Executive Summary: Key Legal and Evidentiary Issues

• Clarendon's bid to recover its full contents limit, without replacing the property and despite being underinsured, depended on an oral settlement agreement that the court found was never proven.
   
• Replacement-cost coverage required actual repair or replacement with property of like kind and quality, so depreciation applied where items were replaced with cheaper materials, replaced by a tenant, or not replaced at all.
   
• Pre-existing obsolescence, latent defects and code non-conformities in the plumbing, electrical and fire-separation systems fell outside the by-law extension because the fire only revealed them and did not cause them.
   
• On business interruption, the court read the policy's "reference turnover" definition as allowing a 24-month baseline and split the difference between the two experts' figures.
   
• Tokio's late payments and Northbridge's failure to disclose their 50-50 co-insurance arrangement supported a separate award of financing costs against those two insurers.
   
• Most of the insurers' counterclaim for overpayments failed because it rested on after-the-fact estimates rather than proof of actual payment, and because it was raised nearly two years after the fire.
   

Facts of the case

On January 23, 2019, fire broke out in the building housing Hôtel Clarendon Inc. at 57 rue Sainte-Anne in Old Quebec, forcing the hotel to close for nearly a year. The building was constructed in four stages (1858, around 1926/1927, around 1927/1928 and 1996). At the time of the fire it had seven floors with 143 rooms, a ground floor with a restaurant and reception halls, and a basement. Michel Côté is the company's president, and his son, Marc-Olivier Côté, is the hotel's general manager.

The fire started in the attic area and a sixth-floor room, probably room #628. Flames stayed within a limited area around rooms #624 and #628. Water used by firefighters caused significant damage to the fifth floor, except for the lower section built in 1927, and partial damage to the floors below. In the lower section, damage was mainly limited to carpets, the bottom of baseboards and corridor ceilings. At least fifty-two rooms [the source reads "cinquante (52)," a word-numeral mismatch] suffered no damage, including forty-two in the lower section. The insurers paid for work in sixty-four damaged bathrooms. Clarendon decided early on to renovate every bathroom in the hotel and ultimately paid for seventy.

Clarendon retained Construction et rénovation M. Dubeau inc. on an hourly "cost-plus" basis, with no written contract for the repair work, and concluded a parallel contract with the same firm for renovations. Groupe Qualinet inc. handled cleaning and drying. Carl Migneault of IndemniPro inc. acted as adjuster for Intact, and Allan Jessome & Associés inc. served as loss estimators. The forty-eight rooms on the fifth and sixth floors reopened in January 2020.

The four co-insurers (Intact, Northbridge, Definity and Tokio Marine & Nichido) paid $21,080,747.96, broken down as follows: $14,072,569.33 for the building, $292,742.08 under the by-law extension, $1,220,436.55 for contents, $5,445,000 for business interruption and $50,000 for extra expenses. Clarendon sued for a further $2,797,875.49. It also claimed an additional $25,019.54 from Tokio and Northbridge for financing costs caused by late payments. The insurers counterclaimed $1,209,919.36 for overpayments; Clarendon admitted owing $497,578.28, leaving $712,341.08 in dispute. The cause of the fire was not at issue.

Policy and legislative provisions at issue

Policy no. 374-4746, in force from December 31, 2018 to December 31, 2019, was an all-risks, replacement-cost co-insurance contract. It included coverage extensions and business interruption coverage for up to twelve months. The building limit was $22,721,145. Under clause 3 ("Insured risks"), the policy covered "all risks that may directly affect the insured property," subject to exclusions.

Clause 5.11 defined replacement cost as the lowest cost of replacing, repairing, constructing or reconstructing the property on the same site with new property of the same kind and quality, and made it conditional on repair or replacement being carried out as soon as possible. Until that happened, coverage depended only on the policy's other conditions and was in any event limited to amounts actually spent. If the insured did not comply, settlement would be at actual value. Actual value took into account factors including replacement cost less depreciation and market value. Depreciation, in turn, considered the property's condition immediately before the loss, its resale value, its normal useful life and its obsolescence. The policy's proportional rule required the insured to carry coverage of at least 80% of value, a requirement the court applied to the contents claim.

Exclusion 2.19 excluded normal wear, rust, gradual deterioration and latent defects. Exclusion 2.20 excluded costs made necessary by defects in materials, workmanship or design. Both carved out resulting damage "directly caused by a risk covered" by the policy. The "Latitude Affaires 2.0" extension 43 ("Legal provisions affecting construction") covered increased repair costs arising from minimum by-law requirements. Under clause 43.8, however, it excluded requirements that the insured was bound to meet before the loss and had not met.

For business interruption, clause 8.4 defined "reference turnover" as turnover in the corresponding period during the twelve months before the loss. That figure was to be adjusted to reflect "as accurately as possible" what the business would have earned had the loss not occurred. The "Business Interruption Extension 2.0" form capped extra expenses at $50,000.

The court also applied several articles of the Civil Code of Québec:

• arts. 2389, 2395, 2396, 2463 and 2465 C.C.Q. on the indemnity nature of property insurance and the exclusion of loss from inherent vice;
• art. 2473 on payment within sixty days;
• art. 2493 on the proportional rule;
• art. 903 on movables attached to immovables;
• art. 1491 on restitution of undue payments.

Reasoning and analysis

Justice Marie Cossette began with the framework. The insured must prove that insured property was directly damaged by the fire, and the insurer must then prove an exclusion. The reasonable expectations doctrine applies only where the policy is ambiguous, following Ferme Vi-Ber inc. c. Financière agricole du Québec, 2016 SCC 34. An insured's disappointment at a lower payout, or the effort needed to read a long policy, does not create ambiguity.

On contents, the admitted replacement value of all contents was $2,105,856.50, so the 80% minimum was $1,684,685.20; Clarendon carried $1,281,239.23. Clarendon disposed of the damaged contents without replacing them. It argued that Mr. Migneault had orally agreed on January 31, 2019 to pay the full indexed limit. The court found no agreement. Every supporting email came from the Côtés, and Mr. Migneault's April 26, 2019 email came afterward; that email confirmed a $1,220,436.55 payment on a proportional, depreciated-value basis. Michel Côté, who described himself as "extremely meticulous," raised no objection until January 12, 2021. A few months after the payment, he told Mr. Migneault he had gained between $80,000 and $100,000 by handling the contents himself. The insurers' method actually favoured Clarendon: it applied a 12% shortfall on depreciated value rather than the 24% the policy would otherwise impose. The court held that the $1,220,436.55 payment discharged the insurers.

On compensatory measures for the building, the parties put $813,394.89 in dispute, though the court noted the claims actually before it totalled $650,344.46. The court applied the replacement-cost conditions item by item:

• Cheaper substitutes. Where property was replaced with a cheaper equivalent, such as PEX instead of copper plumbing or a used generator instead of repair, Clarendon could not recover the value of material it never installed.
• Mouldings. For wood mouldings replaced with MDF, the court accepted the insurers' alternative offer but cut their 25% depreciation rate to 15%. It reasoned that the worn look was part of the hotel's heritage character, and awarded $28,983.67.
• Transoms. For the same reason, the court refused any depreciation on the transoms above room doors ($7,370).
• Tenant replacements. Items replaced by the tenant Brasserie Les Mordus were limited to depreciated value.
• Split claims. Several claims were split where the evidence was balanced, including the bathroom fixtures ($584.14) [the source computes the half-difference as both $12,347.88 and $12,347.89, and the resulting balance as both $584.12 and $584.14] and the shower doors ($21,410).
• Basement painting. This was allowed at one third ($24,026.57). The damage had probably been caused by a pipe broken by hotel staff, which the court treated as a separate event rather than a "loss within the loss."

The court granted $93,704.29 on this head, for a total of $322,430.17 with the $228,725.88 the insurers already accepted.

The refused-indemnity claims for plumbing ($517,997.22) and electrical work ($291,065) failed. The evidence showed that flames were confined to the sixth floor and that firefighting water could not damage in-wall piping. The insurers had paid 100% of rough plumbing and electrical on the fifth and sixth floors outside the lower section. As a practical measure, they had also paid 25% on floors one to four, which the court described as generous. A subcontractor's refusal to warrant its work unless old systems were replaced was not an insured risk. The court also relied on a letter Michel Côté sent the City in December 2018 seeking a tax reduction. In it, he wrote that the plumbing was old, obsolete and rusted, that the electrical was obsolete and non-compliant, and that the building was a "nid à feu" (fire trap).

The $449,320.43 non-conformity claim also failed. It covered missing fire separations, unprotected urethane foam and absent fire dampers. Following Emond c. Trillium Mutual Insurance Co., 2026 SCC 3, and Roth v. Economical Mutual Insurance Company, 2016 ABCA 399, the court held that the by-law extension is not a stand-alone peril. It covers only upgrades to damaged property, not pre-existing violations. Clarendon argued that the 2018 policy lacked clause 43.8, but this did not help: the same principle was implicit in the earlier exclusions and in arts. 2463 and 2465 C.C.Q. The lack of a formal notice from the Régie du bâtiment was irrelevant, particularly for an owner who has been a member of the order of architects since 1981. Among the "other refusals," the court granted several items linked to work the insurers had accepted, such as fire extinguishers ($5,075.64) and heat pumps, for a total of $34,316.65.

On business interruption, Clarendon's expert, Monique Rosszell of HVS, assessed the loss before extra expenses at $5,815,565.95. The insurers' expert, Alexandra Kulovics of Williams Meaden & Moore, produced two scenarios: Scenario A ($5,431,443, based on twelve months) and Scenario B ($5,555,819, based on twenty-four months). The court found clause 8.4 clear and not a rigid twelve-month limit. It also noted that the parties had worked from the May 9, 2023 WMM report, which used only Scenario B. Splitting the difference between Rosszell's figure and Scenario B produced $5,685,692.47, leaving $240,692.47 owing after the $5,445,000 already paid. No further extra expenses were due. The $50,000 cap applied, and Clarendon's alternative route under the actual-loss form would have yielded only $13,693.77, because the hotel earned no revenue from January 23, 2019 to January 15, 2020.

The claim against Tokio and Northbridge succeeded. Tokio paid interim claim #1, dated February 19, 2019, only on August 9, 2019, 170 days later, and took 192 days to pay its share of interim claim #6. Northbridge breached its duty of utmost good faith by not telling Clarendon that its share would be split 50-50 with Tokio. The uncontested $25,019.54 was awarded.

The court analyzed the counterclaim under art. 1491 C.C.Q. The largest item was $274,739.98 for the seventy unaffected bathrooms [the heading reads $274,739.98, while para. 617 gives $274,739.80 and para. 612 gives the total claimed as $387,443.70 rather than $387,443.98]. That item failed, as did further sums for unaffected rooms, structural work and quarter-inch drywall, because the insurers relied on Jessome's estimates rather than proof of specific invoices paid in error. Jessome had admitted not checking the invoices sent to Clarendon. Since Jessome had reviewed Dubeau's billing throughout, the court held that the insurers could not produce a new analysis nearly two years after the fire.

The court allowed four counterclaim items, totalling $47,976:

• $22,425 for ceramic tile;
• $2,080, half the claim for a wood window whose replacement stemmed from concurrent causes;
• $9,425 for Qualinet cleaning in the lower section;
• $14,046 for other cleaning.

The claims for TV mount and headboard installation were dismissed. The court found the policy ambiguous and, applying art. 903 C.C.Q., treated items physically attached to the building as part of it. It also found the insurers had not proven double indemnification. The court declined to reduce the counterclaim under art. 1699 C.C.Q.

Ruling and overall outcome

The Superior Court partially granted both Clarendon's action and the insurers' counterclaim. Clarendon obtained the following, with legal interest and the art. 1619 C.C.Q. additional indemnity from January 21, 2022:

• $282,835.87 as an additional building amount recommended during the hearing [this figure appears only in the dispositif and is not discussed in the reasons];
• $322,430.17 in compensatory measures, including the $228,725.88 already accepted, plus the $10,595.75 settled at trial;
• $34,316.65 in refused indemnities;
• $240,692.47 for business interruption.

The insurers were also ordered to pay interest and the additional indemnity on $228,879.95 already paid, between February 17, 2021 and March 17, 2026 [neither this amount nor the period is explained in the reasons]. Tokio and Northbridge were separately ordered to pay $25,019.54 with interest from March 15, 2021.

On the counterclaim, Clarendon must pay $545,554.28, which includes the $497,578.28 it admitted. The court ordered set-off between the two awards without stating a net figure, so no single net amount can be determined from the judgment. Clarendon bears half of Jessome's fees ($9,450) and all of the Technorm ($16,808.62) and Ampèreformant ($4,162.03) expert fees, plus taxes, with each side paying its own business interruption experts. Legal costs go to Clarendon on the main action and to the insurers on the counterclaim.