The Supreme Court of Canada recently denied leave to appeal in respect of the Alberta Court of Appeal’s decision in 852819 Alberta Ltd v Sovereign General Insurance Company, 2017 ABCA 76, leave to appeal denied 2017 CanLII 51468 (SCC) (“852819 Alberta”), which provides much needed clarification regarding the interpretation of the By-law Endorsement coverage common to most all-risk commercial property insurance policies in Canada. The defendant insurers were represented by the authors.
On January 29, 2011, there was damage discovered to a portion of the roof in one of the bays of a multi-bay commercial building owned by the corporate plaintiff, which was insured under an all-risk commercial insurance policy issued by the defendant insurers (the “Policy”). The cost of repairing that ice damage was $8,234.63 and paid in full by the insurers to the satisfaction of the plaintiff.
However, in the course of assessing the ice damage, an engineer retained by the plaintiff determined that the balance of the undamaged roof did not meet the safety requirements of the 2006 Alberta Building Code, nor the 1970 Building Code in effect when the building was constructed in 1972. This deficiency was reported by the engineer to the City of Edmonton (the “City”) in accordance with his professional obligation.
Consequently, the City ordered the plaintiff to strengthen and upgrade the entire roof, which the plaintiff did at a cost of $527,497.46. The plaintiff then sought indemnity from the insurers pursuant to a By-law Endorsement in the Policy which provided coverage for extra expense incurred by an insured in remediating damaged buildings and structures, but only if such expense is caused by a peril insured under the policy, being direct physical loss or damage. That claim was denied by the insurers and the plaintiff commenced an action at the Alberta Court of Queen’s Bench seeking recovery of the expenses it incurred in upgrading the entire roof.
The By-law Endorsement
The By-law Endorsement states, in relevant part:
2. Building By-laws: This Policy shall, and only as a result of a peril insured against, extend to indemnify the Insured without increasing the amount of insurance stated on the "Declarations Page" for "Building" or the amount of insurance for "Building" shown in the Statement of Values if coverage is on a "Property of Every Description" basis, for:
(iii) any necessary increase in the cost of repairing, replacing, constructing or reconstructing the building, or structures, on the same site or on an adjacent site, of like height, floor area and style, and for like occupancy; arising from the enforcement of the minimum requirements of any by-law, regulation, ordinance or law which:
(a) regulates zoning or the demolition, repair or construction of damaged buildings or structures; and
(b) is in force at the time of such loss or damage.
Except as otherwise provided in this endorsement all terms, provisions and conditions of this Policy shall have full force and effect.
The insurers brought a summary trial application before Justice Manderscheid seeking dismissal of the claim on the basis that the plaintiff’s claim incorrectly treats the policy as a warranty against any pre-existing defects in the building, rather than as a policy of insurance against fortuitous direct physical loss or damage occurring during the policy period. Justice Manderscheid found in favour of the plaintiff and awarded judgment in the amount of $527,497.46: 954470 Alberta Ltd (Centre South) v Sovereign General Insurance Co, 2016 ABQB 185.
Not only did Justice Manderscheid find that there was coverage under the By-law Endorsement for the structural defects, he also found that none of the standard exclusions in the Policy applied, including latent defect, inherent vice, and faulty or improper material, workmanship or design.
Alberta Court of Appeal Decision
The insurers appealed the summary trial decision of Justice Manderscheid to a three judge panel of the Alberta Court of Appeal. The Court of Appeal unanimously overturned the summary trial decision and held that the cost of upgrading the entire roof was not covered under the Policy or the By-law Endorsement.
Relying on the decision in Roth v Economical Mutual Insurance Company, 2016 ABCA 399 (“Roth”) which was released shortly prior to the present decision, the Alberta Court of Appeal found that the non-compliant roof may have been discovered as a result of the damage caused by the insured peril (being the ice damage), but the damage was not caused by that peril. This is reflected in the express language used in the By-law Endorsement which states that the Policy “shall, and only as a result of a peril insured against, extend to indemnify the Insured…” .
In the result, the Court of Appeal allowed the appeal and found that the insurers were not obliged to indemnify the plaintiff for the $527,497.46 incurred to upgrade the entire roof of its building because this cost was not from “a loss resulting from an insured peril.”
Leave to Appeal to the Supreme Court of Canada
The plaintiff subsequently sought leave to appeal the Court of Appeal decision to the Supreme Court of Canada. The Supreme Court of Canada denied the leave application in favour of the insurers with the result that the decision in 852819 Alberta remains as one of leading authorities in Alberta on this issue.
Somewhat surprisingly, Canadian jurisprudence had not directly considered the scope of the By-law Endorsement prior to the decisions in Roth and 852819 Alberta. American case law authorities are similarly unhelpful given the conflicting lines of authority, with some American cases finding that the mere discovery of the damage as a result of an insured peril is sufficient for coverage, while other American courts have decided that the insured peril has to be the direct cause of the damage for there to be coverage.
The appellate decisions in Roth and 852819 Alberta now provide much needed clarification with respect to the interpretation of the By-law Endorsement consistent with the fundamental tenets of insurance law. These decisions affirm that policies of property insurance are designed to cover fortuitous losses, and should not be interpreted as a warranty contract for pre-existing structural defects or Code infractions. Accordingly, the mere discovery of a Code infraction as a result of an unrelated peril which did not cause the Code infraction or defect will generally not be covered under By-law Endorsements.
This development in Canadian insurance law provides insurers with more certainty in underwriting policies of property insurance, and in particular, endorsements which purport to cover the additional cost arising from the enforcement of the minimum requirements of any by-law, regulation, ordinance or law as a result of the a peril insured against.