“Court confirms the necessity of strict adherence to conditions under replacement cost endorsements”

In a recent decision, the B.C. Supreme Court has confirmed that insurers who issue replacement cost endorsements to property policies are not required to fund replacement of damaged property in advance. Rather, insureds under such policies are required to adhere strictly to the requirements of replacement cost endorsements in order to recover indemnity on this basis.

Bahniwal v. The Mutual Fire Insurance Company of British Columbia, 2016 BCSC 422, involved a Plaintiff who owned rural property in Oliver, B.C., with several structures located thereupon, including a residential dwelling, greenhouses and a storage facility with an attached living suite. The independent dwelling and the suite attached to the storage facility were rented out to a tenant. The Plaintiff and her husband ran a greenhouse and garden supply business on remaining portions of the property, and had never occupied the dwelling or the attached suite thereupon. A fire erupted in the storage facility and the attached suite, effectively destroying the structure and its contents. While the cause of the fire was not determined, post-fire investigation by the fire department revealed the presence of a marijuana grow operation within the suite.

The insurer decided to treat the Policy as void on the basis of a material change in risk due to the Plaintiff’s failure to disclose the existence of the marijuana grow operation. The Plaintiff commenced her action seeking a declaration of coverage and indemnity under the policy on a replacement cost basis. The Court determined that the Plaintiff had no knowledge of the existence of the grow operation on the property and therefore held that she did not breach the conditions of the policy, turning to the consideration of whether the Plaintiff was entitled to recovery based on “replacement cost” or “actual cash value” (ACV).

The policy contained a replacement cost endorsement that provided indemnity on a replacement cost basis subject to the replacement being “effected by the Insured with due diligence and dispatch”. The insurer took the position that the Plaintiff was only entitled to indemnity on the basis of ACV because the Plaintiff had not replaced the destroyed building and its contents.

The Court rejected the idea that the Plaintiff did not have the financial means to rebuild and replace the destroyed property. However, it accepted that the Plaintiff made the decision to await the result of the action against the insurer before undertaking replacement. The Plaintiff argued that the insurer was obligated under the policy to fund the replacement in advance. The Court held that the insurer was not required to fund such replacement in advance and the Plaintiff had breached a fundamental condition for the application of the replacement cost endorsement by not effecting replacement with due diligence and dispatch. As such, the Plaintiff’s recovery was restricted to ACV.

The Court referred to the decisions in Carlyle v. Elite Insurance Co., [1986] B.C.J. No. 135 (C.A.), Anastatov v. Halifax Insurance Co., [1987] B.C.J. No. 1437 (C.A.) and Davidson v. Wawanesa Insurance Co., [2015] B.C.J. No. 1701 (S.C.) as being instructive on the issue. These cases had largely confirmed that replacement cost endorsements required insurers to pay for replacement once it had been completed, but did not require insurers to advance funds to enable replacement by insureds. While these decisions required the courts to consider whether an insurer was required to advance funds for replacement prior to the insured undertaking such replacement, they did not deal with circumstances where the insured had delayed replacement of damaged or destroyed property pending the outcome of the decision on whether they would be indemnified. The Court’s decision in Bahniwal therefore favours a strict application of the conditions to replacement cost endorsements requiring insureds to replace damaged property with due diligence and dispatch, regardless of whether they delayed same until the insurer’s liability was determined.