The Ontario Court of Appeal clarified the concept of replacement cost property coverage in the recent decision of Carter v. Intact Insurance.

Property insurance policies generally provide for the basis of valuation, which is the manner in which a loss will be quantified. There are two common types of valuation in property policies: actual cash value and replacement cost.

Take, for instance, the case of a fire damaging a television that is four years old. A policy providing only actual cash value would take the cost of the television when it was new and apply a reduction (usually a percentage) for depreciation. Therefore, the policyholder would not receive enough money to buy a new television. If, on the other hand, the policy provided for replacement cost coverage, the policyholder would be entitled to the cost of a new television of the same type and quality as the damaged one.

Often, replacement cost coverage is available as an endorsement (an addition to the policy providing additional coverage) to a property policy. Moreover, policies often specify that the policyholder must replace or repair damaged property within a specified time frame, such as two years, in order to qualify for the replacement cost coverage, preventing people from profiting from the insurance. The insurer will generally pay the actual cash value of the damaged property and will then pay the further amounts owing for replacement cost once the property is replaced (assuming replacement cost coverage was purchased).

In the case of Carter v. Intact, the policyholder owned and insured a series of small apartment buildings on one property. A fire caused substantial damage to the buildings and the owners demolished and rebuilt everything. The issue, however, is that the new apartments were very different from the old ones. Originally, there were 15 residential units in small one, two and three storey buildings with a total of 51,000 square feet of floor space. The new condo building, however, was eight and a half storeys high, contained 129 residential units, and over 193,000 square feet of floor space.

The Court of Appeal determined that the policyholder was not entitled to replacement cost coverage, despite having the endorsement, as the building was not replaced with "like kind and quality", wording that is often used in connection with replacement cost coverage. Simply put, the policyholder replaced their property with something that was bigger and better. The Court noted that the building had not been "replaced" within the meaning of the policy.

In summary, when reviewing property policies, it is important to determine whether the basis for valuation is actual cash value or replacement cost. Even if replacement cost coverage is available, there might be certain requirements that need to be met in order to qualify for the coverage, such as making replacements within a given time period and replacing property with "like kind and quality".

See Carter v. Intact, 2016 ONCA 917 (CanLII)