March 11, 2009 – a disastrous day for Mr. and Mrs. Willoughby. Their home was destroyed by fire. And while they might have moved back and had their home rebuilt, they instead decided to relocate. This decision had a consequence that surprised them.
At the time of the fire that destroyed their home, the Willoughbys had insurance coverage through Pilot (the “Policy”). The Policy included a guaranteed replacement cost endorsement, the Willoughbys’ entitlement to which Pilot denied. It was denied on the basis that the Willoughbys had moved instead of rebuilding their home “on the same location”. The Willoughbys, of course, took issue with same and consequently commenced litigation.
For the purpose of understanding the decision that follows, knowledge of the wording of the Policy is key. The Policy reads as follows:
Your Principal Residence and Other Buildings
[Basic Coverage Provision]
If you repair or replace the damaged or destroyed building on the same location with a building of the same occupancy constructed with materials of similar quality within a reasonable time after the damage, you may choose as the basis of loss settlement either (A) or (B) below; otherwise, settlement will be as in (B).
(A) The cost of repairs or replacement (whichever is less) without deduction for depreciation, in which case we will pay in the proportion that the applicable amount of insurance bears to 80% of the replacement cost of damaged building at the date of damage, but not exceeding the actual cost incurred, nor for more than the applicable amount of insurance.
(B) The Actual Cash Value of the damage at the date of the occurrence.
Guaranteed Replacement Cost on Dwelling Buildings
[GRC Coverage Endorsement]
If Guaranteed Replacement cost is indicated in the Declarations, we will pay the cost of repairs or replacement even if it is more than the amount of insurance for Coverage A, provided:
a) the amount of insurance for Coverage A shown on the Coverage Summary page on the inception date of the policy, or the most recent renewal da[t]e or the increased amount under the inflation protection coverage on the date the increase took effect was not less than 100% of the cost to replace the dwelling building, as determined by a valuation guide acceptable to us;
b) the amount of insurance applicable to Coverage A has not been reduced below the amount determined by the valuation guide; and
c) you notified us within 30 days of the start of the work if any improvement extension or addition has been made to your dwelling.
If you do not repair or replace we will pay the actual cash value [sic] of the damage on the date of occurrence.
The Willoughbys argued that because they had purchased the GRC Coverage Endorsement, the Basic Coverage Provision did not apply. Also, because the GRC Coverage Endorsement made no mention of the requirement to replace their home “on the same location”, as it did in the Basic Coverage Provision, GRC coverage could not be denied. Both Pilot and the Court disagreed.
The Court, in determining that GRC coverage was not available to the Willoughbys, was guided by the following principles. First, when the language of an insurance policy is unambiguous, the Court should give effect to clear language, regarding the insurance policy as a whole. Second, where the language of an insurance policy is ambiguous, the Court should rely on general rules of contract construction. For example, it should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as the interpretations can be supported by the text of the insurance policy. It should also avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time that the insurance policy was concluded. And third, when the rules of contract construction fail to resolve existing ambiguity, the Court should construe the insurance policy against the insurer, with coverage provisions to be interpreted broadly and exclusion clauses to be interpreted narrowly. The Court was additionally guided by the words of Justice Lang in Pilot Insurance Co. v. Sutherland, 2007 ONCA 492 (CanLII), 2007 ONCA 492, which read:
[I]n my view, an endorsement is generally not understood to be a self-contained policy. … An endorsement changes or varies or amends the underlying policy. While it may be comprehensive on the subject of the particular coverage provided in the endorsement, it is built on the foundation of the policy and does not have an independent existence.
The above considered, the questions that were answered by the Court were these: first, could the language contained in the GRC Coverage Endorsement be interpreted as extending GRC coverage to the Willoughbys despite their decision to relocate? Second, did the GRC Coverage Endorsement override the Basic Coverage Provision that limited Pilot’s liability to Actual Cash Value in the event that the replacement of the Willoughbys’ home was not carried out “on the same location”?
With respect to the first question, the Court determined that, yes, the language in the GRC Coverage Endorsement could be interpreted as extending GRC coverage to the Willoughbys despite their decision to relocate. This decision was arrived at after consideration of the dictionary definitions and the literal meanings of the words “replace” and “replacement”, as well as existing jurisprudence. It was also arguable, said the Court, that the terms of the Policy were to be construed against Pilot, as a result of ambiguity, and that the GRC Coverage Endorsement was to be construed broadly, to the Willoughbys’ benefit.
As to the second question, the Court determined that, no, the GRC Coverage Endorsement did not override the Basic Coverage Provision because the GRC Coverage Endorsement could not be viewed as a self-contained policy. Instead, it was the Court’s obligation to search for an interpretation of the Policy that promoted the true intent of both the Willoughbys and Pilot. The following concept was consequently of significance:
Insurance for only the actual cash value of damaged property is often insufficient for many insureds, who would be unable to rebuild to maintain use with only depreciated value. Insuring depreciation is a departure from indemnity, as the insured may be placed in a better position following the loss, than he was in before. The reason is that depreciation is already lost to the insured before an insured loss occurs, but the depreciation may be recovered as insurance proceeds on the occurrence of such a loss. The potential to recover lost depreciation increases moral hazard, because it allows the insured to benefit from an insured loss. The coverage is usually offered as an optional supplement to actual cash value coverage.
[Replacement cost insurance raises concerns of increased moral hazard because it creates the potential for an insured to obtain more than mere indemnity for the damaged property. To address this concern, insurers willing to offer replacement cost insurance have typically limited their obligation to pay more than actual cash value to circumstances where reconstruction was carried out ….] [(Brkich & Brkich Enterprises Ltd. v. American Home Assurance Co. 1995 CanLII 1809 (BC CA), (1995), 127 D.L.R. (4th) 115 (B.C. C.A.))].
The above in mind, the Court decided that the basic intent of the Willoughbys and Pilot was to enter into an arrangement whereby the Willoughbys would be “placed in the same position (i.e. the pre-loss use) he or she enjoyed before the loss and nothing more”. An interpretation of the GRC Coverage Endorsement that would entitle the Willoughbys to enjoy potential further betterment (by relocating) would be inconsistent with this intent, unless expressly provided for in the Policy. To explain, “the cost of restoring the insured to the pre-loss use which he or she enjoyed at a building located on the same site is far easier to ascertain and confirm objectively than it would be if the insured could simply take the estimated replacement cost and invest it in a new location. Put in [a] slightly different way, the potential for betterment – which is ordinarily to be avoided in property insurance claims – is far more difficult (if not impossible) to control if the insured is left with the option to buy a replacement building elsewhere”. GRC coverage was consequently denied.
Willoughby v. Pilot Insurance Company, 2014 ONSC 95 (CanLII).