Canada: Discovered Damage: Bylaw Coverage And The Principles In Roth v Economical Mutual Insurance Co.

Last Updated: February 1 2019
Article by Kamara Q. Willett

Prospective property owners are often drawn to older buildings for their charming facades or classic architectural features. Those same owners are likely aware that their charming old buildings were not built to current building code or bylaw standards.  For that reason, savvy property owners will often choose to purchase bylaw insurance coverage.

Bylaw coverage is intended to provide comfort to property owners that, in the event their property is damaged and repairs are required, insurance will pay for the costs of repairing or rebuilding property to standards required by current and stricter safety or building code requirements.

Bylaw coverage will respond to a number of situations, including those in which compliance with bylaws require the owner to rebuild or repair a property using more modern materials or methods.  Bylaw coverage will also cover the costs to ensure the rebuilt or repaired property meets current safety and accessibility standards.  In certain cases, bylaw coverage will even cover the cost of partially or completely demolishing a structure, if such demolition is required for code compliance.

However, property owners and insurance professionals alike would be wise to note that bylaw coverage may not be responsive to every bylaw requirement identified in the course of repairing a structure after an insured loss.  In fact, many bylaw coverage endorsements only require insurers to provide coverage for repairs necessary as a result of the insured peril.  Depending on the wording of the policy in issue, an insurer may not have to provide coverage for repairs needed to remedy a building deficiency that was simply discovered as a result of an insured peril.

This limitation on the scope of certain bylaw coverage endorsements was identified by the Alberta Court of Appeal in Roth v Economical Mutual Insurance Co., 2016 ABCA 399 [Roth].  In that case, Economical issued a policy of insurance to Roth, which included a bylaw coverage endorsement. Roth owned a body shop in Medicine Hat, Alberta. The shop was initially constructed in the 1950s.  In the summer of 2012,  heavy rain caused a storm sewer to overflow and the wood-framed shop sustained some limited water damage.

When an adjuster visited the shop to assess the damage, he removed the water-damaged drywall only to discover that the wood framing at the base of the foundation had pre-existing moisture exposure and was rotting. The adjuster also discovered that portions of the wiring behind the water-damaged drywall were not up to current bylaw standards.

The adjuster applied to the City of Medicine Hat (the "City") for a permit to carry out repairs to the shop, which triggered an inspection by the City. The City determined that the wood-framed shop was structurally unsound; it refused to issue a permit unless the building was demolished in its entirety or engineered drawings were produced showing it could be repaired to current City standards.

Economical took the position that the problems with structural integrity of the shop pre-existed the water damage that was the subject of Roth's claim, and that the bylaw coverage provision in Roth's policy did not require Economical to pay for deficiencies that were merely discovered as a result of the water damage.  Roth disagreed, and sued for the replacement cost of the wood-framed shop.

The matter went to a summary trial, where the judge interpreted the policy language to mean that once water damage occurred, the policy was extended to indemnify the insured peril of bylaw enforcement.  Put another way, the trial judge appeared to accept that non-compliance with bylaws was a separate insured peril in addition to the water damage that caused Roth to make a claim under the policy.

Economical appealed the trial judge's decision. The Alberta Court of Appeal considered the lower court's decision and concluded that interpreting the insurance contract as the trial judge had would not be consistent with the reasonable expectations of the parties.  The Court doubted that Roth and Economical both expected Economical to be responsible for hidden structural defects that pre-existed the water damage underlying Roth's claim; if that were the case, Economical would be providing Roth with something more in the nature of a warranty than an insurance policy. The Court granted Economical's appeal, and Economical was not required to replace Roth's shop.

The Court's reasoning in the Roth case was later followed in 852819 Albert Ltd. v Sovereign General Insurance Co., 2017 ABCA 76.

The limits to the application of bylaw coverage endorsements discussed in Roth may not come into play often, but when they do the implications may be significant to both insureds and insurers. For that reason, insurance professionals should endeavor to make the limitations of bylaw coverage clear to property owners at the time the coverage is purchased.  When property owners are aware of the limitations of the coverage available to them at the outset, it is far less likely that the parties to the insurance contract will become engaged in disputes about coverage after a claim is made.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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