Insurer to replace, not clean, fire-damaged equipment: Court

In a dispute over whether it would clean or replace dental equipment damaged in a commercial building fire, a national insurer was ordered to pay the replacement costs and actual cash value of the equipment, as well as $18,800 in legal fees, to the dental practice. 

Aviva Insurance Company of Canada sought judicial review after a jointly-approved appraiser panel determined replacement costs of $1.7 million and actual cash value of $900,000 for the fire-damaged equipment. The Ontario Superior Court rejected Aviva’s bid to overturn the appraiser’s finding. 

The issue 

In August 2020, a fire broke out on the main floor of the commercial building where the insured’s dentistry practice was located.  

The insured, Dr. Lawrence Freedman Dentistry Professional Corporation, made a claim for smoke and water damage to dental and IT equipment in its third-floor clinic and basement storage space. Aviva insured them under an ‘all risks’ policy, which had a limit of $1.695 million for loss or damage to contents.  

The insured wanted the equipment replaced, arguing it was irredeemably contaminated by smoke.  

Aviva did not agree. It said the equipment needed to be cleaned and obtained a $58,400 estimate to do the work. 

The insured hired a public adjusting firm to assist with their claim. Together, they submitted a Proof of Loss form to Aviva, which made a claim for loss or damage to contents up to the policy limit. The Proof of Loss stated the replacement cost for the “Total Loss or Damage” to contents was $2,349,689.22.  

Aviva rejected the claim, maintaining its position that the equipment did not need to be replaced. The insured then commenced legal action against Aviva. 

The insured provided Aviva with notice of their intention to proceed with an appraisal in March 2022. 

The appraisal process 

According to the Insurance Act, appraisals are handled as follows:  

“In the event of disagreement as to the value of the property insured, the property saved, or the amount of the loss, those questions shall be determined by appraisal as provided under the Insurance Act before there can be any recovery under this contract whether the right to recover on the contract is disputed or not, and independently of all other questions. There shall be no right to an appraisal until a specific demand [therefore] is made in writing and until after proof of loss has been delivered.” 

According to the Act, the insured and Aviva each appointed an appraiser, and the two appraisers appointed an umpire. The appraisers were to resolve the matter at hand, and if they couldn’t agree, they submit their differences to the umpire. 

In August 2022, the insured’s appraiser advised Aviva’s that the Proof of Loss was incorrect (it contained a duplicate entry on a piece of equipment), and that the revised total replacement cost for the contents was $1,898,389.81, which still exceeded the policy limit.  

Then in June 2023, the insured’s appraiser received updated estimates from suppliers and again revised the schedule of loss for the equipment to $2,128,711.04. 

The umpire advised the appraisal would proceed as previously submitted, and that “additional items claimed would not be part of the appraisal but would be dealt with in a subsequent appraisal.” 

The appraisal proceeded before the panel on Oct. 30, 2023. A week later, the umpire issued the appraisal award, which was signed by the insured’s appraiser, but not Aviva’s. 

The appraisal award listed the matters of disagreement as “office contents” and “practice interruption.” Per the award, the replacement of the office contents was found to be $1.72 million, and the actual cash value of the contents was found to be $900,000. The award for “practice interruption” was to be determined later.  

Aviva filed for judicial review of the appraisal award in December 2023. 

Aviva argued the appraisal panel exceeded its jurisdiction by determining the amount of the dentist office’s lost contents based on the cost to replace rather than to clean the office equipment. Aviva said the appraisal panel usurped the court’s function and acted unreasonably by “making what amounted to a coverage decision.” Aviva also said it was denied procedural fairness.   

Aviva drew upon previous cases — Shinkaruk Enterprises Ltd. v. Commonwealth Insurance Co., and Aviva Insurance Co. of Canada v. Cunningham — to support their position that the umpire should have submitted separate valuations for the cleaning and the replacing of the damaged equipment. The carrier also maintained the ultimate decision should be left to the court. 

The decision 

But the judge disagreed. “While there is some dispute between the parties about factual issues relating to the appraisal, I am satisfied…that the umpire together with the respondents’ appraiser acted within the authority provided by the insurance policy and the Insurance Act in making the Appraisal Award.” 

Aviva also contended it was denied procedural fairness, since the insured failed to submit an updated Proof of Loss after it made revisions to its schedule of loss. Aviva said the duplicated equipment issue should have been left to the court to address, and that the umpire proceeded with making the Appraisal Award without obtaining a reconciliation of the equipment list. 

Aviva’s appraiser also disputed the evidence of the respondents’ appraiser that the two of them had agreed upon $900,000 as the actual cash value of the equipment. 

The judge again disagreed. “I have already found that the appraisal panel did not exceed its jurisdiction. As well, there is no evidence of misconduct that would justify the court’s intervention,” the decision read. 

As for the duplicated equipment dispute, the judge said: “Given the previous clarification that the respondents’ appraiser provided about the duplicated piece of equipment, I see no prejudice to Aviva arising from the fact that the umpire did not require the respondents to provide an updated proof of loss prior to the appraisal meeting. 

“Finally, I see no merit in Aviva’s challenge to the determination of the actual cash value for the equipment,” the judge wrote. 

“Accepting as correct Aviva’s factual assertion that the appointed appraisers did not agree on the $900,000 amount, the Appraisal Award was signed by the umpire and the respondents’ appraiser,” the judge said. “In those circumstances, I see no basis for Aviva’s challenge to that determination.” 

The court found the panel acted within its authority and upheld the replacement cost and actual cash value determination—and additionally ordered Aviva to pay $18,800 in legal costs.  

Feature image by iStock.com/AndreyPopov