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Insurance - 'Actual Cash Value'. Intact Insurance Company v. Laporte
In Intact Insurance Company v. Laporte (Ont CA, 2024) the Ontario Court of Appeal allowed an appeal against an earlier JR quashing of a s.128 insurance umpire decision "of the actual cash value (“ACV”) of a business premises that had been partially destroyed in a fire".
Here the court considered principles of 'actual cash value' determination in awarding the dollar value of a claim:[12] First, I agree with Leiper J. that Intact, and the decision of the majority, have given unwarranted priority to market value in assessing ACV by treating it as a benchmark. Although the market value is an important factor to be considered, depending on the circumstances, ACV can exceed market value. The disparity between market value and an assigned ACV is therefore not necessarily a dependable indicium of an unreasonable ACV assessment. In my view, the majority erred by effectively accepting Intact’s position, and giving market value undue weight by treating it as a benchmark.
[13] The reason ACV can exceed market value is that, unless its meaning is altered by the policy, “‘actual value’ means the actual value of the property to the insured at the time of the loss”: Re Barrett et al. v. Elite Insurance Co. et al (1987), 1987 CanLII 4160 (ON CA), 59 O.R. (2d) 186 (C.A.), at p. 189, citing Canadian National Fire Ins. Co. v. Colonsay Hotel Co., 1923 CanLII 49 (SCC), [1923] S.C.R. 688 (emphasis added). What others may pay for the property may not reflect the value of the property to the insured: Barrett, at p. 189. In this case the definition was not altered by the policy. It simply lists “market value” as a factor to be considered, without assigning it any prevalence in quantifying ACV. Specifically, the insurance policy states, in relevant part:Actual Cash Value: Various factors shall be considered in the determination of actual cash value. The factors to be considered shall include, but not be limited to, replacement cost less any depreciation and market value. In determining depreciation, consideration shall be given to the condition of the property immediately before the damage, the resale value, the normal life expectancy of the property and obsolescence. [14] Second, I also agree with Leiper J. that, contrary to the position of the majority, there was a foundation before the umpire permitting him to assign the ACV that he did. It is not contested that Mr. Laporte had been operating a profitable business prior to the fire. The brief furnished to the umpire described the unique location near the Petawawa base as the key to this success, identifying particular advantages that location provided. It also described the functionality and utility of the adapted building to the business, identifying particular features that made it so. The majority discounted these claims as bald assertions. They were not. The basis for the claims was explained. Moreover, the umpire was able to observe the features of the building during his site visit. These are not mere indications of emotional value that should not be entertained. They are features that affect the monetary value of the premises to Mr. Laporte.
[15] Moreover, Mr. Laporte made clear his intention to continue to operate from the business location as he had been doing before the fire, a claim that was solidly supported by the fact that he was still operating from the partially repaired premises some 16 months after the fire when the umpire attended the location. There was no information before the umpire that Mr. Laporte had attempted to or was intending to sell the building and every indication that retaining that business location was worth enough to him to undertake the necessary expenses to keep the business operating as he had been the day before the fire. To give the amount required to keep him operating in that location, the umpire was provided with three repair estimates, the amounts of which were not challenged.
[16] However, the majority accepted Intact’s submission that this repair cost information could not be considered in assessing ACV because to do so would be to conflate ACV with depreciated replacement value, which was not the valuation method under consideration. I do not agree. As I have indicated, the policy specifically identifies depreciated replacement value as a factor for consideration in assessing ACV. Indeed, as Laskin J.A. recognized in Carter v. Intact Insurance Company, “[s]ince most property depreciates over time, actual cash value is equivalent to replacement cost less depreciation”, in some cases: 2016 ONCA 917, 133 O.R. (3d) 721, at para. 21, leave to appeal refused, [2017] S.C.C.A. No. 53. Without question, repair estimates can assist in identifying replacement costs before depreciation. Moreover, it is clear that the umpire did not conflate the two evaluation methods. As I will elaborate below, he selected the amount of $1,084,000 based on the competing ACV calculations offered by the parties. . Intact Insurance Company v. Laporte et al.
In Intact Insurance Company v. Laporte et al. (Div Court, 2023) the Divisional Court considers an 'actual cash value' (ACV) appraisal, here primarily under the principle of 'indemnity':[24] The appraisal mechanism under the Insurance Act is a unique process without formalized rules or procedures, which derives its jurisdiction from the terms of the policy of insurance and s. 128 of the Insurance Act.
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[29] The Applicant submits the assessed ACV valuation is unreasonable because it is contrary to the indemnity principle. In this case, the ACV is almost four (4) times the Property’s market value. The Applicant submits that insurance policies should be interpreted consistently with the principle of indemnity, and a windfall should be avoided.[11] [Brissette v. Westbury Life Insurance Co., 1992 CanLII 32 (SCC)]
[30] The Applicant asserts that, regardless of the methodology used to determine ACV, it is the market value of the Property that sets the defining boundary of the indemnity principle which governs the valuation. The Supreme Court has confirmed that replacement costs less depreciation is not the correct calculation of the ACV if the person will not replace in the damaged property.[12][Canadian National Fire Insurance Co. v. Colonsay Hotel Co., 1923 CanLII 49 (SCC), [1923] S.C.R. 688] The Applicant submits that the assessed ACV will not indemnify the insured, but rather will give a profit, as it would provide recovery for an amount beyond the loss suffered by the Respondent.
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Does the ACV violate the principle of indemnity?
[35] The Applicant asserts that, as the assessed ACV violates the principle of indemnity, the decision suffers from the second fundamental flaw identified by the Supreme Court in Vavilov: the decision is untenable in light of the relevant factual and legal constraints imposed upon the Umpire.
[36] The approach to interpretation of insurance contracts is well-settled law. Those principles include:a. effect should be given to clear and unambiguous language;
b. ambiguous language should be interpreted using general rules of contract construction; and
c. courts should avoid interpretations that would give rise to an unrealistic result or one that would not have been in the contemplation of the parties at the time that the Policy was entered.[13] [Progressive Homes v. Lombard General Insurance Co of Canada, 2010 SCC 33, at paras 21-25] [37] Justice Laskin, writing on behalf of the Ontario Court of Appeal, stated that “indemnity is a main objective of insurance and, to the extent possible, coverage provision should be interpreted with that objective in mind”.[14] [Carter v. Intact Insurance Co. 2016 ONCA 917, at para. 48]. He described a policy providing for actual cash value coverage as a pure indemnity contract: “actual cash value recovery prevents insureds from profiting or benefitting from their loss.”[15] [Carter, at para. 21].
[38] Justice Sopinka stated that “[a]n interpretation which will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided”.[16] [Brissette] Justice Laskin explained how insurers control or limit the “moral hazard” in the context of replacement cost coverage: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 insurers will be careless about preventing insured losses because they will be better off financially after a loss.
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.[17] [Carter, at paras. 24-25.] [39] The Declaration Page of the Policy states “[i]n consideration of the premium stated, [Intact] will indemnify the [Respondent] with the terms and conditions of the Policy.” It also states that should the insured’s property be “lost or damaged during the policy period by an insured period, the insurer will indemnify the Insured against the direct loss or damage so caused…”
[40] Under the Policy, the Respondent had a choice to either rebuild or accept the ACV. Had the Respondent elected to rebuild, he would have had access to the replacement cost amount, which the parties had agreed was $2,500,000.00.
[41] As the Respondent has elected to not rebuild, under the terms of the Policy he is only entitled to receive the ACV. The principle of indemnity applies.
[42] In the text, Insurance Law, Denis Boivin describes the factors involved in determining ACV as follows:Actual cash value is the default basis of valuation; the method that is the most consistent with the indemnity principle. In the absence of a valued policy or replacement cost option, the insured's loss will be settled on this basis. The expression has acquired a technical meaning in the industry and case law. “Actual cash value” signifies (1) the cash value of the damaged, destroyed or lost property, (2) to the person insured by the contract, (3) calculated at the time of the loss. This definition has three interrelated components.[footnotes removed][18] [Denis Boivin, Insurance Law, 2nd edition, Toronto, Irwin Law Inc., 2015 p. 462] [43] The Ontario Court of Appeal has described ACV in similar terms:“actual value” means the actual value of the property to the insured at the time of the loss and not its replacement value… the actual cash value is not or is not necessarily the replacement value nor the market value. The value to the insured may depend on many factors; there may be a value in use by the insured much higher than its market value; at the same time its value to the owner may be much less than the cost of replacement even allowing for physical and functional depreciation.[19] [Barrette et al v. Elite Insurance Co. et al, 1987 CanLII 4160 (ON CA)] [44] The Supreme Court in Colonsay Hotel identified actual cash value as:... “the actual value of the property to the insured at the time of the loss,” having regard to all the conditions and circumstances then existing--not necessarily its market value on the one hand and certainly not, on the other, its “replacement value” which, while it may sometimes be less than its actual value to the insured, will more often exceed that value and sometimes, as in the present instance, very grossly exceed it. The right of recovery by the insured is limited to the actual value destroyed by the fire.[20] [Colonsay Hotel, at p. 694.] ....
[58] While I recognize that the actual cash value is not or is not necessarily the replacement value nor the market value, the ACV must be constrained by the indemnity principle: the insured must not receive a windfall. ...
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[64] Absent evidence to establish that the Property had a particular value to the Respondent in excess of the market value, an ACV of $1,084,000, offends the indemnity principle, as it creates a potential windfall: Groupone Insurance Services v. Li, 2019 ONSC 3428, at para. 7. The decision would be untenable in light of the relevant legal constraints imposed upon the process.
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[66] The Court of Appeal in Newfoundland and Labrador cited with approval a passage from Boivin as follows:... Second, the loss must be evaluated from the perspective of the insured. The question is not what value a reasonable person would attach to the property. The question is what value the insured attached to the property. Accordingly, the insured may establish that the good had a particular value to him or her, as long as that value is quantifiable and capable of being proven. Third, the process of evaluation must be conducted in monetary terms. It is the value in cash that must be determined. Thus, non-pecuniary factors such as attachment and sentimental value have no bearing in this analysis. [footnotes omitted][21] [Cornhill Insurance v. Sphere Drake Insurance, 2006 NLCA (CanLII), at para. 115][emphasis added] [67] It is for the insured to establish that the Property had a particular pecuniary value to him, provided this value is quantifiable and capable of being proven. The key is that the value must be quantifiable and capable of proof.
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