No by-law coverage for undamaged portions of an elevator shaft

There was no coverage for the cost of making those portions of property that were not damaged by an insured peril by-law compliant.

Insurance law – All-risk insurance – By-law coverage – Latent defect – Interpretation of policy – Evidence – Expert evidence

Osborne Towers Ltd. et al v. Aviva Insurance Company of Canada et al, [2024] M.J. No. 5, 2024 MBKB 4, Manitoba Court of King’s Bench, January 10, 2024, S.D. Greenberg J.

Floors one to seven of the elevator shaft and mechanical duct shaft in the insured’s 26-story building suffered water damage after a fire hose system burst in the course of responding to a fire. Subsequent investigation revealed that the shafts were non-compliant with the Manitoba Building Code and the walls would need to be replaced at all floor levels before the insured could be issued an occupancy permit. The insurer indemnified the insured for only the first seven floors, taking the position that the by-law extension endorsement under the policy only covered the cost to ensure that property directly damaged by an insured peril complied with by-laws. The insured sought a declaration of coverage for the remaining floors.

There was conflicting expert evidence as to whether it was necessary to replace the entire shaft in order to address the water damage on floors one to seven. The court preferred the evidence from the insurer’s expert that the shaft was comprised of a series of assemblies and could be repaired separately. Therefore, given the court agreed that the by-law extension only covered the cost of making property damaged by an insured peril compliant with by-laws, the Court found in favour of the insurer. As the loss fell outside of coverage, there was no need to consider the latent defect exclusion.

This case was digested by Michael J. Robinson, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Michael J. Robinson at mrobinson@harpergrey.com.

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