COURT FILE NO.: CV-14-516920

DATE: 20180604

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, Respondent

BEFORE: Pollak J.

COUNSEL: Rory Barnable and Leona Kung, for the Applicants

Robert Clayton, for the Respondent

HEARD: March 8 and 9, 2018

ENDORSEMENT

[1] The Applicants, Healthcare Insurance Reciprocal of Canada, HIROC Management Limited and Factory Mutual Insurance Company brought an Application to determine if coverage for a loss was required under a boiler and machinery policy issued by the Respondent, Royal and Sun Alliance Insurance Company ("RSA"). RSA admitted that coverage was due under its policy. Pursuant to consent Order dated March 31, 2015, the parties agreed to a reference by a Master to determine the amount owing to the Applicants pursuant to the RSA policy.

[2] The Applicant brings this motion to oppose the confirmation of the Referee’s Report with Reasons for Decision of the Master dated June 27, 2017 and Supplemental Reasons on Costs dated November 6, 2017. This is opposed by the Respondents.

[3] The Reference was to determine what portion of the claims submitted by the insured should be paid by RSA pursuant to its Machinery Insurance Policy No. 4161132.

Standard of review

[4] The Applicants argue that the Master's reasons contain errors of law and that, therefore, the standard of review for such errors must be correctness. They submit that the confirmation of a reference on motion is substantially dealt with as an appeal. The Applicants opposing the confirmation must convince this court that the decision is wrong.

[5] The Applicants further submit that where great delay and expense has already been incurred by the parties, this court should make its own findings on the record before it, instead of directing a further reference.

[6] On the motion, the Applicants argue that because a reference considers substantive legal issues and not just a calculation of value, the standard of review for errors in law must be correctness. The Applicants seek to have this court apply a standard of correctness to the interpretation of the insurance policy wording, and to determine amounts to be paid pursuant to that correct interpretation of the insurance policy. In effect, they ask the court to “rehear” the reference on its merits.

[7] RSA, however, submits that the reasons deal with questions of fact and not law. They argue that the standard of review is one of reasonableness.

[8] RSA submits that the Master was not interpreting the standard form of contracts, and therefore did not adjudicate issues of precedential value, as is alleged by the Applicants. RSA characterizes the reference as an examination of a factual matrix surrounding the value of the loss under RSA's Boiler and Machinery Policy. The Master did not interpret the different valuations provisions in property policies, but rather, the Master only had evidence of one appropriate valuation pursuant to RSA policies and accepted such evidence in arriving at her decision. For these reasons, the standard is not correctness; rather, deference should be given to the Master's reasons.

[9] In this case, however, for the reasons I explain below, the standard of review would not be determinative as I do not agree with the submissions of the Applicants that the Master made errors in the interpretation and application of insurance coverage generally and the RSA policy language specifically.

Analysis

[10] The Applicants argue that the errors in law and principle arise because of the legal distinctions the Master made between the RSA policy and other policies.

[11] Specifically, the Applicants submit that the Master’s Reasons disclose errors in the interpretation and application of insurance coverage generally, and the RSA Policy language specifically. The Master drew distinctions between the RSA Policy and other policies, which distinctions are contrary to established law on “replacement costs coverage” and “actual cash value coverage.” As a result of these false distinctions, the Master accepted the evidence of the RSA in the “Murrant valuations” instead of the Applicants' valuation evidence (including the Bachs affidavit). This was an error.

[12] As a matter of law, the Applicants submit that “Like Kind replacement” entitles an insured to have an old machine replaced with a machine that will perform the similar function but with no deduction for depreciation. It is argued that although replacement cost coverage of Like Kind does not allow for “all the benefit of technological advances,” it can allow for the replacement with an old model in new condition. It cannot, however, allow for replacement with a better model.

[13] RSA disagrees. RSA argues that the Applicants’ approach is erroneous because it is based on their policies rather than the RSA policy. RSA submits that the Master found as much, and that there is no reviewable error in such finding. Specifically,

• The Master found that the valuation clauses in the policies are different. The valuation clauses in the Applicants’ policies provide for valuation on a replacement cost basis. The RSA policy, however, was to repair the property damaged or to replace the “said property with property of like kind, capacity, size and quality.” RSA submits that the Applicants’ property policies allow them to obtain “new for old,” which is not covered by the RSA Policy.

• The Master noted at para. 21 that on cross-examination, Ms. MacPhee, HIROC’s claims examiner, “confirmed that the [A]pplicants 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.”

• The Master found the evidence of the Applicants’ independent valuator, Mr. Bachs, unhelpful.

• Over the four day hearing, the Applicants did not provide the Master with any evidence based on the valuation provisions in the RSA Policy, but relied on the valuation provisions in their Property Policies. This led the Master to note that given the absence 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 had not satisfied her “that their valuation of the loss is in accordance with the RSA policy.”

• RSA’s evidence, on the other hand, was based on an assessment of the amounts payable pursuant to the RSA policy pursuant to s. 2 of the RSA policy. RSA relied on the affidavit of Michael Murrant, a claims examiner with RSA. He relied on a valuation pursuant to the RSA policy based on the damage information available to him.

• The Master preferred the RSA’s evidence on the valuation of the loss over the evidence of the Applicants.

[14] RSA submits that the Master was correct in accepting the evidence of Mr. Murrant over the evidence of Ms. MacPhee with respect to valuation because he is an experienced claims representative with RSA's boiler and machinery department. His training included the valuation of actual cash value and replacement cash value. Ms. MacPhee, however, has no experience in either underwriting or claims adjusting of equipment breakdown or boiler machinery policies and she has not worked within a branch of a company writing boiler and machinery insurance.

[15] Rather than focusing on Ms. MacPhee’s evidence, the Applicants argue that Mr. Murrant's valuations are wrong because although they are allegedly based on “replacement cost,” they factor in depreciation, which is legally wrong. It is submitted that his valuation ignores the additional layer of coverage inherent in replacement cost coverage. In this regard, they rely on the case of Carter v. Intact Insurance Co., 2016 ONCA 917, 133 O.R. (3d) 721.

[16] I do not accept the Applicants’ position on this issue. The court must take into account the wording of the relevant insurance policies and the evidence that was before the Master.

[17] Mr. Murrant stated that “Replacement of the damaged objects for full replacement value without depreciation…is inconsistent with the valuation provisions of the RSA policy mandating repair or replacement with property of like kind, capacity, size, and quality.” The Applicants argue that this contradicts his evidence on cross-examination where he acknowledged that replacement cost is properly valued without depreciation being applied. He applied a depreciation approach to his valuation of what is replacement cost coverage, but should have provided evidence of cost of replacement at “Like Kind.” The Applicants submit that applying this depreciation approach is contrary to the wording of the RSA policy's obligation to replace with "Like Kind". They further submit that the RSA policy wording only considers depreciation when an insured has not replaced the damaged property and the claim is paid at actual cash value coverage. As the insured did replace the property, depreciation cannot be applied in the valuation.

[18] The Applicants submit that their property policies indemnify their insured on the basis of replacement cost, meaning new for old without depreciation. However, RSA argues that the evidence of the Applicants’ witness, Ms. MacPhee, was that the property policies all have different valuation clauses than the RSA policy. Her evidence was that the Applicants adjusted and paid the loss on the basis of replacement cost being new for old as required by their property policies. There was no right to actual cash value under any of HIROC’s policies.

[19] RSA submits that the Master was correct in not interpreting the terms of the property policies because she accepted the evidence that the Applicants’ valuation clause was not the same as that in the RSA Policy. In addition, the Applicants’ reference required the Master to determine the loss in accordance with the terms of the RSA Boiler and Machinery Policy.

[20] The Applicants, however, submit that as a matter of interpretation of their own policies, the use of the words “Like Kind” in the RSA policy implies the same valuation as replacement cost found in the Applicant’s policies. RSA relies on Ms. MacPhee’s evidence that “replacement cost is new for old”, which is not the same as the valuation provisions in the RSA policy.

[21] Ms. MacPhee testified that the Applicants evaluated the claim on the basis of replacement costs, so that it could obtain new material for old material, subject to whether the property could be repaired. Ms. MacPhee admitted that the valuation clause in RSA's policy is different from the valuation clauses in the Applicants’ policies, because the concept of like kind, capacity, size and quality is not equivalent to replacement cost.

[22] On the basis of the above, the Applicants argue that the Master misapprehended the evidence because Mr. Murrant's valuation was wrong.

[23] Mr. Murrant’s evidence is that he applied the valuation clause in the RSA policy as liability for replacement to be "the cost at the time of the Accident to replace said property with property of like kind, capacity, size and quality".

[24] Although the Master acknowledged that Mr. Murrant's valuation was imprecise with respect to certain items, it was the only evidence of an assessment and valuation of the claim payable under the RSA's policy.

[25] The Applicants also allege the Master was wrong to draw an adverse inference against them based on the finding that they had not provided the Respondents with notice of changes to their policies.

[26] RSA responds by pointing out such evidence was submitted only to explain the limitations of Mr. Murrant's valuation and as such was properly accepted by the Master. I agree.

[27] I find no error as alleged by the Applicants and therefore I have no reason to grant the motion to oppose the confirmation of the Referee’s Report.

[28] For all of these reasons, the motion to oppose the confirmation of the Referee’s Report is dismissed.

Costs

[29] If the parties are unable to agree on costs, they may make brief written submissions to me no longer than three pages in length. As the successful party, the Respondent’s submissions are to be delivered by 12:00 p.m. on June 11, 2018, and the Applicant’s submissions are to be delivered by 12:00 p.m. on June 18, 2018. Any reply submissions by the Respondent are to be delivered by 12:00 p.m. on June 22, 2018.

Pollak J.

Date: June 4, 2018