The Principle of Indemnity, Loss of Rental Income and the Fort McMurray Wildfire

On March 3, 2023, the Alberta Court of Appeal rendered a per curiam decision in Shelter Canadian Properties Limited v Aviva Insurance Company of Canada, 2023 ABCA 74, a coverage dispute on loss of rental income coverage provisions arising from the context of the 2016 Fort McMurray wildfire.

Case Context
The Respondent—Shelter Canadian Properties Limited—was both property manager and landlord of 13 multi-unit residential rental complexes (the “Properties”) in Fort McMurray, Alberta, owned by a Real Estate Investment Trust (“REIT”). In April 2016, Shelter, REIT and its holding companies (collectively the “Insureds”) purchased a commercial insurance policy for the Properties from the Respondent insurers. Subject to conditions and limitations, the Policy provided coverage for loss of rental income if any property was destroyed or damaged by covered perils.

On May 3, 2016, residents of Fort McMurray (including tenants of the Properties) were subject to a mandatory evacuation order due to a wildfire in the Regional Municipality of Wood Buffalo spanning across 590,000 hectares. The evacuation order was lifted on June 2, 2016, but Shelter’s Properties remained vacant for a number of weeks while Shelter performed air testing and investigated the extent of damages.

Before the wildfire, an average of approximately 50% of the rental units in the Properties was vacant. However, after the wildfire, the units’ occupancy rates rose to over 75%. In fact, the unique circumstances of this event created an increased general demand for rental housing from residents who were displaced from their homes and contractors undertaking repairs to the city, which inflated occupancy and rental rates.

The Insurers paid the Insureds approximately $6,500,000 for property damage from the wildfire. However, they denied claims for rental losses on the basis that there was no loss according to the wording in the Policy. 

The parties agreed to determine coverage and amounts owed by way of summary trial. 

Summary Trial
The trial judge considered the Policy’s definition of “Gross Rentals” and found it included three categories of covered rental losses. The first was money paid or payable to the Insureds by tenants for the rental of units at the Properties, which covered rental money paid to the Insureds (but was possibly refundable to a tenant paying rent when units were uninhabitable). The trial judge ordered the Insurers to pay $570,000 as compensation for tenants who did not pay their May–July 2016 rents and for tenants who stopped renting due to the wildfire until new tenants moved in or the 12-month lease terms expired.

The second category was the estimated rental value of the unoccupied portions of the buildings, which addressed losses from vacant units that reasonably could have been rented while the Properties were uninhabitable, adjusted for trends of, variations in, or special circumstances affecting “Gross Rentals.” The trial judge relied upon the average five-month vacancy rate set out in the Insureds’ expert report and used that rate to determine that the Insurers owed $730,000 as an estimate for those vacant units which reasonably could have been rented. 

The third category of loss was fair rental value of the portions of the buildings occupied by the Insureds themselves. Shelter owned one or more units for their operations and storage at most of the Properties. The trial judge awarded $61,000 to be paid for loss of rent of these units. 

In total, the Insurers were ordered to pay $1.25 million in gross rental losses, after reducing operating expenses saved by the Insureds. 

An appeal was filed by the Insurers on several bases. The Insureds cross-appealed, arguing the trial judge ought to have found in the alternative that the Insurers were estopped from denying coverage and payment for all or part of the gross rental loss awarded based on their conduct. 

Indemnity
The Court of Appeal emphasized a key principle of indemnity: an insured cannot recover more than the financial loss suffered. To find otherwise would permit a claimant “to profit from the situation by receiving more from the insurer than was lost.”¹

The Court considered the difference between indemnity and non-indemnity insurance contracts; insurance proceeds are linked to the actual loss suffered in indemnity contracts, while non-indemnity contracts typically pay a specified amount upon the occurrence of a loss or event. Here, the Court found the “Gross Rentals” provisions were consistent with the Policy being a contract of indemnity—those provisions provided methods for the calculation of actual, quantifiable loss suffered by the Insureds. The Gross Rentals provisions did not result in the payment of a stipulated amount upon the occurrence of a triggering event, such that the Policy could not be a non-indemnity insurance contract, as argued by the Insureds.

Mitigation
As the Gross Rentals clause in the Policy contained an express mitigation clause, it was unnecessary for the Court to determine whether the principle of mitigation was applicable. The Court found the presence of this clause in the Policy obliged the Insureds to take reasonably practical steps to mitigate their damages. 

Application of the Principles of Indemnity and Mitigation
With respect to the first category of loss of rent (money paid or payable by tenants), the Court of Appeal agreed the trial judge had failed to offset the amount of rent collected from new tenants and to account for security deposits. In addition, the Court found the Insureds were obligated to mitigate their loss, such that collection of rent and retention of security deposits should have been considered in calculating this loss. The parties were thus ordered to recalculate the loss, accounting for rent received and security deposits retained.

On the second category of estimated rental value of unoccupied portions of the Properties, the Insurers argued the trial judge had failed to consider and apply “trends of, variations in or special circumstances”² as required by the Policy’s definitions of “Annual Gross Rentals” and “Standard Gross Rentals.” The Court of Appeal considered the fact that post-wildfire occupancy rates and gross rentals were actually higher than those recorded before. As a result, there was no loss. The Court found the trial judge had failed to interpret the gross rental provisions of the Policy within the context of indemnity and to consider the Insureds’ duty to mitigate. 

Finally, on the fair rental value of portions of the buildings occupied by the Insureds, the Court found the parties had intended the Insureds to be compensated for the inability to use such portions of the buildings lost due to the fire on a “fair rental value”³ basis. The trial judge’s award of damages was left undisturbed.

Decision
The Court of Appeal granted the Insurers’ appeal in relation to the loss of rent for occupied and vacant units. However, it dismissed the Insurers’ appeal on rental value of units occupied by the Insureds. 

Finally, the Court found that the Insureds were sophisticated, commercial landlords who were actively involved in calculating the rental losses and were advocating for different interpretations of the Policy. For that reason and because they did not rely—to their detriment—upon the conduct of the Insurers, the Court disposed of the Insured’s cross-appeal in estoppel.
 

1. Paragraph 35, citing Craig Brown and Thomas Donnelly, Insurance Law in Canada, Toronto: Thomson Reuters, 2019 (eLoose-leaf updated 2021, release 2021-6, October 2021) at § 1:5.

2. Paragraph 54, Shelter Canadian Properties Limited v Aviva Insurance Company of Canada, 2023 ABCA 74.

3. Paragraph 69, Shelter Canadian Properties Limited v Aviva Insurance Company of Canada, 2023 ABCA 74.