Intact policyholder conflates ACV with replacement cost value

Intact recently won an appraisal dispute with an insured who originally claimed more than four times the market value of his business property after a fire, prompting the court to find the insured was conflating actual cash value (ACV) of the property with its replacement value.

In November 2018, a fire significantly damaged a commercial building in Ottawa Valley, then owned by John Laporte. The business created and repaired gear for active members of the Canadian Armed Forces.

Intact’s policy insured the building for either the replacement cost or the actual cash value (ACV) of the property after damage or destruction. Basically, Intact’s policy offered Laporte a choice. Either he could:

repair or replace the damaged building, in which case the policyholder would receive up to $2.5 million in replacement costs; or
if he did not want to repair or replace the building, he was entitled to the actual cash value of the damaged building, minus depreciation. The market value of the building was in the range of $265,000 to $390,000.

Laporte told Intact he did not wish to replace or repair the building. But the two couldn’t agree on the ACV of the building and went through the appraisal process with an umpire.

Laporte’s appraiser told the umpire the actual cash value of the building was worth the replacement cost, minus the depreciation, which amounted to just shy of $2.1 million. The umpire disagreed with that amount and assessed the building’s ACV at about $1.1 million, which Laporte ultimately accepted.

Intact, meanwhile, put forward an actual cash value of $390,000, noting the uncontested market value of the building was in the range of $265,000 to $390,000.

The insurer challenged the umpire’s $1.1-million assessment in the Ontario Superior Court (Divisional Court), arguing it went well beyond the policy indemnity. The court agreed with Intact that the umpire’s assessment provided the policyholder with the opportunity for a windfall.

“The [insured] had the option in the policy to take the agreed replacement cost amount of $2.5 million to repair and/or rebuild,” the court found in a decision released Friday. “The [insured] has elected to not do so. That argument should not now be employed to justify a higher ACV.”

The court observed Laporte’s appraiser felt the building was repairable, and hence it was factoring this into the ACV valuation. This was essentially conflating replacement value with ACV.

“If one accepted the [insured’s appraisal], it could be possible for the [insured] to pursue any number of different actions and pocket the excess proceeds, resulting in a windfall,” Ontario Superior Court Justice David L. Edwards ruled in a 2-1 decision. “For example, the [insured] could erect a smaller building and pocket the excess funds. He could sell the property and either lease or purchase a less expensive property and pocket the excess funds. Both scenarios would result in a windfall to the [insured], contrary to the principle of indemnity.”

The court noted ACV can be higher than the market value in situations in which the property has some kind of unique, intrinsic value to the owner. However, this value has to be quantified or measured somehow, and the umpire’s reasons were not sufficiently robust to explain why the ACV was so much higher than market value in Laporte’s claim.

“The umpire’s reasons simply parrot the factors contained in the definition of ACV in the [insurance] policy, without explanation,” the court found. “The reasons themselves are therefore of little assistance in assessing the reasonableness of the decision.”

In the absence of reasons, the principle of indemnification carried the day.

Feature image courtesy of iStock.com/sommart