Harvey Schultz v. Anna Louise Schultz, 2014 SKPC 174

IN THE PROVINCIAL COURT OF SASKATCHEWAN CIVIL DIVISION Date: July 11, 2014 Citation: 2014 SKPC 174 File: SC#182 of 2013 Location: Saskatoon _____________________________________________________________________________ Between: Harvey Schultz and Anna Louise Schultz - and - Mennonite Mutual Fire Insurance Company of Saskatchewan Harvey Schultz and Anna Louise Schultz On their own behalf H.R. Kloppenburg, Q.C. For the Defendant _____________________________________________________________________________ JUDGMENT D.C.

SCOTT , J _____________________________________________________________________________ Introduction [ 1 ] The plaintiffs Harvey Schultz and Anna Louise Schultz have brought a claim against their insurer, the defendant Mennonite Mutual Fire Insurance Company of Saskatchewan (MMFI), after their home was destroyed by accidental fire.

[ 2 ] The insurance policy guaranteed the replacement cost of their home in the event of an insured peril. MMFI covered the cost to replace the house, with the exception of the concrete basement floor, which was not damaged in the fire. The defendant argues the replacement of the concrete floor is not an insured loss and is excluded from coverage by the policy. [ 3 ] The plaintiffs allege that the cost of removal and replacement of the concrete floor, though undamaged, is covered by the policy.

A permit was needed for the home rebuild and a permit would not have been granted unless the existing concrete floor was replaced, as it no longer complied with mandated building standards. [ 4 ] The plaintiffs rebuilt their home, including the demolition and replacement of the concrete floor slab. They claim damages in the amount of $13,661.55, which represents their cost to remove and replace the existing floor. Background [ 5 ] On June 2, 2011, a fire destroyed the plaintiffs’ house located in Waldheim, Saskatchewan.

The home was a one-storey, full basement bungalow with a preserved wood foundation and concrete basement floor. The concrete floor was not damaged in the fire. [ 6 ] For eighteen years, the plaintiffs held an insurance policy with MMFI, which covered loss resulting from accidental fire. The policy in force at the time of the fire was a one-year renewable policy from March 31, 2011 to March 31, 2012.

The policy provided for guaranteed replacement cost for the plaintiffs’ dwelling to a maximum of $301,000.00 and the same amount for contents. [ 7 ] According to Harvey Schultz, the plaintiffs submitted a Proof of Loss, which Schultz modified to include the costs to remove and replace the basement floor.

However, MMFI refused to cover the cost to remove and replace the basement floor slab, as it was not damaged by the fire. [ 8 ] Insurance proceeds were paid to the plaintiffs for the demolition and replacement of their house in the amount of $352,517.64, representing $266,366.75 for the dwelling, $77,850.89 for contents, and $9,300.00 for living expenses, less the deductible of $1,000.00.

The proceeds did not include the plaintiffs’ cost to replace the basement floor. [ 9 ] Dale Wagner is a building official, licenced by the Province of Saskatchewan under The Uniform Building and Accessibility Standards Act [UBAS] , to review plans, conduct inspections, write orders and provide reported documentation to municipalities. It is his responsibility to ensure compliance with UBAS , which has adopted the National Building Code of Canada 2005 [ NBC ]. He typically becomes involved upon application for a building permit. Mr.

Wagner confirmed the NBC was adopted by a Town of Waldheim bylaw. [ 10 ] According to Mr. Wagner, the plaintiffs were not allowed to rebuild without replacing the existing concrete floor in compliance with the NBC . In particular, there were problems with the floor: it used weeping tiles, which was no longer an approved drainage system; the footing pads may not have been sufficient; and there was no radon protection.

It was not possible to determine whether the existing floor conformed to the NBC without its demolition. [ 11 ] Ken Neufeld was the contractor involved in the demolition and reconstruction of the plaintiffs’ house. He testified that as the building contractor he is obliged to meet all zoning bylaws and NBC standards. He is unable to obtain an occupancy permit unless a building has passed inspection. With respect to the rebuilding of the plaintiffs’ house, he could not obtain a building permit from the town unless he removed and replaced the concrete floor. Mr.

Neufeld confirmed the drainage system did not comply with current NBC standards. This could not have been determined until the floor was removed. [ 12 ] According to Mr. Neufeld’s invoice, the amount of $13,661.55 including GST is attributed to the demolition and replacement of the concrete floor.

[ 13 ] Wesley Moroziuk, Claims Manager for MMFI, testified on behalf of the defendant. He explained that the defendant did not pay out insurance proceeds in relation to the concrete basement floor, because it was not damaged in the fire. Had the floor been damaged, MMFI would have covered the cost to bring it into compliance with the NBC . [ 14 ] Specialized Property Evaluation Control Services Limited (SPECS) was engaged by MMFI to handle the construction bid process for the rebuilding of the plaintiffs’ house. Two of their reports were submitted as exhibits at trial.

The first report appears not to have addressed the matter of the NBC . A second report was completed, attaching the C.A. Reed & Associates engineering report, also filed at trial. [ 15 ] The engineering firm conducted an inspection to evaluate the structural condition of the existing basement floor. The report confirms that all building construction within the Province of Saskatchewan must be built to the standards of the 2010 NBC . [ 16 ] The report recommended retaining the concrete floor and installing new weeping tile and crushed rock cover, along with a new moisture membrane.

An excavation of the perimeter basement walls would expose deterioration which could be readily cut out and replaced. [ 17 ] Mr. Wagner did not agree with the engineer’s opinion that the house could be rebuilt with repair, rather than replacement, of the existing drainage system, in conformity to present day codes. According to Mr. Wagner, the engineering report did not address the use of weeping tiles, radon protection or the location of footing pads and point loads. Once Mr.

Wagner was assured that the NBC would be complied with, he issued a building permit, plan review and inspection schedule. [ 18 ] Nonetheless, in reaching its decision not to cover the cost of the floor’s replacement, MMFI relied on the SPECS report and the Reed engineering report. In a letter dated October 3, 2012, MMFI informed the plaintiffs that their policy allowed for replacement or repairs to damaged insured property only. Discussion 1.

How should the coverage clause be interpreted? [ 19 ] The plaintiffs rely on the following, which I will refer to as the coverage clause, in the policy: Guaranteed Replacement Cost: If the Coverage

Summary page indicates that Guaranteed Replacement Cost (GRC) applies, we agree to pay any insured loss under Dwelling Building, on the basis of the following: 1. Subject to paragraph 2 below, we agree to pay : (

a) The actual cost reasonably incurred to repair or replace the building on the same site with materials of like kind and quality, without deduction for depreciation, even if this exceeds the amount of insurance specified for Dwelling Building on the Coverage

Summary page, and (

b) Without increasing the amount of insurance, and only as a result of an insured peril, loss resulting from the demolition of any undamaged portion of the dwelling; or the cost of demolition, and clearing the site of any undamaged portion of the dwelling; or any increase in the cost of repairing, replacing, construction or reconstructing the dwelling on the same site arising from the enforcement of

the minimum requirements of any by-law, regulation, ordinance or law which regulates zoning or the demolition, repair or constructionof damaged dwellings and is in force at the time of such loss or damage. We will not pay for losses caused by the enforcement of any by-law regulation, ordinance or law which prohibits you from rebuilding orrepairing on the same site. (Emphasis added) ...

Replacement Cost means the cost, at the time of the loss or damage, of repair or replacement (whichever is less) with new property ofsimilar kind and quality, without deduction for depreciation. [20] There is no dispute the loss was the result of an insured peril.

The plaintiffs submit the above clause states that the defendantagreed to pay for (1) the actual reasonable cost to replace their dwelling, and (2) the loss resulting from the demolition of any undamagedportion of the dwelling, (3) the cost of demolition and clearing the site of any undamaged portion of the dwelling or (4) any increase inthe cost of reconstructing the dwelling on the same site arising from the enforcement of the minimum requirements of any bylaw whichregulates the construction of damaged buildings. [21] The plaintiffs contend that the concrete floor was an undamaged portion of the damaged dwelling which required demolitionand replacement, resulting in an increased cost to reconstruction because of the operation of a bylaw. [22]

Interpretation of the coverage clause requires consideration of its meaning in light of certain punctuation, as well as itsrelationship to established legal principles regarding undamaged property. (

a) The placement of the semicolons [23] MMFI argues that because of the placement of the semicolons in the coverage clause 1(b), the concrete floor must have beendamaged by the fire in order to be covered by the policy. However, Mr.

Moroziuk could not really explain why that was the case. [24] Punctuation marks, specifically semicolons, were discussed by the Supreme Court in Laurentide Motels Ltd. v Beauport(Ville), (SCC), [1989] 1 SCR 705, [Laurentide] where L’Heureux-Dube J. cited with approval at para. 113, Pelletier J. inMontreal Light, Heat and Power Co. v Cite de Montreal (1917), 26 KB 368, at p. 375: [TRANSLATION] But there is this unfortunate semicolon, which puts the whole matter in doubt! – and it may be a mistake by aproofreader or printer. I find a semicolon to be a rather uncertain basis...

L’Heureux-Dube J. continues: A debate on punctuation cannot take the place of an

interpretation based on the legislative context and ordinary meaning of words. Thereliability of punctuation as a tool of

interpretation has indeed been questioned, and this passage from the opinion of Pelletier J. is citedwith approval by P.A. Cote in his text The

Interpretation of Legislation in Canada (1984), at p. 48. [25] Laurentide was considered with approval in Workers’ Compensation Board v Moore, 2011 BCSC 459 where the Courtinterpreted the commas in a court injunction. The Court found that in a case of contempt where there is any ambiguity in the order, itwas impossible to rely strictly on the point of grammar with respect to punctuation to interpret the injunction: para. 56.

[26] In Falk Bros. Industries Ltd. v Elance Steel Fabricating, (SCC), [1989] 2 SCR 778, the Supreme Court wastasked with interpreting

section 109 of the Insurance Act—a lengthy

section which contained no punctuation. The Court read in certainpunctuation and numbering, to give a broad and generous

interpretation to the provision, based upon its remedial nature. [27] A contextual approach, which considers the rules of

interpretation, the ordinary meaning of words, prior courts’interpretations of similar clauses, and the intentions of the parties, has generally been preferred over an analysis focused on strictgrammatical rules.

This is particularly so where there is an ambiguous use of punctuation marks. [28] In this case, the position of the semicolons in the coverage clause appear to serve only to separate further circumstances wherecoverage will be allowed, including (1) loss resulting from demolition of any undamaged portion of the dwelling; (2) the cost ofdemolition and clearing the site of any undamaged portion of the dwelling; (3) any increase in the cost of reconstructing the dwelling onthe same site arising from the enforcement of requirements of a law which regulates the construction of damaged dwellings in force atthe time of the loss.

It is difficult to conceive of another

interpretation as a result of the semicolons. [29] In addition to the actual reasonable cost to replace the plaintiffs’ dwelling, coverage would be allowed for loss fromdemolition of the concrete floor, the cost of demolition and clearing of the concrete floor, or any increase in cost of reconstructing thedwelling arising from enforcement of laws which regulate construction of damaged dwellings. On that

interpretation, the cost ofdemolition, clearing and replacing the concrete floor would be covered by this clause. (

b) Was the concrete floor considered part of the fire’s damage? [30] Even if the contract is strictly read in favour of the insurance company, established insurance principles direct that theundamaged concrete floor ought to be considered damage resulting from the fire, unless there is an applicable limitation clause. [31] In Glad Tidings Temple Missionary Society of Vancouver v Wellington Fire Insurance Co. (1964), (BC SC),46 DLR (2d) 475 (BCSC) [Glad Tidings], the plaintiff’s building was extensively damaged by fire, but could have been restored byrebuilding the

part completely destroyed and incorporating the

part left standing. Because of building bylaws this could not lawfully bedone. As a result, the undamaged portion was demolished. [32] The Court in Glad Tidings ruled that when a portion of a building remains undamaged by a fire, but bylaw regulations renderthe remains valueless, the loss of value by operation of the bylaw ought to be considered part of the damage caused by the fire.

As statedat para. 43: ...if an insured person’s building is partially destroyed by fire then, notwithstanding that it would be physically possible to restore theoriginal building by repair or reconstruction incorporating the undamaged portion thereof, if by operation of a by-law repair orreconstruction is impossible so that the remaining part of the building is valueless then the insured is entitled to be indemnified for theloss of the entire building as direct loss or damage caused by the fire. [33] The Court rejected the defendant’s submission that the loss attributable to the bylaw is not damage caused directly by fire andreasoned: ...the situation is that the plaintiff has suffered a total loss of its building just as it would have done had the plaintiff’s entire building beenconsumed by fire.

It may be that this is a constructive total loss, but be it called a constructive total loss or by any other name, the endresult for the plaintiff is the same, the plaintiff has lost its entire building. In this case: (

a) The plaintiff’s building was partiallydestroyed by fire; (

b) The building could not, because of legal prohibition, be repaired or reconstructed using the part of the building leftstanding; (

c) The part of the building left standing was valueless—the plaintiff lost the

part consumed by fire and lost the part which wasleft standing; (

d) The plaintiff actually suffered the loss of its entire building; (

e) The plaintiff suffered the loss of its entire building as adirect consequence of the fire...In this situation, the plaintiff, having suffered a total loss of its building as a direct consequence of thefire, the defendants ask to have their liability limited in the way that it would have been limited if there had not been a total loss and if the

building could have been repaired or reconstructed using the undamaged part thereof. In fact, the plaintiff’s building could not have beenrebuilt using the part that was undamaged by fire; the defendants, in effect, invite me to assume that which is not so, that the buildingcould have been lawfully rebuilt and to give them the benefit of the limitation clause on this assumption.

In my opinion, the particularlimitation clause with which I am concerned in case of a partial destruction by fire is effective only if it is both possible and permissibleto rebuild using the part of the building which is undestroyed: Glad Tidings, para. 50. [34] As such, portions of a building which are undamaged by fire are part of the damage and loss suffered as a result of the fire, ifthose portions are unable to be used due to the operation of a law or bylaw.

Glad Tidings was cited with approval in Manhas v SovereignGeneral Insurance, 1999 BCCA 164 [Manhas]and Shinkaruk Enterprises Ltd. v Commonwealth Insurance Co., (SKCA), [1990] SJ No 317 (CA) [Shinkaruk]. [35] Applying the principles in Glad Tidings to the circumstances of this case, the concrete floor, although undamaged by the fire,ought to be considered as loss suffered as a result of the fire, if it could not be used because of the operation of the NBC adopted byUBAS and the Waldheim bylaw. MMFI’s position presumes that the plaintiffs’ home could have been rebuilt using the existing floor.

No one from SPECS or the engineering firm testified to explain their conclusions that the existing floor could be retained. I accept Mr.Wagner’s testimony that the plaintiffs’ home could not have been rebuilt to incorporate the concrete floor, as it could not have beendetermined in advance whether it complied with the NBC. In fact, the contractor Mr. Neufeld confirmed when the floor was demolishedthat the drainage system did not comply with NBC and therefore it could not have been salvaged for lawful use.

He would not have beenable to obtain a building permit from the Town of Waldheim unless he replaced the existing floor. [36] The plaintiffs suffered the loss of their entire dwelling, including the floor, as a direct consequence of the fire. In essence, theplaintiffs lost their dwelling, which was consumed by fire and the concrete floor because it was of no value. [37] Therefore, the policy which guaranteed replacement cost covered the cost to replace the dwelling and the concrete floorunless the exclusion clause operates to limit the defendant’s liability. 2.

What is the impact of the exclusion clause? [38] In denying coverage for the undamaged concrete floor, the defendant relies on the following provision in the policy, which Iwill refer to as the exclusion clause: Losses Not Insured—We do not insure: 1.

Losses, expenses or increased costs of repair or replacement directly or indirectly resulting from or contributed to by the operation ofany law or ordinance regulating the zoning, demolition, repair, construction or reconstruction of buildings and their related services. [39] To successfully limit their liability, insurers are required to present a clear, direct and on-point exclusion clause that dealsspecifically with the loss before the Court.

An exclusion clause of this type must precisely meet the circumstances which arise in thecase: Glad Tidings. [40] The clause in MMFI’s policy purports to deny coverage for losses or costs of replacement resulting from the operation of anylaw which regulates construction or reconstruction of buildings. The Waldheim bylaw requires compliance with NBC in the constructionor reconstruction of buildings, including the construction of basement floors. [41] However, it is significant that, according to Mr.

Moroziuk’s testimony, had the concrete floor been damaged, MMFI wouldhave covered the cost of its reconstruction to bring it into compliance with the building codes [transcript, p. 128, lines 8-10]. This is so,even though that cost could be construed as a loss or increased cost of “replacement indirectly resulting from or contributed to by the

operation of any law...regulating construction or reconstruction” as provided by the exclusion clause. Therefore, it does not appear to bethe operation of the bylaw which resulted in the denial of coverage, but rather the undamaged condition of the floor. Following GladTidings, even though undamaged, the floor was of no value and ought to be considered part of the total loss of the dwelling caused byfire. [42] In Glad Tidings, the bylaws required that the building be rebuilt using a different class of construction, that it not utilize theentire site and that it be located at a specific place on the site.

The Court held that the clause which granted coverage “without allowancefor any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair” was insufficient tobar recovery for actual loss resulting from the enforcement of the bylaw. [43] The exclusion clause in Glad Tidings failed because it only mentioned the increased costs of repair or reconstruction due to abylaw; it made no mention of a loss or damage suffered by operation of a bylaw, which was the nature of the loss suffered in that case. [44] The Glad Tidings clause was effective only if it was both possible and permissible to rebuild using the part of the buildingwhich was not destroyed.

The undamaged part of the building had a value that was destroyed by operation of the bylaw, and the policyin Glad Tidings “included nothing which could preclude that loss of value being treated as loss or damage by fire”: Manhas, para. 16. [45] In Carlyle v Elite Insurance Company, (BC CA), [1986] BCJ No 135 (CA) [Carlyle], the insured’s homewas destroyed by fire and the cost of replacement for an identical building was $33,000.00 whereas the cost of replacement for a buildingcompliant with the governing bylaws was approximately $45,000.00.

To be compliant with bylaws, it was required that the buildinghave twenty percent more square footage and that the building have a concrete foundation, unlike the building that was destroyed by thefire.

The insurer took the position that the increased cost of repair was covered by the exclusion clause, which stated that the companydid not insure loss or damage resulting from the operation of any bylaw. [46] However, the Court held that the exclusionary clause was insufficient to limit the insurer’s liability in these circumstancesbecause the words “loss or damage” did not adequately describe the increased costs of repair or reconstruction.

The Court reasoned “thecost of rebuilding is something different from loss or damage—it is an alternative method of making good the loss or damage”. [47] The Court in Carlyle noted that, had the wording from the Glad Tidings exclusion clause been used in the Carlyle clause, thecoverage could be denied since the loss suffered is an increased cost of repair or construction; and, similarly, if the policy wording inCarlyle was used in the Glad Tidings exclusion clause, liability could have been limited to a lesser figure in that case, since theundamaged portions were considered a loss due to the operation of a bylaw. [48] Carlyle was referred to in Del Folk v Saskatchewan Mutual Insurance Company, [1992] BCJ No 2205 (SC) [Del Folk], wherethe plaintiff’s property was destroyed by fire, except for the floor joists and the foundation, neither of which conformed to the city’sbuilding standards.

In Del Folk, the Court held that exclusion of “loss...arising in consequence of...the enforcement of any bylaw” ratherthan increased costs of repair or reconstruction cannot be said to refer unequivocally to the claim settlement provisions.

Consequently, itcould not form the basis for limiting the entitlement of the insured under that clause. [49] In Shinkaruk Enterprises Ltd. v Commonwealth Insurance Co., (SK CA), [1990] SJ No 317 (CA)[Shinkaruk], the Court of Appeal affirmed the principle in McCoy v North Empire, [1918] 1 WWR at 468 [North Empire], that when abuilding is damaged by fire and cannot be repaired or rebuilt because of a bylaw prohibiting repair or rebuilding and in the absence ofany provision in the policy limiting the liability of the insurer, then the “replacement cost” should be construed as the cost of replacingthe whole building.

The Court cited Brown and Menezes, Insurance Law in Canada, (Toronto: Carswell, 1982) at p. 263: Where...repairs are unable to be carried out because, for example, of a prohibitive municipal by-law, even though physically possible, theinsured may recover for loss of the entire property. [50] The exclusion clause in Shinkaruk more closely paralleled that in North Empire which stated “[t]he Insurers will indemnifythe insured against such direct loss or damage without allowance for any increased cost of repair or reconstruction by reason of anyordinance or law regulating construction or repair”.

The Court agreed that the limitation clause made no specific provision in the eventthat it was impossible to restore the original structure because of the operation of a local bylaw.

[ 51 ] The defendant MMFI relied on Wynberg v Allianz Canada , [2002] ILR I-4131 (Ont SCJ) [ Wynberg ] wherein the plaintiff sought to recover the cost of repairs to their sewage system and flooring damaged by sewage backup. The insurance policy provided coverage for the cost of repairs “to comply with any law regulating zoning ”. The Court held “zoning” to be a term of legal art, which did not include performance standards found in the building code for sewage systems. Neither did the parties intend that zoning should include such standards.

The facts and policy provisions in Wynberg appear to be distinguishable from the present case. [ 52 ] In Manhas , a case also relied upon by MMFI, the insured’s residential property was partially destroyed by fire and, although it was physically possible to repair the building, the city prohibited repair or reconstruction because over 75 percent of the value of the building was destroyed.

The Manhas exclusion clause stated that the insurance company would not insure “losses or increased costs of repair due to the operation of any law regulating the zoning, demolition, repair or construction of buildings and their related services.” After discussing Glad Tidings , the Court in Manhas found that this exclusion clause could be differentiated from that in Glad Tidings as the insurer specifically excluded coverage for the damage alleged: Had the exclusion in this case not included the words “losses or”, its effect would have been as in Glad Tidings , i.e., to exclude only increased costs of repair and it would then not have applied on the facts of this case: para. 16. [ 53 ] The Court in Manhas ruled that the exclusion clause applied in the circumstances of that case, because the clause referred to losses and increased costs relating to the operation of law. [ 54 ] The authorities demonstrate that the insurer must be able to point to a specific provision in the policy which clearly and unequivocally limits the insurer’s liability. [ 55 ] The exclusion clause in the contract between the plaintiffs and MMFI excludes “losses, expenses or increased costs of repair or replacement directly or indirectly resulting from or contributed to by the operation of any law or ordinance regulating the zoning, demolition, repair, construction or reconstruction of buildings and their related services.” The clause purports to prevent recovery of loss, expense, or increased costs, for repair or replacement that is a direct or indirect result of the bylaw.

The problem arising for the insurers in Carlyle , Glad Tidings and Del Folk seems to be resolved by the wording in the present exclusion clause, which is similar to that upheld by the Court in Manhas . 3. Is there a contradiction between the coverage clause and exclusion clause?

If so, what is the effect? [ 56 ] Assuming that MMFI was successful in drafting a specific and extensive exclusion clause, which applies to the circumstances of this case, the exclusion clause dealing with bylaw-associated loss appears to be in direct contradiction with the coverage clause. [ 57 ] The exclusion clause purports to limit the insurer’s liability for “losses, expenses or increased costs of repair or replacement directly or indirectly resulting from or contributed to by the operation of any law”; whereas coverage clauses (

a) and/or (

b) purport to pay for any loss associated with the enforcement of minimum bylaws and/or the cost of removing undamaged parts of the building from the site. [ 58 ] Either of the following

interpretations of the coverage clause is viable when demonstrating that the insurance policy covers the loss suffered by the plaintiffs: (

a) Relying only on the second part of clause (b): The concrete floor, due to the minimum requirements of a bylaw, had to be replaced. The removal and replacement of the floor constitutes an “increased cost of repairing, replacing, construction or reconstruction” of the dwelling, which is covered by the insurance policy; or (

b) Relying on clause (

a) and the first part of clause (b): The concrete floor was undamaged and had to be removed from the site, which is covered by the first part of clause (b). This coverage is separate and apart from the coverage in clause (

a) which additionally , not alternatively , allows the insured to claim for the “ actual cost reasonably incurred to repair or replace the building on the same site ” .

[59] Whether coverage is argued using the second part of clause (

b) or by using clause (

a) in combination with the first part ofclause (b), it seems clear that the insurance policy purports to both cover and exclude costs relating to building bylaws. [60] When confronted with contradictory clauses, it is helpful to consider the principles governing the

interpretation of insurancecontracts. These principles were highlighted in Brkich & Brkich Enterprises Ltd. and Mel Hotels Ltd., doing business as the CommercialHotel v American Home Assurance Company (1995), (BC CA), 8 BCLR (3d) 1[Brkich], and were adopted by theSupreme Court of Canada in dismissing the appeal: (SCC), [1997] 1 SCR 1149. In Brkich, the plaintiffs’ hotel wasdestroyed in a fire. The plaintiffs planned to rebuild the hotel and entered into a contract for its reconstruction. However, before thehotel was rebuilt, the plaintiffs sold the hotel and assigned the construction contract to the purchaser.

The question was whether, on thewording of the insurance contract, the plaintiffs were entitled to recovery of replacement costs. [61] In Brkich, the parties agreed that the leading cases for insurance policy

interpretations are Consolidated Bathurst Export Ltd.v Mutual Boiler & Machinery Ins. Co., (SCC), [1980] 1 SCR 888 [Consolidated Bathurst] and Brissette Estate andWestbury Life Ins. Co., (SCC), [1992] 3 SCR 87, from which the following rules of construction are derived: (

a) The court must search for an

interpretation from the whole of the contract which promotes the true intent of the parties at the timeof entry into the contract. (

b) Where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the partieswill be selected. (

c) Ambiguities will be construed against the insurer. (

d) An

interpretation which will result in either a windfall to the insurer or an unanticipated recovery to the insured is to beavoided. [62] The Court held that the contract did not expressly require the plaintiffs to expend the replacement costs themselves, but notedthat at the very least, the contract language was ambiguous on this point. In light of the principles governing the

interpretation ofinsurance contracts, and since the clause was “reasonably capable of the meaning contended for by the plaintiff”, the Court found that itshould construe the

interpretation against the insurer “unless some other consideration foreclosed that result”: para. 58. [63] I will apply the accepted principles to the present case. (

a) The true intention of the parties [64] When interpreting an insurance contract, the Court is tasked with finding an

interpretation which promotes the parties’ trueintentions at the time of entering into the contract. In the present case, the plaintiffs’ intent was to gain insurance coverage for total lossreplacement. Mr. Schultz testified that he deliberately contracted for a policy which provided guaranteed replacement cost and he paidpremiums to the defendant for eighteen years on that basis. MMFI does not dispute that the plaintiffs’ policy guaranteed replacementcost.

However, the intent of MMFI is unclear with respect to the impact of bylaws on replacement cost, due to the apparentlycontradictory clauses—the contract limits its liability but simultaneously provides coverage for the same loss. Further ambiguity israised by Mr.

Moroziuk’s testimony that the floor would have been replaced so as to conform to the bylaw requirements had it beendamaged. [65] As stated in Consolidated Bathurst “literal meaning should not be applied where to do so would bring about an unrealisticresult or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted”. Further, “aninterpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first placeshould be discarded in favour of an

interpretation of the policy which promotes a sensible commercial result”: pp. 58-59. [66] The literal meaning here grants coverage for the concrete floor’s reconstruction, then takes away that coverage using anexclusion clause. In the context of a policy guaranteeing replacement cost of the plaintiffs’ dwelling, the failure to include the cost of the

undamaged basement floor which could not lawfully be retained, would lead to an unrealistic result and one not reasonably contemplated in the insurance industry. (

b) Where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the parties will be selected. [ 67 ] The discussion here will be similar to the discussion above. The intention of the plaintiffs was to obtain home insurance and the intention of MMFI is unknown due to the competing clauses. [ 68 ] In order to be relied upon by insurers, exclusion clauses must be precise and specific to the damage suffered. According to the Court in Consolidated Bathurst , when there are two possible

interpretations, that which produces a fair result, must be taken as the

interpretation which would promote the intention of the parties. [ 69 ] In this case, the fair and reasonable meaning of the two competing

interpretations is that which grants coverage. Given the need to be precise in exclusion clauses, it would be difficult to find that the “fair result” of two competing clauses is one that excludes coverage. This position is also advanced in Consolidated Bathurst , where the Court said: “it is trite to observe that an

interpretation on an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided”: pp. 58-59. [ 70 ] Thus, whether the clause is ambiguous or whether the exclusion clause fails to mention the specific loss suffered by the insured, it appears that the plaintiffs should benefit due to their intention to gain insurance coverage at the time of entering into the contract as well as on the basis of standards of fairness. (

c) Ambiguities will be construed against the insurer [ 71 ] This rule directs that ambiguous contracts should be read in favour of the insured. In this case, given the two competing clauses, the rule would require that the insurance company pay for the replacement of the undamaged concrete floor. [ 72 ] Contra proferentem , a related principle, also applies in these circumstances.

This principle “operates to protect one party to a contract from deviously ambiguous or confusing drafting on the part of the other party, by interpreting any ambiguity against the drafting party”: Daphne Dukelow, The Dictionary of Canadian Law, 3 rd ed. Thomson Canada Limited (2004: Scarborough). [ 73 ] MMFI drafted the contract; therefore, contra proferentem requires that the ambiguity be resolved in favour of the plaintiffs. MMFI’s insurance policy grants and revokes coverage of the specific loss suffered by the plaintiffs.

As a result, the contract should at least be considered confusing and the principle should apply. (

d) An

interpretation which will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided. [ 74 ] According to Consolidated Bathurst a Court should avoid

interpretations that allow the insured “to achieve a recovery which could neither be sensibly sought nor anticipated”: pp. 58-59. In the present case, the plaintiffs will not profit or gain an unanticipated recovery if the policy is read in favour of coverage. The plaintiffs will gain nothing beyond the replacement of their house; they do not pocket any cash from the claim, nor recover more than the cost of replacing their house. In no way can the plaintiffs be accused of engaging in any dubious conduct relating to unlawful or inappropriate claims against MMFI.

The plaintiffs are not asking for repair or reconstruction that is beyond the requirements of the minimum bylaw dealing with the concrete floor, and the repair of their home following fire damage is something that is “sensibly sought” and “anticipated” from an insurance policy.

[ 75 ] The law regarding the

interpretation of insurance contracts directs that courts should avoid

interpretations where the insurance company is able to “pocket the premium without risk”: Consolidated Bathurst . In addition, in Brkich , the Court found that the insurer would receive a windfall if the insurer were not obliged to pay the full amount of the policy because the insurer agreed to pay replacement costs and collected premiums on that basis, without contracting for an alternative method of loss valuation. Although the circumstances differ from those in Brkich , the principle directs that insurance companies should not be able to unreasonably pocket premiums unfairly or without risk.

In the present case, Mr. Moroziuk acknowledged MMFI would have covered the increased cost to bring the floor into conformity with the bylaw had it been damaged. Increased costs associated with bylaw compliance were contemplated by MMFI. [ 76 ] Based on the rules of

interpretation outlined above, the insurance contract between the plaintiffs and MMFI should be read to grant coverage to the plaintiffs for the replacement of the concrete basement floor. The policy is reasonably capable of the

interpretation contended by the plaintiffs: Brkich. [ 77 ] As a result of the rules for interpreting insurance contracts, including the principle of contra proferentem , the contradictory clauses of the insurance contract should be read in favour of the plaintiffs and the exclusion clause should be given no effect in these circumstances. Conclusion [ 78 ] The plaintiffs have established that the cost of demolition and replacement of the concrete pad is an insurable loss covered by the policy.

The undamaged floor, which could not be salvaged due to the Waldheim bylaw, is considered part of the damage and loss suffered by the plaintiffs as a result of the fire. The exclusion clause directly contradicts the coverage clause, which grants coverage to the plaintiffs for loss relating to compliance with minimum bylaw requirements. The rules of

interpretation favour coverage in these circumstances. [ 79 ] The plaintiffs established by the testimony of Ken Neufeld and his company’s invoice 849 dated December 22, 2011, that their cost to demolish and replace the concrete floor to have been $13,661.55 including GST. [ 80 ] The plaintiffs Harvey Schultz and Anna Louise Schultz will have judgment against the defendant Mennonite Mutual Fire Insurance in the amount of $13,661.55, along with interest under The Pre-judgment Interest Act from August 22, 2012, the date they submitted an alternate Proof of Loss to MMFI, and costs of issuing their claim. _______________________ D.C. Scott, J