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Insurance Law - The insurance contract - Interpretation - Coverage provisions and exclusion clauses - Reasonable expectation doctrine

Thursday, January 26, 2017 @ 7:00 PM  

Appeal by the defendant insurer from a summary trial judgment holding that the insurance policy issued to the respondent covered defects and deficiencies in a building. The respondent’s building was damaged as a result of a storm sewer overflow. When drywall was removed to examine the damage, building code violations were discovered and the building was found to be structurally unsound. The City ordered that the building be demolished or, failing that, there had to be a report from a structural engineer as to what steps were required to stabilize it. The appellant refused to pay for the cost of replacing the wood frame building on the basis that it was not covered by the policy. The respondent’s policy excluded any loss caused by the enforcement of bylaws that made it impossible to reinstate the property as it was immediately prior to the loss. A rider to the policy extended coverage, as a result of a peril insured against, for the cost of replacing a building arising from the enforcement of the minimum requirement of any bylaw. The summary trial judge interpreted the phrase “as a result of a peril insured against” to mean that once the water ingress and damage had taken place, the policy was extended to indemnify for the insured peril of bylaw enforcement.

HELD: Appeal allowed. It could not reasonably be suggested that either the appellant or respondent would have anticipated recovery for pre-existing deficiencies in a building where the peril insured against, the water damage, did not actually create the bylaw issue. Extending coverage in such cases would effectively turn an insurer into a guarantor of construction defects and building code violations. The clause was ambiguous and the doctrine of reasonable expectations resolved that ambiguity in favour of the appellant. The building deficiencies did not come about as a result of the water damage. Compliance with bylaws was not an independent insured peril, and any damage or cost associated with such enforcement must be related to the insured peril. The enforcement of the minimum requirements of any bylaw, regulation, ordinance or law was not a separate stand-alone insured peril. Coverage existed only where damage had been caused by a peril insured against and that damage required remedial work or replacement to the standard mandated by the minimum requirements of any applicable bylaw, regulation, ordinance or law in force at the time of the loss. The loss in this case was not caused as a result of a peril insured against but was expressly excluded.