Campbell et el v. Dejardins Insurance
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Note: Being Appealed
The Appraisal Process
An Update… by Glenn Gibson, January 2021
This is the 14th iteration of this research paper. It was first published in 1996.
The Statutory Conditions form part of every property insurance policy that is sold in Canada. There is a mandatory statutory condition that triggers “Appraisal” in the event of a dispute on the amount of loss. This alternate dispute mechanism has been part of the policy conditions for decades however there are misunderstandings about how the process works.
The original legislators intended to have the Statutory Conditions guide both the insured and insurer through the claims process. Policyholders pay premiums for protection so that in the event of a loss they can be properly compensated in accordance with the terms of the contract. The Appraisal condition was contemplated to provide an inexpensive, effective way to resolve issues in dispute that relate to the amount of the loss.
The goals of this article are to:
- Demonstrate how the ‘Appraisal’ process works.
- Provide suggestions on how the process can work effectively.
- Highlight key legal judgments that help frame and direct the appraisal process.
A GUIDE TO ACTUAL CASH VALUE – 2020 Update
George R, Milnes, CFE-Retired, CCFI-C
Indemnity means that the insurers agree to compensate in the event of loss such that the insured is left substantially in the same position financially after the loss as they were before it – the insured cannot profit from a loss!
If the settlement of the Claim results in the insured being in a better financial position than they were before the loss occurred, the extent of the improvement to their situation is known as ‘betterment.’ They would be expected to contribute towards the claims settlement.
In the event of a claim and where the structure or equipment reinstated improves the insured’s position, the principle of betterment applies. In that case, financial payment is required of the insured.
For example, following a fire, it may not be possible to replace a roof in the same dilapidated condition as the old one. Following the principle of indemnity, the insured is now in a better financial position with a new roof than before. Therefore, betterment applies, and the insured must pay something towards the cost of the replacement.
RESTORATION or REIMBURSEMENT FOR LOSS
Insurance against fire and other causes of property damage is generally carried to make good the loss to the insured of what they possessed immediately before the occurrence of the loss. This involves either restoration in like kind and quality, or reimbursement only to the extent of the damage. It does not imply substitution or replacement of what is lost with what is to be desired in place of the damaged or destroyed property unless special provision has been made in the contract of insurance.
Full replacement cost is replacement cost new, in like kind and quality, un-depreciated.
Like-kind may be defined as referring to utility or use made of the building and its type of construction. It means the subject may have been a wood-frame-constructed bungalow on a full basement, a two-storey masonry constructed, walk-up, office/retail building with full basement, etc. The replacement improvement then must be similar in use and construction to the insured property, or structure destroyed.
Like-kind, then, replicates the utility and basic construction of the insurable building improvements in present terms with regard to current building regulations and standards as well as materials and workmanship.
Therefore, an appraiser called upon to estimate the value of building improvements for insurance purposes should consider the cost of replacing the existing improvement.
Like quality refers to the durability and performance characteristics of the particular component. This is especially true if the component is no longer produced, and a substitute is needed. However, a common error of appraisers who rely upon floor area building costs from manuals provided by building cost services, is that the model from the manual may be of average quality and simple design with average components, whereas the subject building improvement is of average quality but has luxury quality heating, ventilation, air conditioning systems and a top-of-the-line, state-of-the-art roof cover.
Of the various ways to quantify physical depreciation, there is none better than careful observation.
All physical depreciation is possible to cure; however, it may not be economically feasible to cure such items as a reconstruction of the building’s structural carcass. Other methods, such as reinforcing a structural floor or placing crossties to support sagging load-bearing walls, may retard such deterioration and extend the life of the building. These ‘cures’ are usually economically feasible, whereas rebuilding the walls or floors would probably not be.
In insurance claim disputes, a carefully documented physical condition survey of the insurable improvements along with fixed building service equipment will always be accepted over straight-line depreciation, mid-life theory or extended life theories, which tend to be frequently relied upon for insurance valuations by appraisers than the more time-consuming and more expensive observed condition surveys.
The inclusion of obsolescence, in estimating insurable value may be a matter of underwriting policy that requires objective judgment and thoughtful, unbiased consideration of both the insurer and the insured’s interests.
Economic obsolescence is a reduction in value as a result of external causes. In most cases, one could probably conclude that reduction in value caused by economic obsolescence will apply entirely to the land.
Functional obsolescence refers to outmoded features of layout or design, structural components, or fixed building service equipment, and maybe incurable or curable, depending upon economic or physical feasibility.
Governing authorities having jurisdiction over the construction of the replacement building will require that it be built in accordance with modern standards as specified in local bylaws, which may include regulations such as the National Building Code. Existing functional obsolescence will not be replicated, and the restoration may also result in betterments over what the insured previously owned, at least physically or from an occupier’s standpoint.
A question arises: If such windfall, cures to these apparent features of functional obsolescence do not result in realizable benefits by way of additional net revenues, has there been a betterment that should offset the insured’s indemnity?
It is this author’s opinion; physical depreciation should only apply to a building’s wearable surfaces and review of updates and maintenance be taken into consideration.
If a structure is still used for its original intended purpose no more than 50% depreciation should apply.
In the case of contents, life expentancies and physical condition will influence actual cash value.
Where policies include “market Value” to be considered when determining Actual Cash Value (ACV) this author believes overall Replacement Cost (RC) should first be determined then, on a case by case basis, market value be considered and weighed on a percentage basis of RC by line item or category. Except in rare circumstances, should market value be given any weight for contents losses.
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