What is replacement coverage? Can replacement be with something different? These questions were recently addressed at the Court of Appeal for Ontario in the decision of Carter v. Intact Insurance Company, 2016 ONCA 917 (CanLII).
In this case, the Court was tasked with interpreting the definition of replacement cost. The Plaintiffs in this case owned a property in the City of Ottawa that consisted of one, two and three storey buildings with 15 residential units and 13 commercial units. The Plaintiffs purchased replacement cost coverage from the Defendant. In March 2011 a fire occurred damaging the entire site. The Plaintiff’s decided to demolish everything and construct an eight and a half storey condominium.
Appraisal determined the actual cash value (ACV) and replacement cost (RC) figures. Actual cash value was $3,900,000.00. Replacement cost was $5,732,136.32. The Defendant paid the actual cash value amount.. The Plaintiffs claimed they were replacing the building, albeit with a larger one, and were entitled to the replacement cost of the previous building. The Defendant took the position that the Plaintiff’s weren’t replacing with “new property of like kind and quality”. The Plaintiffs brought a Rule 21 motion to determine the coverage issue
At the motion, the judge found the building was not of like kind and quality. Importantly, at appeal, the Plaintiffs did not challenge that finding. Instead, they said the motion Judge erred in failing to hold that the proposed condominium was a “replacement” pursuant to the policy. An interesting note is confirmation from the Court of Appeal that when addressing “standard provisions” in insurance contracts, the standard of review is correctness as opposed to reasonableness. This is due to the commonality of insurance contracts.
This case is helpful in giving a crash course on property damage litigation. Specifically, Justice Laskin for the Court clearly articulates the differences between actual cash value and replacement cost. The Court also goes into a discussion of moral hazard – a basic principle of insurance and contracts of indemnity. Moral hazard is the risk that an insured will take actions to cause a loss because they would profit from the insurance proceeds. To limit moral hazard, replacement cost coverage usually has two requirements – a requirement that replacement does in fact occur and a requirement that the cost is limited to a defined amount. Both of these requirements were in the policy in question in this case. The motion judge found that the requirement of “like kind and quality” was also required to limit the moral hazard. The Court of Appeal said the Plaintiff’s argument against that finding may have merit, but their main issue was with the interpretation of the terms “replacement” and “replacement cost”. In other words, if the Plaintiffs couldn’t show that their building was a replacement, then everything else was irrelevant.
The appellants argue that the word “includes” in the definition of replacement was not given effect by the motion judge. That is like kind and quality only modifies “repair, construction or reconstruction”, but it does not modify an unenumerated ground such as building the condominium. They argued that the insurer should not be concerned because the claim would still be limited to the replacement cost. I.e. The Plaintiffs were building a condominium that cost much more than the replacement cost under the policy but the claim is limited to that replacement cost amount. The Court disagreed and said “of like kind and quality” modifies all replacement, both numerated and enumerated. Any replacement must be of like kind and quality.
Another issue at the appeal dealt with the interpretations of the BC Supreme Court decision of Chemainus Properties Ltd. V Continental Insurance Co. (1990), 43 C.C.L.I. 146. In that case, following a loss the insured purchased a building on another site. The Court in that case found that this was a replacement despite the building not being made of like kind and quality. Justice Laskin said he is not bound by a decision decided 25 years ago that never received appellate approval.
This case clearly stands for the proposition that replacement must be of “like kind and quality” in order to trigger replacement cost coverage when the policy sets out such a requirement.
Insureds will have to be cautious when making replacement decisions following a loss. Would replacing a 3 bedroom home with a 4 bedroom home be of like kind and quality? What would happen if they were replacing a vinyl countertop with a granite countertop, would they receive the full replacement cost of a vinyl countertop or only its ACV?
Similarly, commercial insureds may want to review their coverage with their broker to ensure they have the protection they expected to have in the event of a loss. They may chose only ACV coverage if similar replacement will not be feasible. They may also look for coverage that allows them the freedom to replace but not of like kind and quality.