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Insurance - Property Insurance. Trillium Mutual Insurance Company v. Emond
In Trillium Mutual Insurance Company v. Emond (Ont CA, 2023) the Court of Appeal considered (and allowed) an insurer's appeal on the interpretation of a home owners insurance policy, here involving flood damage. The policy essentially insured the 'replacement cost' of the destroyed home as it stood at the time of destruction [see para 56], and a main issue was the interpretation and application of a limiting provision that excluded "increased costs of repair or replacement due to the operation of any law regulating the zoning, demolition, repair, or construction of buildings” (the 'para. 8 Exclusion')" (ie. new, legally-required work).
At these quotes the court considers what constitutes 'increased costs' as it relates to the replacement cost limiting provision:(1) The meaning of “increased costs”
[54] The application judge did not specifically address the meaning of “increased costs” in the para. 8 Exclusion nor did the parties raise this issue on the application or address it on this appeal other than in response to questions from the bench. However, some understanding of it is necessary to appreciate the scope of the para. 8 Exclusion.
[55] The para. 8 Exclusion was the subject of discussion between representatives of the parties before the litigation. Trillium’s representative explained the concept this way:By contrast, bylaws passed and building code changes made since the original date of construction force a homeowner to enhance some of the features when they are required to renovate or rebuild their house. These can include such things as enlarging the size of joists or studs, improving electrical wiring, increasing the insulation factor or creating a flood proof foundation. Trillium sees these requirements as being separate from the term “using current building techniques” and, as such, allows up to $10,000.00 for bylaw and building code requirements. [56] From a review of the case law, it would seem that “increased costs” are those that exceed the amount payable by the insurer to replace the dwelling as it was. This necessarily implies that they result from a “law” enacted after the dwelling was originally built that requires features of the house to be enhanced (the position Trillium articulated in the lead up to the litigation, consistent with case law), or that they pertain to correcting deficiencies in the building as it stood at the time of the loss (a meaning that is also consistent with case law).
[57] The determination of what constitutes “increased costs” begins with an explanation of the “amount payable” on the Declaration page of the Policy for the dwelling, which is: $585,092. The “amount payable” to replace a dwelling would not reasonably be expected to include costs associated with correcting legal deficiencies that exist in the building at the time of the loss, or complying with laws that were enacted after the dwelling was built.
[58] In Roth v. Economical Mutual Insurance Company, 2016 ABCA 399, 46 Alta L.R. (6th) 1, the Alberta Court of Appeal considered whether an insurance policy covers costs associated with fixing pre-existing deficiencies discovered as a result of, but not caused by, an insured peril (these types of costs are specifically excluded from coverage in the Emonds’ Policy). The court found, at para. 23, that“[e]xtending coverage in such cases would require that the insurer determine in each case whether the property complied with all relevant bylaws … Quite apart from the fact that this would be practically impossible in most cases, it would also effectively turn an insurer into a guarantor of construction defects and building code violations.” [Emphasis added] [59] In Allemand v. State Farm Ins. Cos. (2010), 160 Wn. App. 365, the policy excluded “increased costs resulting from enforcement of any ordinance or law”, except for a specified amount in an additional coverage clause. The Washington Court of Appeal excluded from coverage the rebuilding costs to address deficiencies in the foundation, crawl space, and electrical wiring as required by law. This reasoning is consistent with the Alberta Court of Appeal’s reasoning in Roth that extending coverage in such cases “would require that the insurer determine in each case whether the property complied with all relevant bylaws” which would turn the insurer “into a guarantor of construction defects and building code violations”: Roth, at para. 23.
[60] The para. 8 Exclusion for increased costs in this case takes into account the fact that the insurer has not accounted for these types of costs in its estimate of the replacement cost listed on the Declaration Page. As such, any “increase” to the cost of repair or replacement that results from any law that does not allow the building to be rebuilt with the deficiencies that existed at the time of the loss, is excluded from coverage by the para. 8 Exclusion. There is recognition however, that there may be compliance costs borne by the insurer: the BBCC provides up to $10,000 payable by the insurer for such costs.
[61] In terms of what is being repaired or rebuilt, “increased costs” only includes those increased costs related to replacing the dwelling “as it was”. Therefore, enhancements required by laws enacted after the building was constructed are increased costs.
[62] In Fabian v. BCAA Insurance Corporation, 2022 BCSC 552, for example, the “increased costs” excluded were those costs to add a sprinkler system and other items that were not part of the home before it was destroyed, but were now required by a by-law: see paras. 15 and 19. Those costs were excluded by an exclusion similar to the para. 8 Exclusion.
[63] For these reasons, in my view, “increased costs” in these standard form contracts, are those that exceed the amount payable by the insurer to replace the dwelling as it was, because either existing deficiencies have to be fixed, or a law enacted after the original construction requires enhancements on rebuilding. . Trillium Mutual Insurance Company v. Emond
In Trillium Mutual Insurance Company v. Emond (Ont CA, 2023) the Court of Appeal considered (and allowed) an insurer's appeal on the interpretation of a home owners insurance policy, here involving flood damage. The policy essentially insured the 'replacement cost' of the destroyed home as it stood at the time of destruction [see para 56], and a main issue was the interpretation and application of a limiting provision that excluded "increased costs of repair or replacement due to the operation of any law regulating the zoning, demolition, repair, or construction of buildings” (the 'para. 8 Exclusion')" (ie. new, legally-required work).
These quotes set out principles of property insurance interpretation, especially regarding 'replacement cost':[43] The objective of replacement cost insurance as distinct from actual cash value, and the reasons for providing such coverage, were articulated by Laskin J.A. in Carter v. Intact Insurance Company, 2016 ONCA 917, 133 O.R. (3d) 721, at paras. 20-24, leave to appeal refused, [2017] S.C.C.A. No. 53. He held that:The insurance industry has marketed two types of protection for residential and commercial properties: actual cash value coverage and replacement cost coverage. Under actual cash value coverage, property is insured to the extent of its actual cash value. This coverage recognizes that the insurer is entitled to deduct reasonable depreciation from the value of the loss. Under replacement cost coverage, the insured is entitled to the full cost of repair or replacement without any deduction for depreciation.
A main objective of property insurance is indemnity, and a policy providing for actual cash value coverage is a pure indemnity contract. Actual cash value recovery puts insureds in the position they were in before the loss. Since most property depreciates over time, actual cash value is equivalent to replacement cost less depreciation. So actual cash value recovery prevents insureds from profiting or benefiting from their loss.
But actual cash value recovery poses a problem for insureds who want to build a similar structure to replace the insured property that was damaged or destroyed. Because of depreciation, these insureds will incur a cash shortfall, which they may not be able to afford, and which will thus prevent them from reconstructing their damaged structure.
Replacement cost insurance solves this problem. It goes beyond the notion of indemnity. It recognizes that depreciation, or the deterioration of a property over time, is an insurable risk. Replacement cost insurance, in effect, insures depreciation: the difference between replacement cost and actual cash value. So, under replacement cost insurance, if insureds do indeed repair or replace their damaged property, they are entitled to recover from their insurer the full cost of the repairs or the replacement. They can replace “old” with “new”. In that sense, even though replacement cost insurance makes insureds better off and violates the indemnity principle, it is justifiable, because without it, many property owners would be unable to cover the shortfall caused by the depreciation of their damaged or destroyed property. [Emphasis added.] [44] In short, what is insured in the case of replacement cost insurance is the cost of replacing the dwelling without taking into account depreciation: see also Brkich & Brkich Enterprises Ltd. v. American Home Assurance Co., 1995 CanLII 1809 (BC CA), 8 B.C.L.R. (3d) 1 (C.A.), at para. 28, aff’d 1997 CanLII 339 (SCC), [1997] 1 S.C.R. 1149. . Carter v. Intact Insurance Company
In Carter v. Intact Insurance Company (Ont CA, 2016) the Court of Appeal sets out an enlightening overview of the nature of property insurance, in particular the distinction between 'actual cash value' versus 'replacement' cost indemnification:(c) Actual cash value, replacement cost and moral hazard
[19] The following summary is taken from the decision of the British Columbia Court of Appeal in Brkich & Brkich Enterprises Ltd. v. American Home Assurance Co. (1995), 1995 CanLII 1809 (BC CA), 8 B.C.L.R. (3d) 1, aff’d 1997 CanLII 339 (SCC), [1997] 1 S.C.R. 1149, the decision of Stinson J. in Willoughby v. Pilot Insurance Company, 2014 ONSC 95 (CanLII), 118 O.R. (3d) 604, and three secondary sources cited by the appellants: Leo John Jordan, "What Price Rebuilding? A Look at Replacement Cost Policies" (1990) 19 Brief 17; Jerome Trupin & Arthur L. Flitner, Commercial Property Insurance and Risk Management, 5th Ed (Pennsylvania: American Institute for the Chartered Property Casualty Underwriters, 1998); and Johnny Parker, "Replacement Cost Coverage: A Legal Primer" (1999) 34 Wake Forest L. Rev. 295.
[20] The insurance industry has marketed two types of protection for residential and commercial properties: actual cash value coverage and replacement cost coverage. Under actual cash value coverage, property is insured to the extent of its actual cash value. This coverage recognizes that the insurer is entitled to deduct reasonable depreciation from the value of the loss. Under replacement cost coverage, the insured is entitled to the full cost of repair or replacement without any deduction for depreciation.
[21] A main objective of property insurance is indemnity, and a policy providing for actual cash value coverage is a pure indemnity contract. Actual cash value recovery puts insureds in the position they were in before the loss. Since most property depreciates over time, actual cash value is equivalent to replacement cost less depreciation. So actual cash value recovery prevents insureds from profiting or benefiting from their loss.
[22] But actual cash value recovery poses a problem for insureds who want to build a similar structure to replace the insured property that was damaged or destroyed. Because of depreciation, these insureds will incur a cash shortfall, which they may not be able to afford, and which will thus prevent them from reconstructing their damaged structure.
[23] Replacement cost insurance solves this problem. It goes beyond the notion of indemnity. It recognizes that depreciation, or the deterioration of a property over time, is an insurable risk. Replacement cost insurance, in effect, insures depreciation: the difference between replacement cost and actual cash value. So, under replacement cost insurance, if insureds do indeed repair or replace their damaged property, they are entitled to recover from their insurer the full cost of the repairs or the replacement. They can replace “old” with “new”. In that sense, even though replacement cost insurance makes insureds better off and violates the indemnity principle, it is justifiable, because without it, many property owners would be unable to cover the shortfall caused by the depreciation of their damaged or destroyed property.
[24] But, allowing insureds to replace old with new raises a concern for the insurance industry. The concern is moral hazard: the possibility that insureds will intentionally destroy their property in order to profit from their insurance; or the possibility that insureds will be careless about preventing insured losses because they will be better off financially after a loss.
[25] To put a brake on moral hazard, insurers will typically only offer replacement cost coverage if insureds actually repair or replace their damaged or destroyed property. If they do not, they will receive only the actual cash value of their insured property. Insurers also limit replacement cost coverage to an amount defined in the insurance policy. These two conditions – insistence on actual repair or replacement and limiting replacement cost to a defined amount – are found in the appellants’ policy with Intact.
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