Court File and Parties

COURT FILE NO.: CV-21-674161 DATE: 20220512

ONTARIO SUPERIOR COURT OF JUSTICE

RE: ASHLEE SEGAL and NICHOLAS OSEN, Applicants -and- CHICAGO TITLE INSURANCE COMPANY, Respondents

BEFORE: FL Myers J

COUNSEL: Gordon McGuire, for the Applicants Dominique Michaud and Anisha Samat, for the Respondent

HEARD: May 10,2022

ENDORSEMENT

The Application

[1] The issue on this application is whether the respondent is required to pay the applicants their actual insured loss as promised. The insurer submits that the defined term in the insurance policy “Actual Loss” means an amount that is far less than the actual loss incurred by the insured applicants.

[2] There is a second issue of whether the value of the “Actual Loss” is to be determined by a single appraiser chosen from a list of three appraisers nominated by the insurer as set out in the insurance policy or by the mandatory statutory appraisal process.

[3] For the reasons that follow, the applicants succeed on both issues. Accordingly, I grant the relief sought in paras. 1 (a) and (c) of the Notice of Application as amended on April 11, 2022.

[4] Counsel agreed that costs fixed at $20,000 all-inclusive would be payable to the successful party. Accordingly, I also order the respondent to pay the applicants their costs of this application in that amount.

The Facts

[5] There are no facts in dispute. Accordingly, in the recitation below, I borrow liberally from the summary of facts set out in the factum of the respondent.

[6] Shortly after purchasing a residential property in July 2021, the applicants received a municipal order from the Town of Whitchurch-Stouffville, requiring them to remediate the existing swimming pool, rear deck, and cabana that had been previously constructed without the necessary permits and the appropriate construction methods.

[7] This was a covered risk under the policy of title insurance that the applicants had purchased from the respondent when they bought the property.

[8] The applicants made a claim under their insurance policy. The parties worked together to obtain the necessary permits and directions from the municipality and the local conservation authority.

[9] The municipality determined that the swimming pool would not have to be reconstructed and that it could be remediated by simply obtaining the necessary approvals and permits. However, the deck and the cabana had to be demolished and rebuilt to code.

[10] The deck and cabana were very large structures built on a hill in an environmentally sensitive area. According to quotations obtained by the applicants, the cost of demolishing and then rebuilding the deck and cabana was estimated to be in the range of approximately $290,000 to $350,000.

[11] The insurer invoked an appraisal process provided for in the policy. The appraiser determined that the Actual Loss suffered by the applicants was $85,000.

[12] The applicants submit that the appraiser was misdirected by the insurer and failed to calculate their actual loss in the manner provided for in the insurance policy.

The Policy

[13] The following is the insured risk at issue:

23. You are forced by a Governmental Authority to remove or remedy your existing structures or any part of them - other than boundary walls or fences - because any portion was built without obtaining a required building permit from the proper Governmental Authority.

[14] The defined risk is a government order to remove or remedy structures built without necessary permits. The covered risk is not the building structure itself. The physical structure of the building is excluded from coverage as follows:

…You are not insured against loss, costs, legal and/or notarial fees, and expenses resulting from:

8. Physical/structural conditions and defects including but not limited to the improvements located on the Land, those that impact value or marketability and the failure of all or part of the improvement(s) located on the Land to have been constructed in accordance with applicable building codes and/or to comply with current building codes. This exclusion does not limit the coverage described in Covered Risks 17, 21, 22, 23, 25, 33 and 34. [Emphasis added.]

[15] The reference to Covered Risk 23, emphasized above, makes it clear that while the structures themselves are not covered, the risk of a government order to remove or remedy any illegally built structures remains covered.

[16] Article 4 (a)(ix) of the insurance policy provides specific terms dealing with claims under risk 23:

(a) After we receive Your claim notice or in any other way learn of a matter for which we are liable, we can do one or more of the following:

(ix) For claims which are covered under Covered Risk 23, even if they are also covered under another Covered Risk, the Company has the following options:

2. Where the cost of removing or remedying the portion of the structure built without a permit exceeds $50,000.00 we may:

a) pay for the removal or remediation; or

b) End the coverage described in Covered Risk 23 by paying you your Actual Loss resulting from the Covered Risk, as determined by an appraisal conducted by an AACI (Accredited Appraiser Canadian Institute) - accredited appraiser, and those costs, legal fees and expenses incurred up to that time which we are obligated to pay.

[17] This term of the policy provides the insurer with an option. If the cost of remediation under a government order will exceed $50,000, the insurer can end the coverage and pay the “Actual Loss resulting from the Covered Risk” as determined by an appraiser.

Policy Interpretation

[18] Mr. Michaud submits that the option to pay the “Actual Loss resulting from the Covered Risk” under option (b) must necessarily be something different than the the cost of “the removal or remediation” under option (a). Moreover, he submits that logically, (b) must be something less than (a) since it is an option provided to the insurer when the cost of remediation becomes too large (over $50,000).

[19] While that is one logical inference possible, it is not the only one. It could be, for example, that there are different ways to calculate the loss suffered by an insured in this circumstance of a government order but the insurer accepts that, for small claims under $50,000, it will not spend the time, effort, or cost to inquire. However. once the cost of remediation becomes material, the insurer wishes to provide itself with optionality to study and assess the insured’s loss with greater particularity. Neither option is necessarily cheaper in that case.

[20] I do not need to determine this issue however. The policy defines the “Actual Loss” expressly and unambiguously:

(a) "Actual Loss": the difference between the value of the insured estate as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy. The date used to assess Actual Loss will be the date the claim was made by You. unless otherwise stipulated in the Conditions of this policy. [Emphasis added.]

[21] The definition describes a mathematical formula to be calculated by an appraiser. The Actual Loss starts with “the value of the insured estate as insured”. The parties agree that this amount is the fair market value of the whole property at the date of assessment as if there was no defect i.e. with no order requiring remediation. In this case the parties agree that the value of the property is $1,745,000.

[22] Then, the formula provides that the appraiser is to subtract “the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy”.

[23] It is this phrase that is the source of this dispute. The insurer submits and instructed the appraiser that the phrase “the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy” means that he was to calculate the value of the land as if it did not have the unpermitted swimming pool, cabana, and deck at all. He determined that the value of the land as if it had no swimming pool, cabana, or deck was $85,000 less than the fair market value as agreed.

[24] I do not understand how the phrase “the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy” can be translated to mean the land without the illegal structures. The value being determined is the value of the land “subject to the defect…insured against”. The defect insured against is the government order. Mr. Michaud took pains to emphasize Exclusion 8 to say that the building itself is not insured. He relies on case law for the proposition that without a government order, the covered risk does not apply.

[25] In no sense is the land without the offending structures the “insured estate subject to the defect…insured against”. Neither is it the “Actual Loss resulting from the Covered Risk” as required by Article. 4 (a)(ix)(2)(b). As Mr. McGuire points out, the applicants did not buy a pristine piece of land with a manicured but empty back yard. They bought a piece of land with a swimming pool with appurtenant structures that turned out to be both illegal and unsafe. Postulating that there was no pool, deck, or cabana at all ignores the actual facts and ignores the insured risk that came to fruition.

[26] The insured risk is the government order. The value of the estate “subject to the defect…insured against” therefore has to be the value of the land subject to the government order. The question for appraisal then, is what will a willing buyer pay in an arm’s length sale, for this land subject to this government order? I see no ambiguity or uncertainty at all in the application of the words used to the facts as agreed.

[27] The only argument available to the insurer is that the interpretation might make the calculation of the Actual Loss the same under either option. The value of the remediation and the loss of value of the land due to the government order might be the same in this case. Mr. Michaud submits that this must be wrong because the insurer has given itself a cheap escape route for claims over $50,000. It cannot be correct that both options have the same value if the escape route is to have meaning.

[28] I do not accept that the definition of Actual Loss is necessarily a cheap escape route at all. It may just be an option for better calculation of the insureds’ actual loss. In this case, for example, no one has yet determined the value of the land subject to the government order. Is it necessarily reduced dollar-for-dollar by the exact amount of the cost of remediation? Might bidders in today’s real estate market bid the value up anyway? Might a buyer be happy to demolish the deck and cabana and not rebuild? That could save it a significant portion of the cost of remediation. Might the house be a “knockdown” with a land value predicated on redevelopment potential rather than the cost of remediation?

[29] I also need to consider the policy as a whole. The policy is one of title insurance. It covers defects in the value of the property that are not necessarily readily discoverable by title searches. It is not a policy of house insurance. Risk 23, Exclusion 8, Article 4 (a)(ix) and the definition of “Actual Loss” all bear on the question before me.

[30] Ultimately, this is not a difficult case. The wording of the definition of Actual Loss, in the context of a policy of title insurance, and in light of the very specific clauses detailing how claims under risk 23 are to be handled leaves no ambiguity.

[31] The value to be subtracted from the value of the property is the value of the property subject to the government order. That is the “insured estate subject to the defect…insured against”.

[32] As is apparent from the opening paragraph of this endorsement, the words “Actual Loss” do not equate to “cheap escape route” at all. The insurer could have capped its payment at $50,000 or some other defined amount if it had intended to do so. I am interpreting the words of the policy chosen by the insurer in the context of the purpose of title insurance and in light of the various related clauses.

[33] The policy says what it says. The insurer is free to change the policy wording if it has not described the cheap escape route that it wishes.

[34] The appraiser did not calculate the value prescribed by the insurance policy. His valuation or appraisal therefore cannot stand. The next question is how is the value to be calculated.

The Appraisal Process

[35] Article 4 (a)(ix)(2)(b) of the policy provides for the Actual Loss to be “determined by an appraisal conducted by an AACI (Accredited Appraiser Canadian Institute) - accredited appraiser”. It then provides that the insurer proposes a list of three appraisers and the insured picks one.

[36] While the applicants went along with the policy process initially, they now assert that the process is unfair and should not be followed. They raise the risk or appearance that only appraisers who are committed to the insurer will likely get onto the insurer’s list of three.

[37] I do not need to make any finding of bias or unfairness in this case. The Insurance Act, RSO 1990, c I.8 deals with this question expressly.

[38] Subsection 128 (1) of the statute says:

128 (1) This section applies to a contract containing a condition, statutory or otherwise, providing for an appraisal to determine specified matters in the event of a disagreement between the insured and the insurer.

[39] Article 4 (a)(ix)(2)(b) of the policy in this case is a condition providing for an appraisal to determine a specified matter if the parties do not agree. Therefore, s. 128 applies.

[40] Subsection 128 (2) of the statute says:

(2) The insured and the insurer shall each appoint an appraiser, and the two appraisers so appointed shall appoint an umpire.

[41] The statute prescribes a tripartite process for appraisals. The statutory process obviously differs for the process provided by the policy. The next question then is whether the parties are entitled to contract out of the statutory process and replace it with one of their own.

[42] Section 126 of the statute provides the answer to this question. It says:

126 (1) No insurer shall make a contract of insurance inconsistent with this Act.

[43] The appraisal process set out in the policy is inconsistent with the process to govern appraisals set out in the statute. A tripartite process with an independent Umpire is not the same as choosing a decision-maker from a list of three provided by one side. While the insurer’s method is not necessarily unfair, it lacks the structural assurance of fairness provided by the statutory scheme.

[44] It seems apparent to me as well that by requiring a tripartite process, the legislature was implementing a public policy to ensure the existence and the appearance of a fair appraisal process when an out-of-court appraisal process is used to resolve insurance claims. Typically, one cannot contract out of statutory enactments implementing public policy.

[45] The insurer submits that there is nothing inherently unjust about the appraisal process set out in the policy. But it submits no case law or other authority making that submission relevant to the question before me. Absent any argument to limit the application of s. 126 of the statute or any legal basis to allow the insurer to ignore the appraisal process mandated by s. 128, the process in the insurance policy must yield to the mandatory statutory process.

[46] Therefore, as requested by the applicants, I direct that the appraisal of the applicants’ Actual Loss as defined above to be determined under s,. 128 of the Insurance Act.

FL Myers J

Date: May 12, 2022