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By: Dylan J. Cox, Partner |
Introduction
In 4268113 Canada Ltd. v. King et al.,[1] a Manitoba judge found an insurance brokerage and two employees liable in negligence for failing to obtain replacement cost insurance on an apartment building, as requested by the insured. The brokers’ submission to the insurer did not clearly request such coverage. The brokers failed to review the policy documents issued, which only covered the actual cash value of the property (“ACV”). After a fire, the insurer only paid the ACV of the damaged property. The brokers had to pay the plaintiffs the difference between ACV and replacement cost (i.e., the cost to repair the damage).
Facts
The plaintiffs purchased an apartment building in 2007. They intended to renovate it, so at the time of purchase, one of them met with one of the broker employees, and requested a replacement cost builder’s risk insurance policy.[2] Coverage was initially placed with Aviva Canada.
In November 2012, concerned with ongoing construction delays, Aviva advised the brokers that it would not renew the existing policy. The plaintiffs had 30 days to find a new insurer. The only interested insurer was CNA. The broker sent CNA’s underwriter an email requesting coverage for “$3,000,000 Builder’s Risk including Existing Structure … [and] a 12 Month Term.” When CNA subsequently issued policy documents, the brokers failed to confirm if coverage was on a replacement cost basis. They assumed this to be the case, but never reviewed the policy.
In April 2015, a fire caused significant damage to the property. CNA took the position that its policy did not cover the cost to repair the damage; it only insured ACV. The plaintiffs ultimately accepted that the policy did not insure for replacement cost. CNA paid the ACV, and the plaintiffs sued the brokers in negligence for the difference between the ACV payment and the cost of repairs. The brokers’ defence was that the policy covered replacement cost, and they could not be faulted for the plaintiffs’ decision to settle for less.
Brokers Found Negligent
The judge began by considering the text of the policy issued by CNA, which stated (in part):
b. The value of the Covered Property in the process of renovation and temporary structures used in the renovation will be determined as follows:
…
(2) If the value of the existing structure IS indicated in the Declarations, the value
of Covered Property in the process of renovation will be the lesser of:
- (a) The Limit of Insurance applicable to the lost or damaged property; or
- (b) … the least of the following amounts:
- (i) the actual cash value of the existing structure;
- (ii) the cost of reasonably restoring the existing structure to its condition immediately before the loss; or
- (iii) the cost of replacing the existing structure with property of similar or like kind and quality [bolding in original].
The cost to repair the damage was less than the policy limits. Therefore, the applicable provision was b(2)(b), which covered the least of the ACV of the damaged property, the cost of repairs or the cost of replacing the building. In this case, the lowest figure was the ACV, which meant coverage was clearly limited to that figure. The policy wording was not ambiguous, but even if it was, contra proferentem did not apply. That doctrine requires a court hearing a claim for breach of a standard form contract to resolve any ambiguity in the contract against the party who drafted it. It did not apply here, because the brokers were not a party to the policy and one of the parties to that contract (i.e., CNA) was not a defendant.
The judge found the plaintiffs did nothing wrong settling their policy dispute with CNA. CNA’s interpretation was the correct one, so the brokers were not worse off. Had the policy instead covered replacement cost, the brokers would still not be worse off, because this would have defeated the negligence claim.
The brokers acted negligently when they failed to clearly ask CNA for replacement cost coverage. It was also negligent to not review the policy documents. It did not matter that the plaintiffs failed to review the policy. They hired the brokers for their insurance expertise, so they were entitled to assume the brokers would flag any issues.
It also did not matter that the brokers had a short timeline to find replacement coverage. Having agreed to try to find new coverage, they had a duty to review the CNA policy documents before coverage was bound and flag the replacement cost issue with CNA and the plaintiffs. If CNA would not offer replacement cost coverage, the brokers had to tell the plaintiffs this, even if CNA was the only insurer willing to provide any coverage.
Conclusion
In claims alleging negligent failure by the broker to secure appropriate coverage, it is not uncommon for the broker to argue the insured is contributorily negligent for failing to read its own policy. In some cases, a court will find this argument persuasive, such as when the policy limits were insufficient and the insured had better information than its broker on the property’s value. However, often the coverage gap is not something the insured could have reasonably appreciated, even if it had reviewed its policy. This decision confirms that in these circumstances, the broker will often be responsible for the entire loss. This makes sense because brokers are retained for their expertise in insurance products, and insureds should be entitled to rely on them. When placing coverage, brokers should make no assumptions about the terms of the policy. If they are dealing with a new policy form, they should review it before coverage is bound.
Footnotes
[1] 2023 MBKB 35
[2] Although there are differences from policy to policy, a “replacement cost” builder’s risk policy generally provides limited coverage for the lesser of (1) the cost to repair physical damage sustained by a building during the period when it is under construction or renovation or (2) the cost to replace the building.
Dylan Cox is a Partner at Theall Group LLP. He maintains a general civil and commercial litigation and alternative dispute resolution practice, specializing in insurance coverage and product liability matters. He has appeared before the Ontario Superior Court of Justice, Ontario Court of Appeal, and the Manitoba Court of King’s Bench, as well as in private arbitrations.
For more information, visit https://theallgroup.com/
Photo courtesy of Dave Hoefler on Unsplash