In a recent decision, the B.C. Supreme Court has confirmed that
insurers who issue replacement cost endorsements to property
policies are not required to fund replacement of damaged property
in advance. Rather, insureds under such policies are required to
adhere strictly to the requirements of replacement cost
endorsements in order to recover indemnity on this basis.
Bahniwal v. The Mutual Fire Insurance Company of
British Columbia, 2016 BCSC 422, involved a Plaintiff who
owned rural property in Oliver, B.C., with several structures
located thereupon, including a residential dwelling, greenhouses
and a storage facility with an attached living suite. The
independent dwelling and the suite attached to the storage facility
were rented out to a tenant. The Plaintiff and her husband ran a
greenhouse and garden supply business on remaining portions of the
property, and had never occupied the dwelling or the attached suite
thereupon. A fire erupted in the storage facility and the attached
suite, effectively destroying the structure and its contents. While
the cause of the fire was not determined, post-fire investigation
by the fire department revealed the presence of a marijuana grow
operation within the suite.
The insurer decided to treat the Policy as void on the basis of
a material change in risk due to the Plaintiff's failure to
disclose the existence of the marijuana grow operation. The
Plaintiff commenced her action seeking a declaration of coverage
and indemnity under the policy on a replacement cost basis. The
Court determined that the Plaintiff had no knowledge of the
existence of the grow operation on the property and therefore held
that she did not breach the conditions of the policy, turning to
the consideration of whether the Plaintiff was entitled to recovery
based on "replacement cost" or "actual cash
The policy contained a replacement cost endorsement that
provided indemnity on a replacement cost basis subject to the
replacement being "effected by the Insured with due diligence
and dispatch". The insurer took the position that the
Plaintiff was only entitled to indemnity on the basis of ACV
because the Plaintiff had not replaced the destroyed building and
The Court rejected the idea that the Plaintiff did not have the
financial means to rebuild and replace the destroyed property.
However, it accepted that the Plaintiff made the decision to await
the result of the action against the insurer before undertaking
replacement. The Plaintiff argued that the insurer was obligated
under the policy to fund the replacement in advance. The Court held
that the insurer was not required to fund such replacement in
advance and the Plaintiff had breached a fundamental condition for
the application of the replacement cost endorsement by not
effecting replacement with due diligence and dispatch. As such, the
Plaintiff's recovery was restricted to ACV.
The Court referred to the decisions in Carlyle v. Elite
Insurance Co.,  B.C.J. No. 135 (C.A.), Anastatov v.
Halifax Insurance Co.,  B.C.J. No. 1437 (C.A.) and
Davidson v. Wawanesa Insurance Co.,  B.C.J. No. 1701
(S.C.) as being instructive on the issue. These cases had largely
confirmed that replacement cost endorsements required insurers to
pay for replacement once it had been completed, but did not require
insurers to advance funds to enable replacement by insureds. While
these decisions required the courts to consider whether an insurer
was required to advance funds for replacement prior to the insured
undertaking such replacement, they did not deal with circumstances
where the insured had delayed replacement of damaged or destroyed
property pending the outcome of the decision on whether they would
be indemnified. The Court's decision in Bahniwal
therefore favours a strict application of the conditions to
replacement cost endorsements requiring insureds to replace damaged
property with due diligence and dispatch, regardless of whether
they delayed same until the insurer's liability was
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