COURT FILE NO.: CV-09-0512 DATE: 2017-01-16

SUPERIOR COURT OF JUSTICE – ONTARIO

B E T W E E N:

J.I.L.M. Enterprises & Investments Limited Plaintiff

C. Hacio, for the Plaintiff

- and -

INTACT Insurance (formerly called ING Insurance Company of Canada) Defendant

R. Clinker and U. Agostino, for the Defendant

HEARD: May 30, 31; June 1, 2, 3, 6, 7, 8, 9, 10, 13, 14, 15, 16, and 23, 2016, at Thunder Bay, Ontario

Mr. Justice W.D. Newton

Reasons For Judgment

Overview

[1] On May 8, 2009, the Dorion Inn, a motel/restaurant/store/and one time gas bar complex owned by the plaintiff, was partially destroyed by fire. An insurance claim was made promptly to its insurer, INTACT.

[2] The insurer’s adjuster suspected arson which ultimately could not be established.

[3] No payment was made under the policy until April 26, 2012, almost three years after the fire. That payment of $1,069,610 was for INTACT’s calculation of the actual cash value of the building loss claim. Despite that payment, J.I.L.M. has not taken any steps to rebuild. The business has not operated since the fire.

[4] This action was commenced in November 2009 and includes claims for damages for breach of contract, the cost to rebuild the property, lost profits, and punitive damages for bad faith. Much of the claim is premised on the assumption that increased damages were suffered by the plaintiff arising from the insurer’s failure to promptly, or within a reasonable period, pay the claim.

[5] One month prior to the commencement of this trial, a determination of values was made by appraisal under the Insurance Act. The May 11, 2016 award determined the following values:

a. Building damage – replacement cost: $1,747,000 b. Building damage – actual cash value: $1,086,866 c. Business interruption loss – twelve-month coverage: $44,341

[6] The arbitration also determined the building rebuild cost for the purpose of the coinsurance penalty. The coinsurance penalty reduced the replacement cost payable to $1,432,540.

[7] Seven years after the fire, this action was tried over four weeks. Surprisingly, no one from the insurer testified about their decision to delay payment of the claim.

The Facts

[8] Notwithstanding that hundreds of pages of exhibits were filed, the essential facts are largely undisputed.

The Dorion Inn

[9] Ivan Jakovljevic is the sole officer and shareholder of the plaintiff. Ivan personifies the Canadian immigrant success story. He immigrated to Canada, worked hard, accumulated wealth and, in 1982, acquired the Dorion Inn. The corporate name, J.I.L.M., represents Ivan’s initials and the initials of his wife, now deceased, and his two children. His son, Miho, has managed the business for the last few decades.

[10] The property was renovated in 1992 and an 11 unit motel was added. Later, a store was added.

The Business Pre Fire

[11] The business was not particularly profitable. Revenue fluctuated. Some years there was profit, others there was not. It was sufficient to look after the “room and board” needs of Miho who lived in the Inn, and to generate some revenue to cover some of the costs of renovations and maintenance.

[12] In the fall of November 2008, the gas station was closed because the permit for the underground storage tanks had expired. Although disputed, I am satisfied, on a balance of probabilities, that the gas station would have reopened in 2009 but for the fire. The evidence indicates that Ivan and Miho were taking active steps to have new gas pumps and ancillary equipment installed. I am also satisfied, on a balance of probabilities, that this cost would have been funded, if not by loans to the business, then through Ivan’s other assets.

[13] At the time of the fire the Inn owed municipal taxes of $140,000 and Ivan and Miho were in the process of appealing those assessments as they had done in the past. The business owed its accountants about $20,000. There were no other significant debts. The Inn operated without a line of credit and was not mortgaged.

[14] In the year immediately prior to the fire, the business was not profitable. 2006 showed a profit of about over $16,000, while 2007 showed a loss of about $1800. However, according to Ivan and Miho and others, the prospects for the Inn for the period of time following the fire were improved by construction work that was being done in the area, including the twinning of the TransCanada Highway between Thunder Bay and Nipigon.

[15] Dale Stenlund is a resident of the Dorion area and, in the 10 years or so before the fire, an employee of the Dorion Inn working in the store and motel. Prior to the fire, her daughter also worked there. She described herself as a friend of the owners and talked with them prior to the fire about the plans to upgrade the store and gas pumps, and after the fire about their plans to rebuild and continue the operation in the community.

[16] She described the Inn and store as a community socializing place. For gas, restaurant, or groceries, the locals would have to travel to either Thunder Bay or Nipigon.

[17] She admitted that in the years leading up to the fire, the Dorion Inn had been less busy in part due to the loss of the LCBO agency licence. In 2002, the LCBO agency licence was lost as result of Miho’s conviction for failing to report and pay proper sales tax.

[18] Chris Nyman also described the importance of the Dorion Inn. After the fire, he moved from the community and cited the lack of gas station, coffee shop, and grocery store as one of the reasons for his move.

The Fire

[19] Chris Nyman, a mechanical supervisor at OPG and, coincidentally, a volunteer firefighter with the local fire department stopped by the store to make a purchase. When he walked in, the store was unoccupied. He moved into the lounge area and noticed smoke at the ceiling level and encountered the owner, Ivan, who was very distraught and in what Mr. Nyman described as a state of shock. He assisted Ivan, who has an accent, in placing the 911 call. Mr. Nyman then went to the local fire hall to prepare the pumper truck. He and other members of the local fire department attended and initially succeeded in getting the fire under control. However, the decision was made to pull the firefighters out of the building because of concerns with electrical issues. A call was made to Hydro One to disconnect the power to the store. That caused some delay and, as result of that delay, the fire went out of control. Mr. Nyman thought that, but for this delay, the building could have been saved.

[20] Mr. Nyman thought the source of the fire was electrical. He observed that the meter at the back of the building was spinning extremely fast indicating to him that this was a “dead short.”

The Adjuster’s Investigation

[21] The fire was reported to the insurer immediately. It retained an independent adjuster, John Bourett. The adjuster attended the fire while the firefighters were still fighting the fire. He adjusted the claim until December 2010 when he went off work on disability. Mr. Bourett did not testify at trial. The plaintiff took no issue with the assertion by INTACT that the adjuster was unable to testify due to disability. The adjuster’s activity in the file is discerned from a review of some, but not all, of the reports to INTACT. During the course of the trial, the plaintiff sought production of reports and notes that had not been produced and I ruled that the request was too late in the day. It was conceded by counsel for INTACT that Mr. Bourett was, at all times, acting within the scope of his authority and at the direction of INTACT. However, from the reports in evidence, little is said about instructions received.

[22] The adjuster interviewed Ivan and others, including Chris Nyman who described his observations at the time the fire including the “dead short.” Within a week of the fire, the adjuster had been in contact with Origin and Cause, forensic engineers and fire investigators, who attended and took samples of fire damaged material and the fire alarm panel. INTACT’s “Special Investigation Unit” also became involved and attended. This was notwithstanding the fact that the Ontario Fire Marshall’s office advised that they would not be conducting any further investigation. The basis for suspicion is summed up in the first adjuster’s report dated May 25, 2009 as follows:

Presently the cause is unknown, but clearly in the 40 minutes prior to the fire only the insured and his son that had exclusive access to the premises.

There is also clearly a pattern where the insured is suffering substantial financial distress…

We await any directions you may have.

[23] Origin and Cause delivered a comprehensive report on June 19, 2009 which concluded that the “exact cause cannot be identified, and therefore the cause of this fire must be classified as Undetermined.” The investigator concluded that “due to the degree of consumption described, it is not possible to eliminate an electrical malfunction, nor is it possible to eliminate an accidental fire caused by smoking, or an incendiary fire.”

[24] The fire investigators retained by the adjuster wanted to take samples of the flooring in the basement where the fire started to test for the presence of accelerants. When they attended to do so the basement area was flooded and the adjuster suspected representatives of the plaintiff had deliberately caused this to occur. Analysis of the samples tested negative for ignitable liquids.

[25] The adjuster contacted the district OPP and “after discussions with them, they are now following up in detail in respect to investigation of this matter” (report 2). This was notwithstanding the police investigation to date, which included the interview of Ivan by Detective Sgt. Veillieux of the OPP who did not have any “major concerns” that Ivan was involved in a fire. He found Ivan cooperative.

[26] At the same time, the adjuster had also retained GARDA to investigate Ivan’s financial situation. That report came back advising that Ivan had “substantial net worth” and is “meeting all of his financial obligations.”

[27] By July 2009, the adjuster had the OPP and fire marshal involved re-interviewing witnesses. The adjuster had received an anonymous letter suggesting that Ivan had a long history of insurance claims and a newspaper clipping relating to Miho’s conviction for tax evasion in 2002.

[28] By September 2009, despite being prompted by the adjuster to conduct further investigation, both the OPP and the Office of the Fire Marshall concluded that there was “nothing to substantiate further investigation” and the representative of the Fire Marshall’s office indicated to the representative of Origin and Cause that they were “taking their ball and going home.”

[29] Nevertheless, the adjuster persisted in its investigation. Miho was interviewed on October 22, 2009. The adjuster commented on a number of inconsistencies including charges/mortgages against the property. However, it was subsequently confirmed that all charges had been satisfied but not, through inadvertence by the solicitor involved, removed from title.

[30] The adjuster interviewed others who suggested that the anonymous tip might have come from Ivan’s brother who had an “adversarial relationship” with Ivan. The adjuster prompted the OPP to examine the anonymous tips for fingerprints and to attempt to interview Ivan’s brother. The adjuster reported that the OPP were satisfied that the tips were sent by Ivan’s brother although the brother denied doing so.

[31] By late April and May 2010, INTACT’s Special Investigation Unit was still involved and the adjuster was “pressing” to meet with the OPP to arrange a Crime Stoppers ad. This was notwithstanding that Detective Sgt. Veilleux advised him that “Crime Stoppers is for crimes that have been committed and explained that at this point we cannot say that the crime was committed.” The adjuster noted that the ad “will have to be worded carefully, and on the basis of simply collecting further information about the circumstances at the hotel on May 8, 2009.” By May, the OPP advised that they would not be pressing the investigation any further. Notwithstanding the OPP’s position, the Crime Stoppers ad ran in the local papers and on television and radio in the Dorion area. Detective Sgt. Veilleux confirmed that, from the OPP’s perspective, there was no need to make an appeal to the public for more information. The ad began: “Police are looking for your help in the investigation of a fire...”

[32] A second Crime Stoppers ad was run in the local newspaper on July 19, 2010. The ad began: “Through Crime Stoppers investigators are looking for your help in the investigation of the fire that destroyed a well-known local highway landmark.” The ad went on to mention that INTACT was offering a $10,000 reward for information.

[33] Chris Nyman felt that the ads were implicating Miho and Ivan which shocked him. Ivan was also shocked and upset that he was being implicated. To his friends and others in the community, this was a serious challenge to his integrity.

[34] Stuart McKay, the second adjuster, took over carriage of this file in December 2010 when the first adjuster went on long term disability. Based on his review of the file, the causation investigation had been concluded by the spring or early summer of 2010. This is contradicted by the discovery evidence of Mr. Bourett who testified that the investigation was still ongoing in September 2010. Mr. McKay confirmed that there is no reliable evidence that implicated Ivan or Miho as arsonists. INTACT had already retained counsel to defend this action. Despite a conference call in March 2011 with counsel and the instructing claims representative at INTACT, Mr. McKay did not receive any instructions until June 2011 when he was instructed to prepare an actual cash value (ACV) for the building and separate what was covered from the schedules that had been produced by the plaintiff. The ACV evaluation had already been prepared by the first adjuster. Mr. McKay testified that the prior adjuster had been working on the ACV evaluation in November 2010. Mr. McKay was also instructed to retain an accountant to prepare a business interruption report.

[35] When asked in cross-examination whether he found the failure to pay anything under the policy within the two years offensive, Mr. McKay responded by saying that he would not find it offensive, but troubling perhaps.

[36] Meanwhile, through 2009 to 2011, Ivan and Miho were waiting for answers from INTACT. Miho had been told by the adjuster that he had to secure the scene. He hired a watchman, bought and erected fencing, boarded up the property and did some cleanup work. Through counsel, he supplied books of receipts and invoices for his time and travel and expenses. Again through counsel, he prepared proofs of loss on contents and rebuilding. On July 7, 2009, the plaintiff delivered a Proof of Loss claiming replacement cost of the building at $1,768,670 and contents of $825,296.32. Unfortunately, J.I.L.M. persisted in presenting a contents claim when there was no contents coverage under the policy despite the fact that its own broker confirmed there was no contents coverage shortly after the fire. A claim against the broker was settled for $250,000 in 2011. Nevertheless, the plaintiff maintained its claim for contents. INTACT brought a summary judgment motion to dismiss the claim for contents and that motion was successful before Shaw J. in December 2012.

[37] Ivan and Miho sought rebuilding and repair quotes from two local contractors. Both testified at trial. Neither knew the other’s quote but, remarkably, the quotes were quite close. The repair and rebuilding quotes were in the range of $1,800,000-$1,900,000, which included design fees and possible foundation work. At that time, the budget to repair the motel was estimated at over $200,000. Both estimated that, once the insurance issues were settled, site cleanup could commence in the fall of 2009 with construction commencing the following spring for completion by the fall of 2010. All contractors who testified agreed that, on average, construction costs increased approximately 3% annually.

[38] Back in June 2009, Mr. Bourett was also getting estimates. He received a comparable estimate for the main building repairs at 1.9 million plus consulting fees for a total of approximately 2.1 million. That excluded the motel.

[39] Without funds, electricity could not be restored to the complex. The motel, partially damaged by fire and water, lay vacant and unheated. The plaintiff did not have ready funds to remediate the motel. Repairs were delayed because they were waiting for an answer from the insurer.

[40] INTACT had an estimate from its contractor, ServiceMaster, by late June 2009 indicating that the cost to repair the motel was approximately $120,000. However, because INTACT was still suspecting arson, nothing was done to repair the motel.

[41] When mould became apparent in the motel in 2011, J.I.L.M. retained a consultant who recommended remedial measures estimated to cost between $150,000 and $250,000. The necessary work was largely not undertaken resulting in additional mould and deterioration. Recent re-inspection confirmed the spread of mould and further deterioration. Currently, the cost to remediate the motel is in in the range of $800,000-$1 million. Demolishing and rebuilding the motel at this location is not an option since the motel was inadvertently built on an easement.

[42] After Mr. McKay completed the ACV calculation on June 30, 2011 INTACT offered the plaintiff $1,069,610 for the ACV on the building loss. His letter read:

We have been instructed by our principals to make an actual cash value (ACV) settlement offer for the building portion of the claim.

We have calculated the ACV value of this loss to be $1,069,610.00. Our principals are prepared to make payment in this amount in exchange for an interim Proof of Loss in respect of settlement on ACV basis.

No replacement cost payment will be considered until such time as repairs and rebuilding are complete.

[43] In questioning, Mr. McKay confirmed that, despite his last sentence, progress payments during rebuild could have been possible.

[44] Counsel for J.I.L.M. responded seeking confirmation that INTACT would pay the most recent rebuild estimates. Counsel for INTACT then responded that the ACV would be payable upon submission of proof of loss but did not confirm that INTACT would pay the most recent rebuild estimates. Counsel for J.I.L.M. continued to press for an acknowledgment that INTACT would pay the current rebuild estimate and stated upon securing that acknowledgment that J.I.L.M. would undertake rebuilding

[45] Finally, Counsel for J.I.L.M. responded on August 26, 2011 advising as follows:

Our client is willing to accept the sum of $1,069,610 as the ACV value of its building on the date of the fire in question. Having said this, this acceptance is in no way prejudicial to our client’s right to claim any other damages from the defendant INTACT. Our client is specifically preserving all such rights and claims.

[46] Counsel for INTACT provided a breakdown of the ACV offer on October 4, 2011 and on November 23, 2011, confirmed that the ACV would be advanced upon submission of the proof of loss. He also made an offer to settle the matter by offering the ACV payment “for resolution of the property damage claim along with costs as assessed or agreed…”

[47] On November 29, 2011, counsel for J.I.L.M. rejected that offer and sought pretrial dates.

[48] A proof of loss was not submitted and, in February 2012, counsel for INTACT advised that the ACV payment would be made upon receipt of the proof of loss and that failing receipt of the proof of loss the ACV funds would be paid into court.

[49] Finally, on April 26, 2012, after delivering a proof of loss, that payment was made without prejudice to the plaintiff challenging the ACV evaluation and insisting upon replacement cost.

[50] In November 2011, INTACT also offered the plaintiff $39,341 for payment of the business loss. The policy limited the business interruption loss claim to 12 months. J.I.L.M. did not accept, claiming that as result of INTACT’s conduct, it was entitled to additional damages outside the policy. On March 19, 2013, INTACT made that payment without prejudice to the plaintiff claiming business interruption beyond 12 months.

[51] Despite receiving these payments, J.I.L.M. did nothing to restore the motel or rebuild the Inn and store complex. Nevertheless, I accept Ivan’s evidence that he always intended to rebuild the Inn even if the limits were only $1.4 million and that he would finance any shortfall personally. However, his explanation that, even after payment of the ACV, he was awaiting the outcome of the litigation is unacceptable in the circumstances.

The Prospects of the Inn Post Fire

[52] The proof of what might have been is always difficult. In this case, the expert accountants, Ms. Bain Smith on behalf of the Inn and Mr. Gain on behalf of INTACT, provided great assistance. Both had economic reports to assist in their analysis. Both, candidly and professionally, modified their positions based on information and critique provided by the other. By the end of the trial, the experts had collaborated in the compilation of schedules outlining the projected losses from the date of the fire to May 2018 (Exhibit 30).

[53] One difference between the two reports related to whether the gas station would reopen. Mr. Gain prepared calculations based on the gas station reopening and not opening. Ms. Bain Smith assumed that the gas station would reopen and provided low and high range estimates based on that assumption. As indicated, I am satisfied, on a balance of probabilities, the gas station would have reopened. Mr. Gain’s projections based on the gas station reopening is very close to the midpoint of the high and low projections prepared by Ms. Bain Smith. However, the calculations diverge significantly when projecting income post 2013.

Positions of the Parties

[54] The plaintiff argues that INTACT breached its contract with J.I.L.M. by failing to pay the claim promptly and that J.I.L.M. is therefore not only entitled to full replacement cost without rebuilding, but that INTACT must also pay the current cost to rebuild the Inn (approximately $3.4 million) and the full cost to remediate the motel (approximately $1 million) and all of its expenses even though these amounts far exceed the actual policy limits.

[55] J.I.L.M. also claims entitlement to the loss of income or business interruption loss beyond the one year payable under the policy because of this breach to May 8, 2018, the contemplated date that the business would reopen following judgment in this action. Ms. Bain Smith calculated that loss at between approximately $400,000 (low) to $700,000 (high). Mr. Gain projected the loss at about $500,000.

[56] J.I.L.M. also claims punitive damages in the range of $250,000 to $750,000 based on the delay in paying the claim and also because the reputation of Ivan and Miho have been adversely affected by the Crime Stoppers ads.

[57] The defendant argues that the only remaining entitlement under the policy is replacement cost and argues that J.I.L.M. is only entitled to replacement cost if the Inn is rebuilt and that the replacement cost is limited to $1,432,540, which is the replacement cost limit reduced by the coinsurance penalty. After deducting the payment for the ACV, the balance owing, if J.I.L.M. rebuilds, is $345,674.

[58] INTACT argues that delay in payment of the claim was caused by the reasonable and very appropriate arson investigation and by the conduct of the plaintiff in continuing to present claims for items not covered under the policy and not submitting a proof of loss for the ACV in a timely fashion.

[59] The defendant argues that J.I.L.M. has failed to mitigate its damages by failing to commence rebuilding upon receipt of the ACV offer of $1,069,610 and by failing to take steps to preserve/remediate the motel. INTACT also argues that business loss damages payable after the one year period specified in the policy should be limited to the projected rebuild opening date calculated from June 30, 2011, which is the date the offer was made to pay ACV.

[60] Finally, INTACT argues punitive damages are not warranted on these facts.

[61] These arguments lead to the following questions:

1. Did INTACT breach its contract of insurance with J.I.L.M.? Particularly, did INTACT breach the contract by failing to pay the claim within a reasonable period of time?
2. If there is a breach, are damages outside the policy provisions appropriate and, if so, are the damages limited by the failure of J.I.L.M. to mitigate?
3. If there was a breach, what is the appropriate period for awarding lost profits?
4. If there is a breach, is the conduct of INTACT so egregious as to attract punitive damages?

Analysis

1. Did INTACT breach its contract of insurance with J.I.L.M.? Particularly, did INTACT breach the contract by failing to pay the claim within a reasonable period of time?

[62] To answer this question, I first need to determine when it was reasonable to conclude the arson investigation and begin to make payments under the policy. INTACT’s factum fairly sets out the insurer’s obligations and I reproduce the following excerpt from that factum:

The relevant principles pertaining to the duty of good faith are fairly consistent in case law and can be summarized as follows:

a) There is an implied obligation in every insurance contract that the insurer will deal with claims from its insured in good faith and this requires an insurer to act promptly and fairly when investigating, assessing and attempting to resolve claims made by its insured;

b) The first part of the duty speaks to the timeliness in which a claim is processed by the insurer and requires the insurer to pay a claim in a timely manner when there is no reasonable basis to contest coverage or to withhold payment;

c) The second part of the duty requires the insurer to act fairly both in the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim which includes the following considerations:

i. An insurer must assess the merits of the claim in a balanced and reasonable manner;

ii. An insurer must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or to gain leverage in negotiating a settlement; and

iii. A decision to refuse payment should be based on a reasonable interpretation of its obligations under the policy;

d) The following guidelines have emerged from the case law with respect to the duty of good faith:

i. An insurer must perform a balanced and reasonable investigation and assessment of the first party claim;

ii. It must be prompt in handling and assessing the loss;

iii. The insurer must assess the merits of the claim in a balanced and reasonable manner;

iv. It must give as much consideration to the interests of the insured as it does to its own interest and is not to do anything to injure the insured’s rights to benefits under the policy; and

v. It must exercise reasonable care in settling a claim.

702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd’s of London, [2000] O.J. No. 866 (C.A.), paras. 27-29. McDonald v. Insurance Corp. of British Columbia, 2012 BCSC 283, [2012] B.C.J. No. 372 (S.C.), Tab 9, paras. 186- 189 and 201. [Emphasis added]

[63] In assessing INTACT’s conduct, I must caution myself against “hindsight bias” – that is I must judge the conduct “in the moment” and not with the knowledge that I now have that the arson defence was ultimately abandoned.

[64] In assessing INTACT’s conduct, I am limited to the adjuster’s reports (some but not all) and portions of Mr. Bourett’s discovery transcript. As I said at the outset, no one from INTACT testified.

[65] As the first adjuster’s report indicates, Mr. Bourett was suspicious of arson because Ivan and Miho had “exclusive access” and that J.I.L.M. “is suffering significant financial distress.” No one other than Mr. Bourett suspected arson. The best that could be said for the cause of the fire was that it was “undetermined.” This was known within two months of the fire.

[66] The first anonymous tip was received in July 2009 and that prompted Mr. Bourett to have the OPP and the Fire Marshall re-interview witnesses. However, by September 2009, both the police and the Fire Marshall concluded that there was nothing to justify further investigation.

[67] With respect to “financial distress,” by July 2009, INTACT knew that Ivan had “substantial net worth” and was “meeting all of his financial obligations.” An appraiser hired by the adjuster found charges against the property. It was confirmed that those debts had been paid long ago and that the charges should have been discharged. The only significant debt was the municipal tax arrears which J.I.L.M. was appealing.

[68] Within five or six months of the fire, INTACT did not have much to go on to support arson. Nevertheless, INTACT, through Mr. Bourett, continued down that path. Based on my review of the adjuster’s reports, I conclude that Mr. Bourett was not “balanced and reasonable” but, in fact, adversarial. Even as late as his discovery in September 2010, Mr. Bourett was adamant that the investigation was ongoing. This was notwithstanding the opinion of the second adjuster on the file, Mr. McKay, that the causation investigation had been concluded by the spring or early summer of 2010.

[69] Even after Mr. McKay took over the adjusting in December 2010 there was unexplained delay. He did not receive instructions to determine ACV and business interruption loss until around June 2011. The ACV offer was made on June 30, 2011. Plaintiff’s counsel responded that J.I.L.M. was willing to accept that offer provided that it was understood that J.I.L.M. could continue to make other claims. It was not until April 26, 2012 that the payment was made. While it may be argued that part of that delay related to the intransigence of counsel in insisting on a commitment to fund the new building cost and the failure to deliver a proof of loss, the fact is that INTACT had the funds and J.I.L.M. did not. This roadblock could have been circumvented by a payment into court as was suggested by counsel for INTACT at one point. However, no payment into court was made and J.I.L.M. was not put in funds until April 26, 2012.

[70] I acknowledge that, where grounds exist, an insurer is entitled to conduct an appropriate investigation. How long the investigation will take will depend on the circumstances. But for the anonymous tip, I would have thought that six months post fire was sufficient. On these facts, I am prepared to accept Mr. McKay’s evidence that the arson investigation concluded by late spring 2010, which for ease of calculation is one year after the fire. I also accept that in these particular circumstances it was within reason (but close to the limit) to delay the decision to pay for one year. The ACV payment therefore should have been available to J.I.L.M. by May 2010. I find that the failure to pay until almost two years later is a breach of the contract.

2. If there is a breach, are damages outside the policy provisions appropriate and, if so, are the damages limited by the failure of J.I.L.M. to mitigate?

[71] What damages flow from the delay in payment of the ACV? I have accepted that the plaintiff intended to rebuild. I found that the ACV payment should been processed by May 2010 in the normal process with an appropriate interim proof of loss. The payment was not made until two years later. The plaintiff has not taken any steps to rebuild. Replacement cost is currently estimated at about $3.2 million for the Inn complex alone.

[72] By virtue of the coinsurance penalty the replacement cost was reduced from $1,747,000 to $1,432,540 and that this was the maximum amount payable under the policy except for certain specified additional coverages.

[73] Had the construction process commenced in May 2010 (including preparation of drawings and construction in accordance with the schedule accepted in evidence) the construction would have been completed by the late fall of 2011. Since the ACV payment was not made until almost May 2012, construction would not have been completed until the late fall of 2013.

[74] The fundamental principle of mitigation imposes on the plaintiff a duty to take all reasonable steps to mitigate the loss and prevent the plaintiff from claiming any part of the damage which is due to its failure to take such steps (See for example Asamera Oil Corp. v. See Oil and General Corp., [1979] 1 S.C.R. 633). What is reasonable in the circumstances of each case is a question of fact, not law, and the onus is on the defendant to prove, on a balance of probabilities, that the plaintiff failed to take reasonable steps. A plaintiff’s impecuniosity is not normally an excuse for failing to mitigate (See for example Alton Artisans Guild v. Clearway Construction Ltd.).

[75] By the payment of the ACV in late April 2012, impecuniosity was no longer a factor. I accept that the plaintiff was justified in waiting for confirmation that the claim would be honoured prior to commencing construction. I accept the statement of Donnelly J. in Peters v. Commonwealth Insurance Co., that the obligation to rebuild does not attach until the insurer acknowledges its reciprocal obligation to pay. Despite receipt of over one million dollars in 2012 the plaintiff did nothing. It did not seek to have drawings prepared and begin the construction process. It did little to preserve/remediate the motel.

[76] The replacement cost limit payable under the policy, as a consequence of the coinsurance penalty, was limited to $1,432,540. All contractors/estimators agreed that construction costs increase on average 3% annually. Because I have concluded that the construction process should have commenced in May 2010, rather than in May 2012 when the ACV funds finally became available, I conclude that it is appropriate to increase the replacement cost limit by 3% annually for each year of delay. Therefore, the replacement cost limit payable at the end of 2013 when construction would have been completed is $1,565,375. The additional amount payable would therefore, after deducting the ACV as determined at arbitration, be $478,509.

[77] The plaintiff argues that it is entitled to payment regardless of whether it rebuilds or not based on the conduct of its insurer and relies on Pardhan v. American Home Insurance Co., (1993), 13 O.R. (3d) 642 and (1997), 31 O.R. (3d) 641 (C.A.). The hearing judge would have awarded replacement cost without the obligation to replace on this reasoning:

Had the insurer paid promptly, the insureds would have replaced the stolen equipment and continued in business. The insurer, by its conduct, effectively put the insureds out of business. In these circumstances, the insurer cannot benefit from its own wrong and rely on a provision which significantly limits its obligations to the insureds.

[78] The hearing judge relied upon the earlier decision of Peters v. Commonwealth Insurance Co., [1990] O.J. No.1125 which allowed recovery of replacement cost without replacement because replacement had “through the passage of time, become cost prohibitive.” The Court of Appeal disagreed and relied upon the strict wording of the policy that the replacement cost will only be paid after replacement.

[79] INTACT also relies upon Argo’s Foods Inc. v. Economical Mutual Insurance Co., [2016] O.J. No.1508, Bahniwal v. Mutual Fire Insurance Co. of British Columbia, [2016] B.C.J. No.484 and Evangeline Savings and Mortgage Co. v. General Accident Assurance Co. of Canada, [1984] N.S.J. No.65 for the proposition that replacement cost can only be awarded following replacement.

[80] I conclude that it is the clear and unequivocal intention of the contract of insurance that the plaintiff is only entitled to indemnity for the replacement cost, subject to the limits of the policy, upon undertaking and completing replacement. That does not mean that progress payments cannot be made during construction as a draw against the available limits, as Mr. McKay testified. However, until construction proceeds, the insurer is not obligated to pay any amount beyond ACV.

[81] Therefore, I set the replacement cost payable under the policy at $478,509. This amount is not payable until replacement is undertaken.

3. What is the appropriate period for awarding lost profits?

[82] The policy provided for a business interruption payment for one year from the fire to May 9, 2010. That payment was $44,441.

[83] On the evidence, since rebuilding plans were not available, I conclude that the earliest that the Inn would have been rebuilt and in operation was by the late fall or end of 2010. For ease of calculation, I use the date of commencement of operation of January 31, 2011 because that is how the calculations were presented by the accountants in Exhibit 30.

[84] As I have determined that the Inn should have commenced mitigating its losses upon receipt of the ACV payment of $1,069,610 in April 2012, following the same forecasted construction schedule, the Inn should have been back in operation by the end of 2013 – January 31, 2014 for ease of calculation.

[85] Ms. Bain Smith calculated that loss at approximately $426,000 at the high-end and $257,000 at the low-end. Mr. Gain calculated that loss at $456,000. After deducting their estimates of lost profits to January 31, 2011, the projected loss for the period from January 2011 to January 31, 2014 would be Ms. Bain Smith’s high at $314,799 and low at $181,995 (average $248,397) and Mr. Gain at $298,203. Although both experts were extremely helpful and candid, Ms. Bain Smith has more experience in Northwestern Ontario and with businesses such as this and, therefore, I accept her average of $248,397 as the truest measure of lost profits for this period. If counsel cannot agree as to how the payment under the policy of $44,441 should be integrated with these calculations, then I may be spoken to.

4. If there is a breach, is the conduct of INTACT so egregious as to attract punitive damages?

[86] In Fernandes v. Penncorp Life Insurance Co., 2014 ONCA 615, at para. 74, The Court of Appeal summarised the key principles relating to punitive damages from recent cases at the Supreme Court of Canada:

• Punitive damages are designed to address the objectives of retribution, deterrence and denunciation, not to compensate the plaintiff: Whiten v. Pilot Insurance Co., 2002 SCC 18, at paras. 43 and 94, and Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30, at para. 61.
• They are awarded only where compensatory damages are insufficient to accomplish these objectives: Whiten, at para. 94.
• They are the exception rather than the rule: Whiten, at para. 94.
• The impugned conduct must depart markedly from ordinary standards of decency; it is conduct that is malicious, oppressive or high-handed and that offends the court’s sense of decency: Whiten, at paras. 36 and 94; and Fidler, at para. 62.
• In addition to the breach of contract, there must be an independent actionable wrong: Whiten, at para. 78, and Fidler, at para. 63.
• In a case of breach of an insurance contract for failure to pay insurance benefits, a breach by the insurer of its contractual duty to act in good faith will constitute an independent actionable wrong: Whiten, at para. 79, and Fidler, at para. 63.

[87] And, it must be remembered that this insurance contract, like many, is a “peace of mind” contract. By paying a premium, the insured secures a promise from the insurer to pay for certain specified losses after an unforeseen and often catastrophic event. The fire at the Dorion Inn was such an event.

[88] I have concluded that the delay in paying the ACV for almost two years after the arson investigation was completed is a breach of the duty of good faith. Does the conduct of the insurer depart markedly from what is acceptable and does it offend the court’s sense of decency? In my opinion, it does.

[89] While it may be argued that even the delay of one year from the date of loss exceeds what is appropriate, I have concluded that the arson investigation was effectively complete one year from the fire. Nevertheless, I find that Mr. Bourett was, in the absence of any credible evidence to justify the denial, continuing to attempt to prove arson. I find that he was adversarial and not even-handed in dealing with the insured. I find that he pushed the OPP and the Fire Marshall and that he was not prepared to concede that arson was off the table when the OPP and the Fire Marshall were satisfied that it was. This is clear from his evidence on discovery that the investigation was ongoing even in September 2010.

[90] While recognizing that the Crime Stoppers ad would have to be worded carefully, he persisted in not one, but two Crime Stoppers campaigns. Those campaigns misled the public by suggesting that the police were still seeking information about the cause of the fire and impliedly implicated Ivan and Miho as arsonists when this was all driven by the insurer. This conduct, in particular, offends the court’s sense of decency.

[91] Even after Mr. Bourett was replaced by Mr. McKay, INTACT did not address the past failure to pay with due diligence. It took INTACT six months to give Mr. McKay instructions. INTACT elected not to put anyone in the witness box to explain this delay.

[92] In this case, the plaintiff had an ongoing business. Instead of dispatch, there was delay. The plaintiff was vulnerable in that it had ongoing losses. The conduct was not even-handed. It was high-handed and a marked departure from how an insurer should handle a serious claim like this.

[93] Punitive damages are to address deterrence and denunciation. The aim is to prevent similar conduct in the future. In this case, I conclude that the compensatory damages awarded, the amounts found payable as result of the breach, are not sufficient to achieve the ends of denunciation and deterrence. To achieve the denunciation and deterrent effect, the punitive damages must be significant to the insurer. Otherwise, the punitive damages award is merely a licence to continue the impugned behaviour.

[94] The ACV amount that should been paid was $1,086,866. I conclude that the appropriate amount to deter and denounce this behaviour is 10% of the ACV amount for each year of the two years that it remained unpaid. Therefore, the amount payable for punitive damages is $217,373.20.

Conclusion

[95] For reasons given, I give judgment for the following:

1. The plaintiff shall have a declaration against the defendant INTACT that the replacement cost payable under the policy is $478,509 payable, in advances, upon replacement being undertaken.
2. The plaintiff shall have judgment against the defendant INTACT for lost profits in the amount of $248,397.
3. The plaintiff shall have judgment against the defendant INTACT for punitive damages in the amount of $217,373.20.

[96] If counsel are unable to agree on prejudgment interest or discover a calculation error in these reasons they may arrange a further appearance before me through the trial coordinator.

[97] If the parties cannot agree on costs within 60 days, then the parties shall contact the trial coordinator to arrange a teleconference before me for direction on how the costs argument shall proceed. If a conference is not arranged within 60 days, then costs will be deemed settled.

The Hon. Mr. Justice W.D. Newton

Released: January 16, 2017