When a fire insurance policy does not clearly define the term “actual cash value”, an insured can be entitled to the replacement cost of the insured property as opposed to the market value

Ollerhead v. Ecclesiastical Insurance Office PLC, [2005] N.J. No. 272, Newfoundland and Labrador Supreme Court – Trial Division

Mr. Ollerhead lived in a fishing community on the outskirts of St. John’s. He was the owner of a nightclub named the Club Commodore (“Commodore”). The Commodore was built in the early 1940s and consisted of a wooden frame on a concrete foundation. Originally Mr. Ollerhead was interested in obtaining “replacement cost” fire insurance on the Commodore, but was advised that such insurance was not available for nightclubs.

Mr. Ollerhead retained an insurance broker and reviewed several insurance policies. He chose a policy from Ecclesiastical Insurance Office PLC (“Ecclesiastical”) which provided insurance for the “actual cash value” of the Commodore. The policy provided for an increasing scale of premiums based upon the value of the property insured. Mr. Ollerhead paid for premiums to insure the Commodore up to a maximum of $300,000. At the time that he purchased the insurance, he was aware that the market value of the property was $200,000. However, Mr. Ollerhead did not want market value insurance, he wanted replacement cost insurance or the equivalent.

On December 18, 2001, the burglar alarm at the Commodore was triggered, and the police were alerted. When the police arrived at the scene, they discovered that the building was on fire. Although the Torbay Volunteer Fire Department immediately dispatched a fire truck to the scene, the building was completely destroyed. The fire investigation did not determine the cause of the fire, but there was no evidence of accelerants and Mr. Ollerhead fully cooperated with the police. After the fire, an appraiser determined that the market value of the building was $181,000, but that the replacement costs of the building, less accumulated depreciation, was $256,311.

Ecclesiastical advised Mr. Ollerhead that the actual cash value of the building was $181,000 pursuant to the terms of the policy. Mr. Ollerhead took the position that the actual cash value of the building was the replacement cost of the building, less accumulated depreciation. Ecclesiastical provided Mr. Ollerhead with payment of $181,000.

Mr. Ollerhead commenced this action against Ecclesiastical to recover the $75,311, amongst other things. The issue to be decided was the meaning of “actual cash value” in Mr. Ollerhead’s policy of insurance. Halley J. noted that there was no definition of the phrase “actual cash value” set out in the insurance contract. Halley J. noted that in determining the meaning of “actual cash value” in the context of the facts of this case and the insurance contract, it was necessary to consider the rules established by the Supreme Court of Canada for the interpretation of insurance contracts. Specifically, Halley J. noted Consolidated Bathurst Export Ltd. v. Mutual Boiler Machinery Insurance Co. (1979), 112 D.L.R. (3d) 49 in which the Court noted that the Court must search out a construction of the contract that would capture the true intent of the parties and that they “should be loath to support a construction which would either enable the Insurer to pocket the premium without risk or the Insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract”. In addition, Halley J. relied upon Brissette Estate v. Westbury Life Insurance Co. (1992), 96 D.L.R. (4th) 609 for the proposition that 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, that any ambiguities will be construed against the Insured, and any interpretation that would result in either a windfall to the Insurer or an unanticipated recovery to the Insured should be avoided.

Both parties brought legal precedents and articles which supported their client’s interpretation of the meaning of the phrase “actual cash value”. Halley J. noted that while these cases and materials were interesting, they were not helpful because the meaning of the phrase must be determined on a “case by case basis” with an emphasis on the facts which may indicate the intention of the parties at the time of the execution of the insurance contract. Halley J. placed significant weight on the evidence of the insurance broker, Susan Winsor, who testified that although she knew the market value of the building and land was approximately $200,000, she did not believe that that figure was relevant because she was satisfied that “actual cash value” meant replacement costs of the building, less its depreciation. She further testified that she would not have permitted Mr. Ollerhead to over-insure his property and to pay additional premiums to insure his property for $300,000. Halley J. went on to determine that the intention of the parties at the time of the execution of the fire insurance contract was that the “actual cash value” meant the replacement costs of the building, less its accrued depreciation. Accordingly, Mr. Ollerhead recovered the $75,311 from Ecclesiastical.

Halley J. noted that Mr. Ollerhead and Ecclesiastical had a legitimate disagreement with respect to the meaning of the phrase “actual cash value”. Ecclesiastical had negotiated with Mr. Ollerhead in a fair and reasonable manner, and that there were no grounds for either punitive or aggravated damages against Ecclesiastical.

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