Alberta Court of Appeal reduces damage award to account for insured’s actual loss

Introduction

In Shelter Canadian Properties Limited v Aviva Insurance Company of Canada, 2023 ABCA 74, the Alberta Court of Appeal reduced an indemnity payment for loss of rental income to account for the increase in the net rental income of the properties at issue after a wildfire occurred in Fort McMurray, Alberta.

Brief facts

Shelter Canadian Properties Limited (“Shelter”) was the property manager of 13 multi-unit residential rental complexes (the “Properties”) owned by Lanesborough Real Estate Investment Trust (“LREIT”) in Fort McMurray, Alberta. In April 2016, Shelter, LREIT, and LREIT’s holding companies (collectively, the “Insured”) purchased a commercial insurance policy for the Properties from Aviva Insurance Company of Canada and seven other subscribing insurers (collectively, the “Insurer”). This policy provided coverage for loss of rental income resulting from damage or destruction caused by covered perils, which included wildfires.

In May 2016, Fort McMurray’s civil authority issued a mandatory evacuation order due to a nearby wildfire (the “Fire”). Although the evacuation order was lifted on June 2^nd, 2016, the units in the Properties remained uninhabitable for weeks afterwards due to resultant smoke damage.

The Insurer paid the Insured approximately $6,500,000 to cover the cost of the physical damage to the Properties from the Fire. However, they denied the Insured’s claim of $4,430,475.00 for loss of rental income, stating that the Insured’s policy only provided coverage for their actual losses. The Insurer claimed that the Insured did not suffer an actual loss as it pertained to their rental income, as they raised the rent prices of the units after the Fire occurred, which resulted in an increase in their overall net rental income.

Parties’ positions

The Insured took the position that they were not restricted to their actual losses and that the $4,430,475.00 fell within the policy’s definition of “rental losses.” The Insurer argued that the policy only provided coverage for actual losses, which, according to the Insurer, the Insured did not sustain.

Decision under appeal

At issue was whether the loss of rental income claimed by the Insured was covered under the policy. The trial judge considered the definition of “Gross Rentals” and determined it provided coverage for three categories of rental losses:

1. Rental payments which encompassed both unrealized rental income due to the evacuation and potentially refundable payments made by tenants while their units were uninhabitable;
2. Losses resulting from unoccupied units that could have reasonably been rented out while the Properties were uninhabitable; and
3. Coverage for the fair rental value of the portions of the Properties occupied by the Insured themselves that were used for operations and storage.

In finding that all three of these categories applied, the trial judge ordered that the Insurer pay the Insured approximately $1.25 million for gross rental losses.

Analysis

The Insurer appealed the lower court decision on several grounds. They took the position that the trial judge misinterpreted the policy, erred in assessing the Insured’s “actual loss,” and failed to consider the Insured’s duty to mitigate the loss.

Indemnity vs Non-Indemnity policies

The Court of Appeal emphasized that under an indemnity policy, an insured party cannot recover more than their actual loss. Indemnity insurance policies are those that link the indemnity payment to the actual loss suffered, while non-indemnity policies (such as life insurance policies) compensate the insured party with a fixed amount that is not necessarily correlated with the actual loss at issue.

Since the policy’s “Gross Rentals” provisions included methods for calculating the Insured’s actual, quantifiable loss, the Court of Appeal agreed with the Insurer’s position that the policy was a contract of indemnity. Further, the “Gross Rentals” provisions also included an express mitigation clause, the inclusion of which obligated the Insured to take reasonable steps to minimize their losses, which provided further support for the determination that this was an indemnity insurance policy.

“Gross Rentals” provision interpretation

The Court of Appeal made the following determinations with respect to the trial judge’s interpretation of coverage provided for by way of her interpretation of the definition of “Gross Rentals:”

1. Rental payments from tenants for the Properties

The Court of Appeal found the trial judge erred in not considering the rent collected from new tenants in June and July 2016, as well as the security deposits retained by the Insured when assessing the Insurer’s obligations to indemnify the Insured. Considering the Insured’s coverage was limited to the actual loss at issue and that they had a contractual duty to mitigate their losses, they ordered the parties to recalculate this amount accordingly.

2. Losses resulting from unoccupied units that could have reasonably been rented out while the Properties were uninhabitable

The Court of Appeal determined that the trial judge erred by not considering that the rental rates of the unoccupied units increased by 26% from the pre-Fire rates by July 2016. This increase was primarily driven by an increase in demand from contractors doing recovery work and residents needing alternative housing. Consequently, the Properties’ gross rentals during the indemnity period surpassed the pre-Fire amounts. Therefore, the Court of Appeal determined the Insured did not suffer any actual loss under this category and was not entitled to indemnification.

3. Coverage for the fair rental value of the portions of the Properties occupied by the Insured themselves

The Court of Appeal agreed with the trial judge that the Insured was entitled to recover the “fair market rental” of these units during the indemnity period. Although the units were not earning any income, it was evident from the policy that the parties intended to compensate the Insured for their inability to use these units while they were inaccessible. Accordingly, the Court of Appeal did not interfere with the trial judge’s award on this issue, which was in the amount of $61,759.

Takeaways

Insurers ought to be mindful of their obligations to an insured pursuant to both indemnity and non-indemnity policies. A court will look at whether a policy is a contract of indemnity when determining the appropriate remedy.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Insurance Defence group.