Court rejects insurance appraiser's valuation of actual loss to be suffered by resident owners

Appraiser failed to calculate value prescribed by insurance policy, court says

Court rejects insurance appraiser's valuation of actual loss to be suffered by resident owners

The Ontario Superior Court of Justice found that an insurance appraiser failed to calculate the actual loss suffered by two resident owners by demolishing and rebuilding several structures unlawfully built on their property.

In Segal v. Chicago Title Insurance Company, 2022 ONSC 2866, the applicants, Ashlee Segal and Nicholas Osen, purchased a residential property in Whitchurch-Stouffville. In conjunction with the purchase, the applicants obtained a title insurance policy from the respondent, Chicago Title Insurance Company.

The insurance policy provides that a government order to remove or remedy structures built without necessary permits is a covered risk. Moreover, if the cost of eliminating or removing the portion of the structure built without a permit exceeds $50,000, the respondent may end the coverage and pay the applicants their “actual loss resulting from the covered risk” as determined by an appraiser.

Shortly after purchasing the property, the applicants received a municipal order requiring them to remove the existing swimming pool, rear deck, and cabana that had been previously constructed without the necessary permits and appropriate construction methods.

The applicants then claimed under their insurance policy. The municipality determined that the swimming pool need not be reconstructed and could be remediated by obtaining the necessary approvals and permits. However, the deck and the cabana had to be demolished and rebuilt.

According to quotations obtained by the applicants, the cost of demolishing and rebuilding the deck and cabana was estimated to be approximately $290,000 to $350,000. The insurer invoked an appraisal process under the policy. The appraiser determined that the actual loss to be suffered by the applicants was $85,000.

In their application filed with the Superior Court, the applicants alleged that the insurer misdirected the appraiser and failed to calculate their actual loss in the manner provided for in the policy. Meanwhile, the respondent claimed that the term actual loss in the policy means “an amount that is far less than the actual loss incurred by the applicants.”

In granting the application, the Superior Court held that the appraiser failed to calculate the value prescribed by the policy. Therefore, his valuation or appraisal cannot stand.

The respondent claimed that the “actual loss resulting from the covered risk” must be “something less than” the cost of the removal or remediation since it was the option provided to the respondent if the cost exceeds $50,000.

“While that is one logical inference possible, it is not the only one,” Justice Frederick Myers wrote. “It could be, for example, that there are different ways to calculate the loss suffered by an insured in this circumstance of a government order, but the insured accepts that, for small claims under $50,000, it will not spend the time, effort, or cost to inquire.”

The court stressed that once the cost of remediation becomes material, the insurer wants the option to study and assess the insured’s loss with greater particularity.

“Neither option is necessarily cheaper in that case,” Justice Myers wrote.

The court found, however, that there was no need to determine this issue since the policy defines the term actual loss “expressly and unambiguously.” The policy described actual loss as “the difference between the value of the insured estate as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy.”

The respondent argued that the phrase “the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy” meant that the appraiser was to calculate the value of the property as if it did not have the unpermitted swimming pool, cabana, and deck at all. Therefore, the property’s value − as if it had no swimming pool, cabana, or deck − was $85,000 less than the fair market value as agreed.

“I do not understand how the phrase ‘the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy’ can be translated to mean the property without the illegal structures,” Justice Myers wrote. “The value being determined is the value of the property ‘subject to the defect…insured against,’ [and] the defect insured against is the government order.”

The court determined that “in no sense is the property without the offending structures the insured estate subject to the defect…insured against,” and “neither is it the actual loss resulting from the covered risk.”

“The applicants did not buy a pristine piece of land with a manicured but empty back yard, [but] bought a property with a swimming pool with appurtenant structures that turned out to be both illegal and unsafe,” Justice Myers wrote. “Postulating that there was no pool, deck, or cabana at all ignores the actual facts and ignores the insured risk that came to fruition.”

As the insured risk was the government order, the court held that the value of the estate “subject to the defect…insured against” has to be the property’s value subject to the government order.

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