On March 7, 2014, the honorable Justice Jean-Yves Lalonde of the Quebec Superior Court rendered a judgment in Placements Sergakis v. AIG, clarifying the interpretation of certain clauses often found in the standard Replacement Cost Endorsement.
The insured property had been damaged in a ﬁre but was not a total loss. The Policy provided for replacement cost coverage subject to certain conditions including:
- The repairs, replacement or reinstatement must be executed with due diligence and dispatch;
- In the case of buildings, replace- ment may be eﬀected on the same or any other suitable site at the option of the insured;
- Failing compliance by the insured with the obligations above, the basis of valuation shall revert to the actual cash value of the property at the time of the occurrence with due deduction for depreciation
Following the loss, the insured had in- formed its property insurer that it had not yet decided whether it would repair the damaged building. As a result, it was agreed that the insurer would pay the actual cash value of the loss subject to a Replacement Cost Holdback to be paid in conformity with the terms and conditions of the Replace- ment Cost Endorsement.
One year and seven months after the partial settlement of the claim, the insured informed its property insurer that it intended to begin the repairs to the building and that it required the release of the “Holdback”. The property insurer denied the request on the grounds, inter alia, that the insured had not performed the repairs “with due diligence and dispatch” as required by the policy. Thus, the insured had forfeited its Replacement Cost coverage.
Further to this denial, the insured then informed the property insurer that it had performed other repairs and construction work over the pre- vious two years in a neighbouring property that had not been damaged in the ﬁre. Thus, it sought the application of the Replacement Cost “Holdback” to this construction work on the grounds that it constituted a “replacement” of a portion of the damaged building at another loca- tion as authorized by the policy.
The Court ruled that absent evidence of a signiﬁcant impediment to the start of the repairs, the insured was obligated to perform the repairs to the damaged building within a reasonable time frame. A delay of one year and seven months was judged to be unreasonable in the circumstances. The insured’s desire to have the work performed by its own employees and an alleged manpower shortage were not a serious impedi- ment to the performance of the repairs.
Furthermore, the Court ruled that the option to eﬀect the “replacement” of the building on another suitable site only applied where the building was a total loss. Repairs or renovations performed on a neighbouring property that was not damaged in the ﬁre did not constitute a “replacement” within the purview of the policy. The Court found that the policy was unambiguous in this respect and did not require interpretation.
This case will give guidance to the courts in future cases as to what constitutes “due diligence and dispatch” for the purposes of the standard Replacement Cost Endorsement. It also constitutes important judicial authority for the proposition that the standard Replacement Cost Endorsement is drafted in clear and unambiguous language.