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Insurance - Indemnity Principle. 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 considers the 'indemnity principle':[17] Third, I agree with Leiper J. that, contrary to the position of the majority, the umpire’s award does not offend the indemnity principle. According to that principle, an insured is entitled to be put back into the position they were in before the loss, not to profit or receive a windfall that would create a moral hazard: Carter, at para. 21. Mr. Laporte’s position was based on the unique facility and location of the premises. He asserted and it was not disputed that there were no other similar premises available. Simply put, Mr. Laporte could not enjoy the actual value that this premises had been offering him prior to the fire without some repair. He provided evidence of the work required, and he was continuing to operate. All indications were that the award would be consumed by the restoration. There was simply no evidentiary basis for the majority’s conclusion, or Intact’s submission, that the umpire’s ACV assessment is a profit or windfall that would create a moral hazard. . 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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