Valuation of Loss

• Author: Denis Boivin
• Pages: 248-279

248

A. INTRODUCTION

Assume that an insured risk materializes and that an insured gives swift

notice of his or her losses, along with sufficient evidence to begin a

review. Assume also that, following this review, the insurer determines

that the losses are indeed covered and that there are no reasonable

grounds for rejecting the claim. At first glance, it might appear that the

settlement process is over, but it is not. There may still be room for dis-

pute between the parties. Indeed, one of the most important determina-

tions has yet to be made: the loss must be evaluated. The parties must

put a dollar value on the prejudice suffered by the insured in light of the

evidence and of the wording of the policy. This determination requires

more than an invoice and a calculator. It requires an inquiry into the

meaning of value, as well as speculation about the motives and inten-

tions of the insured. As we will see, this determination can make the dif-

ference between a settlement in four figures and one in six figures.

B. PRINCIPLE OF INDEMNIFICATION

In evaluating the loss, the starting point is the principle of indemnifi-

cation. Subject to the contract, the insured is entitled to be fully indem-

nified for his or her losses. The indemnity must correspond as perfectly

VALUATION OF LOSS

chapter 10

as possible to the damages suffered — that is, the insured must not

receive one dollar more or less than the value of the actual damages

suffered. The influence of social policy is seen in this manifestation of

the principle of indemnification: insurance is not a mechanism for

making profits; it is a legal channel for compensation — somewhat like

torts. Financially speaking, the insured should not be in a worse posi-

tion following the settlement of a claim. Nor should the insured be in

a better position.

The importance of the principle of indemnification to valuation is

illustrated by the trial judgment in P.M. Scientific Fur Cleaners Ltd. v.

Home Insurance Co.1The insured cleaned fur coats for a living and

stored them during the spring and summer seasons. He also insured

the coats against theft and damage. At one point, many coats were

damaged by smoke from a nearby fire. After the fire, the insured met a

representative of the insurance company and both agreed to keep the

matter as quiet as possible. The insured was concerned about harming

his professional reputation, while the insurer was concerned about

increasing its exposure. The two also agreed that the insured would

clean the coats himself and that the insurer would pay the cleaning

costs. However, when submitting his claim to the insurance company,

the insured treated the insurer like any other client, charging the insur-

ance company his usual hourly rate — a rate that included a margin of

profit. According to the trial judge, this was a mistake: the indemnity

must not allow a margin of profit unless profits were indeed lost, and

the insured had suffered no loss of profits. As a bailee receiving coats

from customers, the insured was under a duty to safeguard those coats

and to return them to their owners in good condition. He could not

charge the owners for the costs of cleaning, nor did he retain the serv-

ices of a third party to do the cleaning. According to the court, the

insured suffered no losses by doing the work himself, apart from those

in the category of wear and tear. Thus, the judge ruled that the insured

was entitled to an indemnity equivalent to the cost entailed in using

the equipment to clean the coats.

The Court of Appeal reversed this decision, but not on the basis of

insurance principles. The parties, the court ruled, may have been

linked by an insurance contract, but the agreement they reached after

the fire did not concern insurance. Hence, the principle of indemnifi-

Valuation of Loss 249

1 (1970), 12 D.L.R. (3d) 177 (Man. Q.B.), rev’d by (1971), 17 D.L.R. (3d) 444

(C.A.) [Scientific Fur Cleaners].

cation did not apply. According to the Court of Appeal, the agreement

reached following the fire was a simple contract for services. The par-

ties had agreed that the coats needed cleaning and that the insured

would do the work himself in order to avoid any unwanted publicity.

In light of this, the insured was entitled to be paid on the basis of quan-

tum meruit. As services had been rendered partly for the benefit of the

insurer, the insurer would be unjustly enriched if the bailee had to sub-

sidize the cleaning personally. This decision illustrates the difference

between the principle of indemnification and the principle of unjust

enrichment. The former focuses on the losses of the insured and asks

whether the compensation is sufficient to meet these losses. The latter

focuses on the gains realized by the insurer at the expense of its coun-

terpart and asks whether there are any reasons for allowing these gains.

Arguably, the ultimate result in Scientific Fur Cleaners could have

been reached under insurance principles. In denying the insured a prof-

it margin, the trial judge failed to evaluate the time spent cleaning the

coats. Do we know whether the coats were cleaned after hours or dur-

ing the usual course of business? In the absence of evidence to the con-

trary, it seems reasonable to assume that the time spent by the insured

in cleaning the coats is time that he could have spent running his busi-

ness, but for the agreement with the insurer. In other words, the insured

may not have used up a margin of profit to pay someone else to clean

the coats, but he arguably lost an opportunity to earn profit. This is an

actual loss and it should have been valued by the trial judge.

C. THREE BASES FOR EVALUATION

As noted in Chapter 2, the principle of indemnification is always sub-

ject to the will of the parties, and most insurance contracts spell out the

precise basis upon which to evaluate the losses suffered by the insured.

Generally speaking, an insured loss may be evaluated on one or a com-

bination of three alternative bases: (1) on the basis of a value specified

in the contract, (2) on the basis of actual replacement costs, and (3)

on the basis of actual cash value.

1) Valued Policies

Some insurance contracts are valued. These policies clearly state the

value of the insured property in the event of loss or destruction.

Although these policies are exceptional in nature, they are popular for

goods that have a subjective value, such as art and jewellery, and for

250 Insurance Law