How the Courts Value Unopened Businesses in Insurance Disputes

The Supreme Court of British Columbia handed down its decision in a case that required it to consider how business interruption losses should be calculated when the insured’s business never actually began trading. The judgment examined the insurer’s obligation to act in good faith when managing claims.

Background - The insured, 1048977 B.C. LTD, planned to open a restaurant and special events business in South Surrey. In August 2016, a major land subsidence halted construction and caused extensive damage. This was followed by a hydrogen sulphide gas escape and a flood from burst pipes.  

The business never opened and was eventually sold in December 2017. The insurer paid the insured $1,065,937 for business income loss for the 12-month indemnity period following the subsidence.  

The issues before the Court centred around the period of indemnity and the assessment of loss, the alleged breach of duty of good faith and, if established, the damages arising from such breach.

Two occurrences - During the claim process, the insurer initially treated the subsidence and subsequent flood as a single event, arguing that only one indemnity period applied. In closing argument, however, the insurer conceded that the subsidence and the flood were two separate insured occurrences. The Court agreed, noting that there was no evidence that the water damage (or the preceding gas emission and building shutdown) was caused by the subsidence. The Court rejected the insurer’s earlier argument that recognition of two occurrences would limit coverage for the second event and found no basis in the policy for such a contention. The Court confirmed that each event triggered its own, distinct indemnity period.

Underpayment of business interruption losses - The insured argued that, but for the subsidence and flooding, it would have refinanced the property given the substantial equity from its purchase well below the market value.  

The insurer argued that the business was unlikely ever to open and that the insured was adequately compensated. It further contended that the insured was in financial difficulty which was evidenced by two orders nisi granted in September 2016 for $3, 693,776.67, and another in January 207 for $222,762.54. The Court noted that both orders nisi were obtained after the subsidence event. The Court further stated that the redemption periods are a significant factor in this evaluation, as they would have allowed the insured to refinance the property and the value of the property exceeded the debts secured against it. The Court further held that at all relevant times there was sufficient equity in the property to cover the debt obligations registered against the insured and the property, with at least $1 million left over. The Court found that it was likely that the insured would have succeeded in obtaining the refinancing. The evidence of property value and debt obligations did not support the insurer’s argument that the insured’s debts would have prevented the business from opening even if the subsidence had not occurred.

The Court, after assessing detailed evidence including expert evidence, found that the insured’s plan to open the business was real and achievable. The insured had construction and hospitality experience, had made visible progress on the project, and had hired an award-winning chef with experience in restaurant openings. The Court accepted that the restaurant would, in all likelihood, have opened on 1 October 2016. It ruled that the indemnity period began on 18 August 2016 and that actual loss commenced when the restaurant would have started trading.

Relying on expert evidence, the Court awarded the insured an additional $2,278,000 in unpaid business income loss.

Breach of the duty of good faith - The insured alleged that the insurer breached its duty of good faith in the performance of the insurance contract through the cumulative effect of its conduct during the handling of the claim and subsequent litigation.  

The allegations centred on the insurer’s handling of the repair process and repeated cancellation of the policy, its failure to fairly assess the insured’s business income loss, and its continued reliance on unfounded allegations of misrepresentation throughout the proceedings.

The insured contended that the insurer’s management of the repairs was deficient and contributed to the property being sold below market value. The insurer cancelled and reinstated the policy three times, took inconsistent positions on whether the property was vacant, and ultimately cancelled the policy after asserting that the insured had opted for a cash settlement instead of repairs. The Court found that while the first two cancellations stemmed from non-payment of premiums, the third reflected internal inconsistencies within the insurer’s departments but did not, on its own, amount to bad faith. The Court held that the final cancellation, following the insured accepting the actual cash value instead of proceeding with repairs, breached the insurer’s duty of good faith because the insurer failed to advise the insured that accepting the cash value would result in cancellation of coverage.

The insured further alleged that the insurer acted in bad faith by refusing to properly consider the information it demanded from the insured when quantifying business income loss. The Court found that the insurer breached its duty of good faith by relying exclusively on its appointed accountants’ report, despite being aware of its speculative assumptions and lack of industry expertise, while disregarding information provided by the insured. This failure to assess the evidence in a fair and balanced manner constituted bad faith performance of the insurer’s contractual obligations.