Partial Loss in Valued Policies

Limits on Liability in Open Policies

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  indemnity insurance policies typically provide for a deductible- the portion of a loss which the insured agrees to bear before the insurer’s obligation to pay arises
  
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    they prevent moral hazard and discourage claims for small losses
    
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    deductibles and the cost of premiums are inversely related
    
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  insurer’s obligation to pay triggered only where loss/damage exceeds deductible amount
  
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  is an insurer entitled to rely on the doctrine of salvage to take possession of insured property if the insured has contributed to payment of the loss via a deductible?
  
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    So fart his has only been dealt with in the context of auto insurance where the insurer’s salvage rights are expressly provided for by statutory condition- prevailing view in these cases is that an insurer is entitled to claim salvage while enforcing the insured’s obligation to pay a deductible
    
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    Policy reasoning p. 270
    
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      The risk that the insurer will retain a salvage interest in the insured property without paying the deductible is a factor which the insured can and should consider in balancing the deductible amount with the associated premium
      
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  Rationale for Deductibles
  
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    Consumer choice:
    
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      Inverse relationship between deductible amount and premiums
      
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      Promotes affordability of insurance
      
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    Opportunity for high risk consumers to obtain insurance
    
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    Minimizes likelihood of loss and moral hazard
    
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      Insured self-insurer for part of loss
      
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      Incentive for responsible behavior re insured loss/property
      
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      Promotes public safety
      
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    Administrative efficiency, lower costs and affordability for consumers
    
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  Effect of Deductibles from Insured’s perspective
  
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    Detrimental to insured’s interests
    
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      In every loss situation you are responsible for at least part of it
      
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    Recovery less than actual loss
    
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    Clauses limiting insurer’s liability must be visible in policy: BCIA, s. 31
    
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      Insurers are required to warn insureds when the policy contains a deductible or any other clause that affects the amount that an insured can recover
      

Sue and Labour Clauses

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  Contractual provision which obligate the insured to take reasonable steps to prevent insured property from further loss or damage when the property has been partially damaged by an insured risk
  
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    Requires the insurer to pay for all or some of the cost of the insured’s preservation efforts- this payment duty is ordinarily imposed irrespective of whether the insured is successful in preventing further damage
    
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    Insurer can refuse to pay for further damage if the insured fails to fulfill its sue and labour responsibility
    
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  Generally, an insured can only recover sue and labour costs if the insured’s expenditures satisfy three criteria:
  
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    The costs must relate to a loss falling within policy coverage
    
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      The insurer is not responsible for costs incurred by the insured in preventing loss which is not covered by the relevant policy
      
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    The expenses must be reasonable
    
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      Reasonableness is determined by comparing the sue and labour costs with the cost which the insurer would be expected to pay if a further loss did occur
      
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      An insurer will not be responsible for preventative measures which cost more than the loss they were intended to avert
      
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    The costs must have been incurred to prevent further damage from a materialized risk
    
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      The insurer is liable for mitigation expenses, not for costs associated with generally preventative measures
      
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  BCIA s. 29 stat cond 9
  
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    (1) In the event of loss or damage to insured property, the insured must take all reasonable steps to prevent further loss or damage to that property and to prevent loss or damage to other property insured under the contract, including, if necessary, removing the property to prevent loss or damage or further loss or damage to the property
    
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    (2) The insurer must contribute on a prorated basis towards any reasonable and proper expenses in connection with steps taken by the insured under subparagraph (1) of this condition.
    

Benson & Hedges Ltd v. Hartford Fire Insurance

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  A bottling tank exploded at the insured’s brewery- experts determined that the explosion was caused by faulty welding in the tank
  
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    After repairing the ruptured tank, the insured hired experts to inspect the remaining tanks and to repair any tanks which had a similar defect- claimed associated expenses under sue and labour clause
    
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  Majority held that the insurer was not obligated to pay for the costs relating to the unruptured tanks
  
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    The risk of these tanks exploding was distinct from the risk of further loss caused by the tank which had already exploded
    
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  Dissent said that the risk was continuing and indivisible- imminent danger should be liberally interpreted
  

Office Garages Ltd v Phoenix Insurance Co of Hartford

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  Insured building suffered $8,000 in damage as a result of an explosion
  
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    Following the explosion, the atmosphere in the basement of the building contained a mixture of gasoline and air- insured hired an engineering firm to investigate the cause of the explosion and to excavate and remove contaminated soil from the basement of the building in order to prevent a further explosion
    
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  Insured’s claim for sue and labour costs was about $27,000
  
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    In assessing reasonability, court considered the value of the insured property as a whole- the expenditure was not unreasonable to prevent further loss to a building valued at $900,000
    
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    Note that court did not compare the amount of the expenditure claim to the amount of the loss already suffered
    

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