Property Loss Update (February 01, 2010)

For the most part, 2009 was a rather quiet year in our court system for property cases. But, as we moved into the last quarter of the year things started heating up with some very interesting judgments. The past decade has resulted in some interesting decisions relating to bad faith claims. As we moved through a number of groundbreaking decisions, we have seen the Supreme Court of Canada provide clarification on what constitutes bad faith. This has resulted in greater clarity around what we can and cannot do when dealing with some of the tricky situations we find ourselves in as loss adjusters.

It boils down to two key things, in my opinion:

1. We need as much clarity as possible in setting out the terms and conditions of the insurance contract. Do the people selling and buying this product clearly understand the product?

2. Files need to demonstrate that the adjuster has clearly and fully communicated with the policyholder in regards to the handling of the file.

TGA Contracting and Restoration Inc. v. Cirillo; Cirillo v. Wawanesa Mutual Insurance Co. Ontario Superior Court of Justice, DiTomaso J., Oct. 15, 2009

On Mar. 7, 2004 an accidental fire caused significant damage to a family-owned dwelling. The insureds had a homeowner’s policy with Wawanesa Insurance Company. The building limit was $219,500, but there was a Guaranteed Replacement Cost Endorsement (GRC) on the policy.

In the immediate aftermath of the fire, the loss adjuster brought in two experienced fire general contracting firms to scope the damage and submit repair prices. They quoted $175,000 and $203,000. Early in the process, the insureds also engaged a public adjusting firm who inspected the damage and produced an estimate of $235,000 to repair the building. The relationship with the public adjusting firm was terminated and the insureds engaged TGA Contracting — a contractor of their choosing — to do the repair work. This firm used the public adjusters’ scope of damage as their initial guideline, recognizing the GRC endorsement was going to be involved which would push the policy indemnity past the stated limits on the building coverage.

When the insured was authorizing repairs to the building, the insurer made it clear it was taking the position that the policy obligation to indemnify for repair costs was based on the lowest quote obtained. The initial stage of the repair process was to strip out fire-damaged materials that required replacement. In the course of doing this it became evident there was additional damage to the building structure. This led to a re-inspection of the damage by the insurer and their contracting representative and a re-estimate of $295,000.

As the repairs continued, the insured’s engaged a second firm to do some sub-trade work on the building. Wawanesa made regular progress payments up to the point where they felt they had reached their maximum responsibility. This was based on the lowest priced estimate and the additional repair costs. The insureds not only disagreed with the position of the insurer, but also ran into conflict in reconciling the amount of money that TGA Contracting was owed for work completed. This resulted in two lawsuits: One was against the insurer for breach of contract and the other was defending a “lien” action commenced against them by TGA. Both actions were consolidated into one trial. In an unusual move, the insureds chose to represent themselves.

There is a lengthy review in the judgment of the flow of this loss. The trial judge commented specifically on the evidence at trial of two Wawanesa employees: Sharda Dookhie-Kangal and James Phinn. He commented that:

“…(they) were excellent witnesses. Their oral evidence was clear and cogent. They had excellent recollection of this particular claim which was supported by a meticulous insurance file consisting of telephone call notes, reports, summaries, computer entries involving Ms. Dookie-Khangal, her manager Mr. Phinn and his manager Dieter Mayer. Their evidence demonstrated a consistent and professional handling of the file which entirely supported the position taken by Wawanesa. They were professional and competent in handling this claim which was acknowledged by Mr. Ferris [son-in-law] and Mr. Wilkins [contractor]. Mr. Ferris also testified that Wawanesa’s representatives were courteous in all their dealings with the Cirillos.”

The comments by the judge provided an early insight to the outcome, which included:

• Wawanesa was entitled to rely upon the lowest repair estimate.

• The insurer was not party to any contract involving the insured and their choice of contractor.

• The insurer had clearly and effectively communicated their point of view to the insured and their contracting firms.

• There was no disagreement that TGA Contracting had done excellent work on the repairs they had completed. They were granted their lien and a judgment for the work they performed.

Case summary

This was obviously a complex loss with many interesting dynamics including the early involvement of a public adjusting firm. The trial judge was clearly and distinctly impressed with the work of Wawanesa’s claim professionals.

Wu v. Gore Mutual Insurance Company Ontario Superior Court of Justice, J. Nolan, Dec. 2, 2009

Some time around Oct. 10, 2006 an arson fire destroyed a rental dwelling in Windsor, Ont.

The dwelling owners, Paul and Wendy Wu, lived several blocks away from the rental property and had owned it for 13 years prior to the fire. The owners had a variety of tenants during this period of time with no issues until they rented the property to a new tenant in 2002. Initially there were no problems until the tenant’s boyfriend moved into the residence in 2003. From that point onward there were complaints of garbage piling up on the property. This led to a citation from a building department inspector in early 2006. The tenant responded to a clean up at that time, but it wasn’t long before conditions deteriorated. This led to an ‘order’ to clean-up the property in March 2006, which again resulted in appropriate clean-up action from the tenant. But, it wasn’t long before problems escalated and the tenants were eventually ordered by the owner to leave the property. They left on Aug. 4, 2006.

The owners, who were at the house daily, orchestrated a major clean up of the dwelling resulting in over 1,400 kilograms of refuse going to the city dump. By mid-September, they were ready to rent the house. A new tenant was scheduled to move in on Nov. 1, 2006.

On Oct. 11, 2006, the dwelling owner discovered a fire had occurred in the property. The fire had burned itself out without being discovered. Fire and police services investigated the fire and determined it was arson with most of the suspicion focused towards the prior tenant. The authorities laid no charges in this matter.

When the dwelling owner reported the fire loss to his broker he was advised of the 30-day vacancy exclusion. Wu reports this was the first time he became aware of the exclusion.

Initial damage estimates were in the area of $70,000. No repairs were carried out immediately and by the time this case went to trial the suggestion was the damages had crept upward into the $130,000 area.

Key dates and events in the handling of this fire loss:

• The fire was discovered on Oct. 11, 2006.

• An adjuster met the dwelling owner on Oct. 12, 2006 and obtained a Non-Waiver Agreement. This was based upon initial information that a policy exclusion could be involved with the loss.

• On Nov. 7, 2006 the handling adjuster sent a blank proof of loss form to the insured. They also advised their investigation was still ongoing.

• The proof of loss had not been returned before the adjuster, on Dec. 6, 2006, formally advised the insured that his claim was being denied because the insurer investigation had determined the dwelling had been vacant since Aug. 5, 2006. This was more than the 30-days that was allowed under the policy.

• On Jan. 9, 2007 the owner received a formal letter of cancellation of coverage for the rental property based upon its current condition.

• The proof of loss form was provided to the insurer on Jul. 12, 2007. The insurer continued to maintain its position on the damages being excluded.

At trial the insurer moved beyond relying only the 30-day vacancy exclusion and also adopted the position that there had been a breach of statutory condition four, which suggested the insured had also failed to notify the insurer of a “material change in the risk.”

During the trial, an underwriter appeared as one of the insurer’s witnesses. Her evidence at trial hit on a few points:

• The insurer was not aware the property was vacant prior to learning of the fire.

• They also had not been aware of complaints from neighbours nor the involvement of the city building inspector.

• A property “vacancy” is considered by an insurer to be a “material change in risk.”

• If the insurer had been aware of the deteriorating condition of the property before the fire they would have cancelled the policy.

In cross-examination the plaintiff’s lawyer elicited clarification that:

• There was no requirement in the policy for the insured to get a vacancy permit.

• There was also no requirement the insurer had to be notified each time a tenant might move from the insured premises.

• There was no policy requirement relating to being informed of complaints about the property condition.

• The usual chain of events was that if a property was vacant for one to two weeks the insurer is notified.

• When the tenants moved out on Aug. 4, 2006 and the dwelling was not immediately habitable, then the insurer should have been notified on that date. When challenged on where the contract required this type of notification, the underwriter promptly referred to statutory condition number four.

• The underwriter conceded there was no policy definition for occupancy. But, rightly pointed out there was a clear definition for what vacancy was supposed to mean.

• It was the broker’s responsibility to go through the contract with the insured.

The trial judge reviewed a variety of legal cases from the lawyers handling this case. None of the cases was exactly on target, but the trial judge noted that, “In the case before me, the tenants moved out on Aug. 5, 2006 and had moved out all their possessions. No one else moved in or even stayed overnight occasionally.” The judge noted that this was, “. . . not a seasonal property and was insured as a rental property . . . ”

Various arguments were raised by opposing lawyers including an effort to use the case of Tilden Rent-a-Car Company vs. Clendenning (1977), 18 O.R. 601 (Ontario Court of Appeal. In the case involving a rental car, the Court of Appeal held that the provision on the reverse side of the contract was in “small type and so faint on the customer’s copy to be hardly legible.” The company had not taken steps to alert the customer on the onerous provisions of the standard form contract and the defendant was not aware of them. So, the provisions did not apply.

But, in this situation the trial judge did not feel the policy exclusions or statutory conditions were ” . . . hidden in any way in the insurance policy.” While the dwelling owner argued his broker did not explain the policy to him, he acknowledged he did receive a copy of the policy. There was no evidence that Wu was not able to understand the policy, so the judge concluded he was “…deemed to have understood the provisions.”

It was of interest that the plaintiff lawyer did try to argue the “fairness principle.” The trial judge did not agree. This was a case of interpreting the terms of the contract. Both parties owe a duty of good faith to each other. In this case, the dwelling owner had a duty to inform the insurer or their broker of the vacancy and the deteriorating condition of the property. The case against the insurer was therefore “dismissed.”

Case summary

It was interesting to see the broker was not included as a co-defendant in this legal action.

It is also noteworthy how the policy exclusion for vacancy has evolved to the current language:

“[The insurer] does not insure direct or indirect loss or damage “occurring after your dwelling has, to your knowledge been vacant, even if partially or fully furnished, for more than 30 consecutive days”.”

This was the second time this same definition was subject to a trial. It was also seen in Saavedra vs. Gore Mutual Insurance Company, Thomson J., Ont. Superior Court, Unreported decision, Windsor file 47338.

2069190 Ontario Inc. v. Economical Mutual Insurance Group, Ontario Superior Court of Justice, Lalonde, J., Dec. 8, 2009

A piece of forestry machinery was allegedly stolen Oct. 7. 2006. The policyholder initiated an action against the insurer on Mar. 16, 2009. The insurer was seeking to dismiss the action by way of a summary judgment on the basis there was no genuine issue for a trial judge to determine as it was statute barred.

There is a key sequence of dates that need to be noted:

• By early November 2006, the adjuster sent proof of loss forms to the insured.

• A proof of loss was received on Feb. 5, 2007.

• The adjuster felt the form was incomplete. He sent a new form to be completed by a letter dated Mar. 5, 2007.

• A new proof of loss was completed and signed on Aug. 16, 2007. It was sent to the insurer in a lawyer’s letter dated Aug. 23, 2007.

• On Oct. 17, 2007 a lawyer acting for the insured wrote the adjuster and requested a status report on the claim.

• On Feb. 22, 2008 the lawyer requested a reason behind the apparent denial of his clients claim.

• On Mar. 19, 2006 the adjuster advised the lawyer his client’s claim was statute barred as the reason for denying the claim.

What follows in this decision is an interesting review of limitation arguments and the manner in which the plaintiff lawyers framed their pleadings. But, the main argument being raised was that the policyholder had been lulled into a false sense of security by the adjuster and that this had worked to his detriment. They argued that the insurer had not told the insured the reasons as to why his original proof of loss was being rejected.

They also argued that the limitation period should run from the date that the insurer formally rejected the claim in March 2007 and not from the date of loss.

The plaintiff lawyer also moved onto arguments relating to the principle of fairness. Their arguments in this area related to the level of responsiveness to the lawyers request for a status report. The plaintiff lawyer then moved on to a novel argument relating to Section 438 of the Insurance Act R.S.O. 1990 c. 1.8. This relates to “unfair or deceptive acts or practices” by an insurer. The plaintiff lawyer arguments came in the face of what seemed to be an obvious missing of a limitation period.

The insurer’s lawyers led their own strong arguments on many fronts with the trial judge concluding a number of things:

• Section 438 of the Insurance Act does not apply to this case.

• There was no evidence in the affidavits filed of deliberate acts or delays by the insurer.

• The language was clear that the insured had a one-year prescription period running from the date of the loss.

• The plaintiff could not argue the “discoverability” strategy because they had not included it in their pleadings.

• Breach of trust and breach of duty also must be pleaded as stand alone causes of action. They had not been included in the pleadings.

• The plaintiff was represented by council prior to the expiry of the one-year limitation. There is no duty owed to the plaintiff’s lawyer for the insurer to advise them of their strategy.

The judge granted the motion and dismissed the action against the insurer.

Case summary

The critical thing here was that the policyholder was represented by legal counsel prior to the one-year limitation period expiring.

Conclusions

The Court of Appeal is passing along some very important messages, including their views on the application for insurance. That is a core, fundamental starting point for the selling of our product, so the points they have raised are very important to recognize. Our purpose as adjusters is to help people. Your commitment to achieving this purpose is important. Keep this in mind as you move forward into a new decade of what should be exciting but challenging times.

Glenn Gibson has 35-years experience as a loss adjuster. In addition to being an executive general adjuster, he is the global chief strategy officer with Crawford & Company Inc.