Executive Summary: Key Legal and Evidentiary Issues

• Dispute over insurance coverage for increased repair costs due to building code upgrades after flood damage

• Interpretation of a $10 million sub-limit on demolition and increased cost of construction coverage

• Whether policy wording was clear or ambiguous regarding application of sub-limits

• Onus on insurers to prove the application of sub-limits restricting broader replacement cost coverage

• Application of principles of insurance contract interpretation by the court

• Court ruled in favour of insurers, confirming the sub-limit applied and awarding partial indemnity costs

Facts of the case
In 2012, a heavy rainstorm and subsequent flood damaged the City of Thunder Bay’s wastewater pollution control plant. The City sought insurance coverage for the repair of the plant, including significant increased costs required to comply with updated building codes and similar regulations (“code upgrades”). The insurers were Ontario Municipal Insurance Exchange, Royal & Sun Alliance Insurance Company of Canada, and Catlin Canada Inc.

A dispute arose regarding the interpretation of the insurance policy. The City claimed that code upgrade costs should be covered under the main replacement cost coverage without restriction. The insurers argued that a $10 million sub-limit applied under the policy’s demolition and increased cost of construction (DICC) clause.

Positions of the parties
The City argued that the DICC coverage provided additional protection beyond basic replacement cost coverage and should not restrict payment for code upgrades associated with repairing damaged property. The City also maintained that the policy was marketed as providing broad, industry-leading coverage, supporting its reasonable expectation of extensive protection. The insurers acknowledged that they bore the onus to prove the sub-limit’s application and submitted that the wording of the policy clearly and unambiguously capped code upgrade costs at $10 million.

Court’s analysis
Applying established principles of insurance contract interpretation from cases such as Progressive Homes and Trillium, the Court found the policy language unambiguous. The Limit of Liability was expressly subject to sub-limits, and the DICC sub-limit of $10 million applied to both damaged and undamaged portions of the facility requiring code-related upgrades. The Court rejected the City’s argument that the DICC clause provided separate or additional coverage for upgrades, finding it consistent with industry norms and confirming that the sub-limit applied as written.

Outcome
The Court ruled in favour of the insurers, confirming that the $10 million sub-limit applied to the increased cost of construction for code upgrades. The City’s broader claim was not supported by the policy wording. On costs, the Court found the insurers’ cost request excessive but awarded them $25,000 in partial indemnity costs. The decision reinforces a clear approach to interpreting sub-limits within commercial property insurance policies.