In Shelter Canadian Properties Limited v Aviva Insurance Company of Canada<\/em>, 2023 ABCA 74, the Alberta Court of Appeal reduced an indemnity payment for loss of rental income to account for the increase in the net rental income of the properties at issue after a wildfire occurred in Fort McMurray, Alberta.<\/p>\n\n\n\n Shelter Canadian Properties Limited (\u201cShelter\u201d) was the property manager of 13 multi-unit residential rental complexes (the \u201cProperties\u201d) owned by Lanesborough Real Estate Investment Trust (\u201cLREIT\u201d) in Fort McMurray, Alberta. In April 2016, Shelter, LREIT, and LREIT\u2019s holding companies (collectively, the \u201cInsured\u201d) purchased a commercial insurance policy for the Properties from Aviva Insurance Company of Canada and seven other subscribing insurers (collectively, the \u201cInsurer\u201d). This policy provided coverage for loss of rental income resulting from damage or destruction caused by covered perils, which included wildfires.<\/p>\n\n\n\n In May 2016, Fort McMurray\u2019s civil authority issued a mandatory evacuation order due to a nearby wildfire (the \u201cFire\u201d). Although the evacuation order was lifted on June 2nd<\/sup>, 2016, the units in the Properties remained uninhabitable for weeks afterwards due to resultant smoke damage.<\/p>\n\n\n\n The Insurer paid the Insured approximately $6,500,000 to cover the cost of the physical damage to the Properties from the Fire. However, they denied the Insured\u2019s claim of $4,430,475.00 for loss of rental income, stating that the Insured\u2019s policy only provided coverage for their actual losses. The Insurer claimed that the Insured did not suffer an actual loss as it pertained to their rental income, as they raised the rent prices of the units after the Fire occurred, which resulted in an increase in their overall net rental income.<\/p>\n\n\n\n The Insured took the position that they were not restricted to their actual losses and that the $4,430,475.00 fell within the policy\u2019s definition of \u201crental losses.\u201d The Insurer argued that the policy only provided coverage for actual losses, which, according to the Insurer, the Insured did not sustain.<\/p>\n\n\n\n At issue was whether the loss of rental income claimed by the Insured was covered under the policy. The trial judge considered the definition of \u201cGross Rentals\u201d and determined it provided coverage for three categories of rental losses:<\/p>\n\n\n\n In finding that all three of these categories applied, the trial judge ordered that the Insurer pay the Insured approximately $1.25 million for gross rental losses.<\/p>\n\n\n\n The Insurer appealed the lower court decision on several grounds. They took the position that the trial judge misinterpreted the policy, erred in assessing the Insured\u2019s \u201cactual loss,\u201d and failed to consider the Insured\u2019s duty to mitigate the loss.<\/p>\n\n\n\n The Court of Appeal emphasized that under an indemnity policy, an insured party cannot recover more than their actual loss. Indemnity insurance policies are those that link the indemnity payment to the actual loss suffered, while non-indemnity policies (such as life insurance policies) compensate the insured party with a fixed amount that is not necessarily correlated with the actual loss at issue.<\/p>\n\n\n\n Since the policy\u2019s \u201cGross Rentals\u201d provisions included methods for calculating the Insured\u2019s actual, quantifiable loss, the Court of Appeal agreed with the Insurer\u2019s position that the policy was a contract of indemnity. Further, the \u201cGross Rentals\u201d provisions also included an express mitigation clause, the inclusion of which obligated the Insured to take reasonable steps to minimize their losses, which provided further support for the determination that this was an indemnity insurance policy.<\/p>\n\n\n\n The Court of Appeal made the following determinations with respect to the trial judge\u2019s interpretation of coverage provided for by way of her interpretation of the definition of \u201cGross Rentals:\u201d<\/p>\n\n\n\n The Court of Appeal found the trial judge erred in not considering the rent collected from new tenants in June and July 2016, as well as the security deposits retained by the Insured when assessing the Insurer\u2019s obligations to indemnify the Insured. Considering the Insured\u2019s coverage was limited to the actual loss at issue and that they had a contractual duty to mitigate their losses, they ordered the parties to recalculate this amount accordingly.<\/p>\n\n\n\n The Court of Appeal determined that the trial judge erred by not considering that the rental rates of the unoccupied units increased by 26% from the pre-Fire rates by July 2016. This increase was primarily driven by an increase in demand from contractors doing recovery work and residents needing alternative housing. Consequently, the Properties\u2019 gross rentals during the indemnity period surpassed the pre-Fire amounts. Therefore, the Court of Appeal determined the Insured did not suffer any actual loss under this category and was not entitled to indemnification.<\/p>\n\n\n\n The Court of Appeal agreed with the trial judge that the Insured was entitled to recover the \u201cfair market rental\u201d of these units during the indemnity period. Although the units were not earning any income, it was evident from the policy that the parties intended to compensate the Insured for their inability to use these units while they were inaccessible. Accordingly, the Court of Appeal did not interfere with the trial judge\u2019s award on this issue, which was in the amount of $61,759.<\/p>\n\n\n\n Insurers ought to be mindful of their obligations to an insured pursuant to both indemnity and non-indemnity policies. A court will look at whether a policy is a contract of indemnity when determining the appropriate remedy.<\/p>\n\n\n\nBrief facts<\/h2>\n\n\n\n
Parties\u2019 positions<\/h2>\n\n\n\n
Decision under appeal<\/h2>\n\n\n\n
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Analysis<\/h2>\n\n\n\n
Indemnity vs Non-Indemnity policies<\/h3>\n\n\n\n
\u201cGross Rentals\u201d provision interpretation<\/h3>\n\n\n\n
1. Rental payments from tenants for the Properties<\/h4>\n\n\n\n
2. Losses resulting from unoccupied units that could have reasonably been rented out while the Properties were uninhabitable<\/h4>\n\n\n\n
3. Coverage for the fair rental value of the portions of the Properties occupied by the Insured themselves<\/h4>\n\n\n\n
Takeaways<\/h2>\n\n\n\n