A recent decision of the BC Supreme Court determined that despite an insurer’s wrongful denial of coverage, an insured’s failure to replace fire damaged buildings and contents with due diligence and dispatch restricted the insured’s recovery to actual cash value (“ACV”).

In Bahniwal v. The Mutual Fire Insurance Company of British Columbia 2016 BCSC 422 the Plaintiff was the owner of a property on which several structures were located. These included a residential house, commercial greenhouses and a storage facility with attached living suite. The house and attached suite were rented. The Plaintiff and her husband operated a garden supply business on the remainder of the property. A fire completely destroyed two of the structures and their contents. While attending the fire, members of the fire department observed some signs of a marijuana grow operation in the rental suite (plastic sheeting on the walls, venting and grow lights), although marijuana plants were not present. The cause of the fire was never determined.

The property was insured under a policy which provided for coverage on a replacement cost basis subject to various conditions including the usual: “Replacement shall be effected by the Insured with due diligence and dispatch”.

The insurer took the position that the policy was void because of the insured’s failure to disclose the existence of a marijuana grow‑op. The Plaintiff denied any knowledge of the grow‑op and sued seeking a declaration of coverage under the policy on a replacement cost basis.

At trial the Court ultimately determined the Plaintiff did not have knowledge of the renters’ marijuana grow operation and concluded the Plaintiff was entitled to recover under the policy.

The insurer then took the position that the Plaintiff was restricted to recovery only of the ACV of the buildings and contents because no replacement had yet taken place. The Plaintiff said that she did not effect replacement because, as the insurer had denied coverage, she did not have the money to do so. The Court rejected this argument stating that the Plaintiff had the ability to borrow the money necessary to replace the burned building and contents, but made the decision to await the result of the lawsuit before doing so. Having failed to replace with due diligence and dispatch, the Court decided this constituted a breach of a condition fundamental to the application of the replacement cost extension. As such, the Court restricted the Plaintiff to recovery of the ACV of the building and contents.

In reaching its decision the Court looked to some earlier cases of the BC Court of Appeal in which it was confirmed that while replacement cost endorsement wording required an insurer to pay the cost of replacement after replacement is complete, it did not require the insurer to advance funds to enable replacement. Those early cases focussed on whether an insurer was obliged to advance the cost of replacement prior to replacement having been completed. This is different from the situation where the insurer has denied coverage and the insured delays replacement until clarifying if it will be fully indemnified. Previously, the case law suggested that in such circumstances the insured’s election to either accept ACV or to replace the property would be “suspended” until the insurer’s liability was determined. This recent decision of the BC Supreme Court goes against that approach and strictly applies the requirement to replace “with due diligence and dispatch”.

It is not known at this time if this decision will be appealed.