Be mindful about sub-limits!

The Demolition and Increased Cost of Construction sub-limit limited the coverage available for code upgrades required to replace the damaged property.

Insurance law – Property insurance – By-law coverage – Machinery – Replacement value; Damages – Sub limit

Thunder Bay (City) v. Ontario Municipal Insurance Exchange, [2025] O.J. No. 2671, Ontario Superior Court of Justice, June 9, 2025, W.D. Newton R.S.J.

The City of Thunder Bay sought coverage from the Ontario Municipal Insurance Exchange for rainstorm and flood damage to the City’s wastewater pollution control plant. At issue was whether code upgrades were subject to a $10 million sub-limit, which would result in an uninsured loss of millions of dollars.

The basis of loss settlement was replacement cost. The assessment of replacement cost was subject to the following provision: “If repairs, replacement or construction with material of like kind and quality is restricted or prohibited by any by-law, ordinance or law, settlement shall be based on the increased cost of repair, replacement or reconstruction due thereto, limited to the minimum requirement of any such law, by-law, or ordinance.”

The declarations indicated that the coverage limit would apply, “unless a Section contains a sub-limit”. The declarations set out several “sub-limits”, including a $10 million sub-limit for Demolition and Increased Cost of Construction. The policy provided that the Demolition and Increased Cost of Construction sub-limit applied to the increased cost of repair or construction “of the damaged and undamaged facility.”

The City argued that the Demolition and Increased Cost of Construction provisions offered distinct coverage that is different from the replacement cost code upgrade provisions. Rather, the City argued they were intended to cover upgrades to portions of the building that were not damaged by the flood or required changes to building size or configuration, whereas the replacement cost code upgrade provisions related to code upgrades to portions of the building that were actually damaged.

The Court rejected the City’s argument, noting that the Demolition and Increased Cost of Construction wording specifies that it applies to “the increased cost of repair or reconstruction of the damaged and undamaged facility.” The Demolition and Increased Cost of Construction mirrored the replacement cost clause and recorded a mutual insuring intent to grant code compliance cost coverage, up to the sub-limit.

This case was digested by Dionne H. Liu and edited by Steven W. Abramson of Harper Grey LLP.  If you would like to discuss this case further, please feel free to contact them directly at [email protected] or [email protected].