June 2011
PFD | Insurance

Regardless of the terms of the policy, underinsurance may lead to an indemnity that is lower than the actual value of the damages

By Annie-Claude Ménard

Annie-Claude Ménard, attorney

When taking out a new owner-occupant home insurance plan to cover building losses, it is important to properly assess the aggregate value of the building. In fact, an appraisal that is lower than the building's actual value may lead to unfortunate consequences for the building owner, regardless of the terms of the insurance policy - a fact that was recently upheld by the Québec Court of Appeal (Intact, compagnie d'assurances v. Harvey, 2011 QCCA 712).

Under the insurance-related rules in the Civil Code of Québec, an insurer cannot refuse to pay a policyholder if he/she is insufficiently insured because the building was not adequately appraised when issuing or renewing the policy. However, should an incident occur, the insurer will not be required to cover all of the damages suffered by the policyholder.

Should an incident resulting in a total loss occur, the insurer must pay the limit of coverage that was agreed upon based on the initial evaluation and not the actual value of the damages.

In the case of a partial loss, the insurer must pay out an indemnity based on the limit of coverage and the actual value of the building. For example, in the recent case before the Court of Appeal, the building was appraised at $175 000 when the policy was issued. The limit of liability was therefore set at $175 000. Water damage eventually occurred, partially destroying the building. Experts then assessed the value of the repair work ($48 584.80) and the building, which was appraised at $232 000 rather than $175 000. The Court of Appeal therefore established that the insurer would pay out the indemnity as follows:

$175 000 Indemnity

------------ X ---------------

$232 000 $48 584.80

Indemnity = $36 648.02

The Court also added that even if the insurance policy did not directly refer to the rule in the Civil Code of Québec, the principle still applied in this particular case and could be validly raised by the insurer. A contractual clause is therefore not required to invoke the rule.