What you do know can hurt you

What you do know can hurt you: where an insurer issues a policy with a clause excluding coverage in certain conditions that already exist, and the insurer knows those conditions exist at the time of issuing the policy, the insurer may be estopped from relying on that exclusion clause to deny coverage in the future

Ontario Court of Appeal upholds decision that an insurer is estopped from denying coverage pursuant to a clause excluding coverage in certain conditions that exist at the time the policy is issued when the insurer knows those conditions exist at the time of issuing the policy.

Insurance law – Property insurance – Arson – Exclusions – Estoppel; Practice – Appeal – Duties and liabilities of insurer

Lalani Properties International Inc. v. Intact Insurance Company, [2024] O.J. No. 3381, Ontario Court of Appeal, July 24, 2024, P.S. Rouleau, L. Sossin and J. Dawe JJ.A.

In April 2010, part of the north exterior wall of the Empress Hotel located at Yonge Street and Gould Street in Toronto, Ontario collapsed.  The hotel was forcibly vacated.  In July 2010, the City gave notice of its intention to designate the hotel a heritage building, and it became unclear whether the hotel could be demolished or would have to be repaired.  It stood vacant until January 3, 2011, when it was burned down by an arsonist.  The hotel owner, Lalani Properties International Inc. (the “Insured”) had an insurance policy with Intact Insurance Company (the “Insurer”). 

In June 2010, approximately 6 weeks after the wall collapse, the Insured’s broker had sent the Insured a renewal policy with increased property coverage and liability limits, and a higher premium, which was otherwise unchanged from the existing policy.  Similar to the existing policy, it contained an exclusion of coverage if the hotel had been vacant for more than 30 consecutive days.  The renewal policy insured the hotel against fire loss, with no exclusion for arson.

When the Insurer issued the renewal policy, it knew the hotel had already been vacant for more than 30 days and would have to remain vacant for the foreseeable future.

On October 26, 2020, the Insurer advised the broker that it no longer wanted to insure the building in its current state and gave 60 days notice of its intention to terminate the policy.  Amendments to the policy were issued on November 2, 2010, including that a “Vacancy Permit Endorsement” would be in effect until January 4, 2011.  During that period, coverage for various perils were to be excluded, including arson. 

The building was burned down by arson on January 3, 2011.

The Insurer denied coverage for both the wall collapse and the fire.  The Insured sued, and the trial judge found there was no coverage for the wall collapse, but there was coverage for the fire.  Both parties appealed.

With respect to the wall collapse, the issue at trial was the cause of the collapse.  The policy in place at the time was an all perils policy that insured against physical loss or damage except for that caused by things like leakage of water, the entrance of rain, and wear and tear.  The trial judge accepted the Insurer’s theory that the collapse had been caused by water seepage and freeze-thaw cycles which created cracks over time and weakened the structure of the wall.

It is implicit in an all perils policy that acts that are not expressly excluded from coverage must be fortuitous in order to fall within the grant of coverage.  The insured had the onus of showing the loss would not have occurred without an act or event that was not expected to occur in the ordinary course.  The trial judge concluded the Insured had failed to establish on a balance of probabilities that the wall collapse was a fortuitous event, and the Court of Appeal upheld that finding.

With respect to the fire, there were two issues at trial.  First, whether damage by arson was excluded from coverage by way of the attempt to modify the terms of the policy in the fall of 2010.  Second, whether the Insurer was estopped from relying on the terms of the June 2010 renewal policy that excluded losses if the building was vacant for more than 30 days.

The trial judge found the attempt to modify the terms of the policy in the fall of 2010 was invalid and legally inoperative because the Insurer did not obtain the Insured’s written agreement contrary to the requirements of sections 124(1) and (2) of the Insurance Act, R.S.O. 1990, c. I.8.  As a result, what was in place at the time of the fire was the renewal policy from June 2010, which did not have an exclusion for losses resulting from arson.

The trial judge further found the Insurer was estopped from relying on the term of the June 2010 policy that excluded losses if the building was vacant for more than 30 days, because the Insurer knew when it issued the renewal that the hotel was vacant as a result of the wall collapse, that it had already been vacant for over 30 days, and that it would remain vacant for the foreseeable future until it was torn down or the wall was rebuilt. 

The Court of Appeal found that after the Insurer undertook in June 2010 to continue insuring what it knew was a vacant building, the doctrine of promissory estoppel barred the Insurer from withdrawing its promise not to enforce the vacancy exclusion without giving the Insured reasonable notice of its change of decision.

This case was digested by Mollie Clark and edited by Steven W. Abramson of Harper Grey LLP 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 feel free to contact them directly at [email protected] or [email protected].