. On raw materials, supplies or other merchandise not manufactured by the Insured:
if repaired or replaced, the actual expenditure incurred in repairing or replacing the damaged or destroyed property; or
if not repaired or replaced, the actual cash value.
F. On all other property, the less of the following:
The cost to repair.
The cost to rebuild or replace on the same site with new materials of like size, kind and quality.
The cost in rebuilding, repairing or replacing on the same or another site, but not to exceed the size and operating capacity that existed on the date of loss.
The selling price of real property or machinery and equipment, other than stock, offered for sale on the date of loss.
The cost to replace unrepairable electrical or mechanical equipment, including computer equipment, with equipment that is the most functionally equivalent to that damaged or destroyed, even if such equipment has technological advantages and/or represents an improvement in function and/or forms part of a program of system enhancement.
The actual cash value if such property is:
a) useless to the Insured; or
b) not repaired, replaced or rebuilt on the same or another site within two years from the date of loss, unless such time is extended by the Company.
Analysis
[18] I have considered the policies of insurance of the applicants and RSA, the evidence before me and the submissions of the parties concerning their respective valuations of the items in question as summarized in the combined master schedule of loss.
[19] The applicants have not satisfied me that the valuation of the loss pursuant to the RSA policy is the amount of $732,031.41 (less item nos. 31 and 42). For the following reasons, I have determined that the valuation of all boiler and machinery loss and water damage pursuant to the RSA policy is the amount of $104,541.85 on the basis summarized in the combined master schedule of loss under the headings, “Murrant valuations” and “Murrant commentary.”
[20] The applicants valued the loss on the basis of their policies and not the RSA policy. The valuation clauses in the policies are different.
[21] On cross-examination Ms. MacPhee confirmed that the applicants have not performed an adjustment of the loss on the basis of the RSA policy valuation clause (MacPhee cross-examination, Q. 47-49, P. 13-14).
[22] The applicants adjusted the claim submitted by CHEO pursuant to the terms of their respective property policies and in particular the valuation clauses within those policies on a replacement cost basis. RSA has submitted an assessment of the indemnity payable pursuant to the terms and provisions of the RSA to repair the property of CHEO damaged in the incident or to replace the “said property with property of like kind, capacity, size and quality” pursuant to the property valuation at section 2 of the RSA policy.
[23] In almost all cases where repair was not effected to damaged objects, they were replaced with new product at full price. Replacement of the damaged objects for full replacement value is consistent with the valuation provisions in the HIROC and FM policies and is inconsistent with the valuation provisions of the RSA policy mandating repair or replacement “with property of like kind, capacity, size and quality.”
[24] On cross-examination Ms. MacPhee confirmed that the applicants responded to CHEO’s claim on the basis of replacement costs whereby CHEO could obtain new material for old material, subject to whether the property could be repaired (MacPhee cross-examination, Q. 39-46, P. 12-13).
[25] On cross-examination Ms. MacPhee confirmed that the valuation clause in the RSA policy is different from the wording of the HIROC and FM policies. The RSA policy responds to like kind, capacity, size and quality which is not equivalent to replacement cost (MacPhee cross-examination, Q. 45-46, P.13).
[26] Where the evidence of Ms. MacPhee with respect to the valuation of the loss conflicts with the evidence of Mr. Murrant, I accept the evidence of Mr. Murrant. As noted above, the applicants’ valuation was not based on the RSA policy wording. In addition, Ms. MacPhee stated on cross-examination that she has no experience in either underwriting or claims adjusting of equipment breakdown or boiler machinery policies and that she has not worked within a branch of a company writing boiler and machinery insurance (MacPhee cross-examination, Q. 13-14, P. 5). Mr. Murrant is an experienced claims representative with RSA’s Claims Global Specialty Lines Division. He has completed the CIP (Chartered Insurance Professional) course. He has taken many claims adjusting courses. His training includes the concepts of actual cash value and replacement cash value (Murrant cross-examination, Q. 75-76, P. 17-18).
[27] The evidence of Mr. Bachs is not helpful to the determination of the valuation of pursuant to the RSA policy. Mr. Bachs confirms that he has not reviewed copies of the HIROC, FM or RSA policies (Bachs affidavit, paragraph 11).
[28] The valuation attached to Mr. Murrant’s affidavit was performed based on the valuations sections of the RSA’s policy. RSA concedes that RSA’s valuation is imprecise with respect the valuation of certain items. This, however, is a result of the position RSA was placed in by the applicants.
[29] Following the loss, CHEO reported the incident to the applicants and RSA who instructed adjusters to attend to investigate the cause and eventually the quantum of the loss. RSA determined that the repair of the damaged object, being the fractured coils, would be covered.
[30] RSA initially denied the balance of the claims based on the “other insurance” provisions in its policy as had been applied in the past. At the time RSA was unaware that the specific wording in the HIROC and FM policies had been changed. HIROC and FM changed the wording in their policies to trigger RSA’s boiler and machinery policy without advising RSA (Murrant affidavit, paragraph 7). It was not unreasonable for RSA to initially proceed on the basis that HIROC and FM had not changed their policy wording.
[31] The proof of loss submitted by CHEO to HIROC also indicates that there is no other contract of insurance (MacPhee affidavit, exhibit “D”, application record, page 775).
[32] The first notice to RSA that the RSA policy might be engaged for more than the repair of the fractured coils was by email from the adjuster at claimspro dated April 3, 2014.
[33] The effect of the changes to the HIROC and FM policies was the initial subject of this application. As noted above, at the return of the application it was agreed that the RSA policy would be primary coverage.
[34] As set out in report one claimspro dated June 20, 2014, HIROC and FM made a conscious decision to adjust and pay this loss and then seek recovery from RSA (MacPhee affidavit, exhibit “D”, application record, pages 245-246).
[35] Mr. Murrant attributed a value of 10 per cent and 25 per cent for the replacement of certain items. Older items were assessed at 10 per cent and newer items at 25 per cent. This assessment was based on Mr. Murrant’s experience and a review of the documents provided by the applicants (Murrant cross-examination, Q. 245-250, P. 61-62). Although Mr. Murrant did not follow his usual procedure in arriving at these values which would have included looking at the actual items in question and consulting a third party assessor, RSA’s failure to adjust the loss in the normal course is reasonably explained based on the applicants’ failure to advise RSA that the applicants’ policy wording had changed and the applicants’ decision to adjust and pay the loss and then seek recovery from RSA.
[36] In cases where is no damage to an item, the applicants have not satisfied me that an amount is owing pursuant to the RSA policy.
[37] My reasons apply to all items as summarized in the combined master schedule of loss. I will address one item specifically due to the value claimed, representing just under one half of the total amount claimed.
[38] The applicants submit that the amount of $340,827.14 is the proper valuation for the Perkins Elmer TQD MSMS screening system (item no. 5). The evidence before me is that the unit could have been repaired for significantly less than the amount paid to replace (MacPhee affidavit, exhibit “D” Waters Quote, application record, pages 381-388). Pursuant to section II(i) of the RSA policy, RSA’s liability is the lesser of the cost to repair or the cost to replace with property of like kind, capacity, size and quality. I am not satisfied that the amount claimed for the replacement of the unit by the applicants is the amount that ought to be paid pursuant to the RSA policy. I accept the amount to repair in these circumstances.
[39] On the reference, the applicant referred to the decisions of Carter v. Intact Insurance Co., 2015 ONSC 4400 (Ont. S.C.J.), Wilson v. Canadian General Insurance Co. and Rodriguez v. Allstate Insurance Co.. These decisions can be distinguished on the basis that the decisions considered home owners property insurance and not boiler and machinery policies.
[40] The court does not have the benefit of any assessment on the part of the applicants of how a boiler and machinery policy would have valuated and paid for the loss. The applicants have not satisfied me that their valuation of the loss is in accordance with the RSA policy. The only valuation that attempts to apply the valuation provisions in the RSA policy is Mr. Murrant’s valuation on the basis summarized in the combined master schedule of loss under the headings, “Murrant valuations” and “Murrant commentary.” The valuation of all boiler and machinery loss and water damage pursuant to the RSA policy is the amount of $104,541.85.
[41] If there is an issue of costs that the parties are unable to resolve, the parties may make arrangements to re-attend before me. Any re-attendance shall be scheduled, not necessarily proceed, within 60 days.
[42] Counsel for the applicants may prepare a draft formal report for approval by counsel for RSA and thereafter submission to the court.