In New Dawn Enterprises Limited v. Northbridge General Insurance Corporation, 2020 NSSC 150, Mr. Justice Joshua M. Arnold agreed that an umpire’s failure (i) to share information obtained and relied on or (ii) to give a party the opportunity to respond breached the principle of audi alteram partem. Acknowledging that an umpire does not conduct an arbitration or provide an adjudicative process, Arnold J. determined that the umpire’s exercise of discretion in choosing his own procedure had created legitimate expectations and that, by deviating from that procedure, breached the duty of fairness.
By commercial insurance policy (“Policy”), Northbridge General Insurance Corporation (“Northbridge”) provided comprehensive coverage, including property coverage, for 53 buildings owned by New Dawn Enterprises Limited (“New Dawn”). Holy Angels Convent, listed as Location #52 in the coverage schedule to the Policy, suffered damage while vacant when a sprinkler line failed on March 7, 2017.
Notified of the damage and New Dawn’s claim under the Policy, Northbridge retained ClaimsPro to adjust the claim. ClaimsPro assigned Mr. Shane Walker (“Mr. Walker”) as adjuster to the file.
Northbridge retained an appraiser, Turner Drake & Partners Ltd. (“Turner Drake”) to provide an appraisal opinion on the Replacement Cost New (“RCN”) and the Actual Cash Value (“ACV”). The Policy mentioned but did not define ACV. Mr. Richard J. Escott (“Mr. Escott”) prepared the Turner Drake report which issued April 10, 2017. The reasons at paras 12-24 summarize the steps taken by Mr. Escott and the results on his efforts which established the ACV of the Convent at $230,000.00.
New Dawn retained its own appraiser, Altus Group Limited (“Altus”) to calculate the Convent’s RCN and ACV. Mr. James Hardy (“Mr. Hardy”) prepared the Altus Group report which issued December 21, 2017. The reasons at paras 25-32 summarize the steps taken by Mr. Escott and the results on his efforts which established the ACV of the Convent at $1,590,000.00.
Given the gap between the appraisal at $230,000.00 and the appraisal at $1,590,000.00, the parties agreed to submit their differences to an umpire as provided for at section 32 of the Insurance Act, RSNS 1989, c 231. That section provides that, in the event of difference or disagreement between an insured and the insurer over an appraisal to determine matters specified in a condition to their contract of insurance, the appraisal shall be made by two disinterested appraisers, the insured and the insurer each selecting one and the two so chosen then selecting a competent and disinterested umpire. Section 32 stipulates that the two (2) appraisers shall then determine the matters specified in the condition and, if they fail to agree, they shall submit their differences to the umpire, and the finding in writing of any two determines the matters.
The appraisers selected an individual from de Stecher Appraisals Ltd. to act as umpire (“Umpire”). The Umpire wrote to counsel for each of New Dawn and Northbridge and requested documents/information listed at para. 35 of the reasons. Mr. Escott and Mr. Hardy provided the Umpire with the requested documents/information.
On March 16, 2019, the Umpire e-mailed Mr. Escott and Mr. Hardy to provide a draft of his decision. In transmitting the draft, the Umpire advised that he had proofread it but would make edits if he misquote either from the documents they submitted. He also reminded them of the provisions in section 32 of the Insurance Act :
“Quoting from Section 32 of the Insurance Act, “The appraisers shall then determine the matters specified in the conditions and, if they fail to agree, they shall submit their differences to the umpire, and the finding of any two determines the matters.” As you will note, I have determined that the Actual Cash Value is actually different than the Actual Cash Value concluded by either of you in your appraisals, and I believe there are valid reasons for this difference. Therefore, if this matter is to be settled, I require at least one of you to agree with my decision. If this is the case, I will send a copy of the final decision for your signature”.
On March 18, 2019, both Mr. Escott and Mr. Hardy acknowledged receipt of the draft. Early on March 19, 2019, Mr. Escott replied to the Umpire, cc’ing Mr. Hardy, that he was prepared to agreed and accept the Umpire’s conclusion on the ACV even though the Umpire did no agreed with Mr. Escott’s own final conclusion regarding ACV. In doing so the Umpire’s decision became binding on New Dawn and Northbridge.
Later that same day, without having heard from Mr. Hardy, the Umpire e-mailed to Mr. Escott, without cc’ing Mr. Hardy. “I wanted to let you know that a copy of the final decision is on its way to you via courier. Please sign and send it back to me by FedEx – there is a prepaid waybill with the envelope”.
The Umpire’s signed, final decision did not vary from the draft he sent to Mr. Escott and Mr. Hardy. Arnold J. at paras 41-51 of his decision details the Umpire’s analysis.
Unbeknownst to New Dawn, the Umpire had exchanged with Mr. Nicholas Charlton (“Mr. Charlton”) for Specialized Property Evaluation Control Services Limited. Earlier in the process, at the request of Northbridge, Mr. Charlton had prepared two (2) reports, dated April 17, 2018 and April 25, 2018, in which Mr. Charlton, at Northbridge’s request, prepared a Cost Analysis of the Convent using particular method, the Quantity Survey Method.
“In his report dated April 17, 2018, and addressed to Shane Walker at ClaimsPro, Nicholas Charlton, PQS, of SPECS concluded that the RCN of the Convent was $11,213,416.82. This amount included a 10% design contingency and a 10% construction contingency. However, just over one week later, on April 25, 2018, Charlton sent a second report to Ross E. Trueman, Director, Claims Atlantic Canada, at Northbridge, which stated that the RCN of the Convent was $8,914,262.71”.
The exchange between the Umpire and Mr. Charlton is reproduced at para. 53 of the reasons. The Umpire on February 1, 2019 e-mailed Mr. Charlton and asked him questions regarding design and construction contingencies, including why Mr. Charlton removed those contingencies from his second report. Mr. Charlton replied by e-mail on March 11, 2019.
See para. 43 for the way the Umpire incorporated that information in his report.
On behalf of New Dawn, Mr. Hardy e-mailed the Umpire later on March 20, 2019, the day after the final decision was sent by the Umpire to Mr. Escott for signature. Mr. Hardy had noted a reference on page 8 of the draft which mentioned that design and construction contingencies are not standard practice. Mr. Hardy noted the following:
“This appears to be obtained from your correspondence with Nicholas Charlton PQS with his answer to your question 4. I assumed you would have gave the same benefit to discuss the particulars of standard costing practice for insurance purposes with David Dooks, PQS, author of the Altus costing report prior to finalizing your opinion”.
In his reply on March 21, 2019 to Mr. Hardy, the Umpire referred to his exchange with Mr. Charlton. Arnold J. focused on this notice to New Dawn.
“[57] This email was the first notice to Hardy or New Dawn that [the Umpire] had interviewed Shane Walker, the adjuster working for Northbridge”.
New Dawn objected to the manner in which the Umpire had corresponded with those working for Northbridge. It argued that the Umpire breached his duty of procedural fairness by relying on the information without sharing it with New Dawn or its appraiser or giving them an opportunity to respond.
Northbridge defended the Umpire’s approach. It noted that the Umpire had advised New Dawn’s counsel that it was going to contact Mr. Charlton and also copied him on the e-mail to Mr. Charlton setting out the questions.
“Northbridge submits that it was not until [the Umpire] issued his decision that New Dawn suggested it should have been given an opportunity to review and respond to any answers provided by SPECS. According to Northbridge, New Dawn did not object to the umpire contacting SPECS when it was first proposed, and it should not be permitted to object now simply because it disagrees with the umpire’s decision”.
Arnold J. noted that both parties agreed that: (i) the Umpire owed New Dawn a duty of fairness; (ii) the content of the duty is to be decided on the specific context of each case; and, (iii) the duty of fairness is determined by considering the five (5) factors set out in Baker v. Canada (Minister of Citizenship and Immigration), 1999 CanLII 699 (SCC), [1999] 2 SCR 817. At para. 66, Arnold J. reproduced the summary made in Nova Scotia Public Service Long Term Disability Plan Trust Fund v. Hyson, 2017 NSCA 46 and dealt with them in turn in his reasons at the paras identified for each below:
(1) the nature of the decision being made and the decision-making process (see paras 78-80 of Arnold J.’s reasons);
(2) the nature of the statutory scheme and terms of the statute pursuant to which the decision-maker acts (see paras 81-82 of Arnold J.’s reasons);
(3) the importance of the decision to the individual affected by it (see para. 83 of Arnold J.’s reasons);
(4) the legitimate expectations of the parties (see paras 84-89 of Arnold J.’s reasons); and,
(5) the procedures chosen by the decision-maker, particularly if the statute has left the choice of such procedures to the decision-maker (see paras 90-91 of Arnold J.’s reasons).
Despite their agreement on the approach, Arnold J. noted that the parties disagreed on its application to their circumstances. “Where they disagree is on whether the content of the umpire’s duty, as determined by the Baker factors, required him to share the information obtained from Nicholas Charlton and Shane Walker with New Dawn and its appraiser, and give them the opportunity to respond to it”.
Arnold J. confirmed that there were no Nova Scotia decisions considering the content of the duty of fairness applicable to the appraisal and dispute resolution process under section 32 of the Insurance Act but acknowledged that other jurisdictions did when reviewing similar decisions under similar legislation. Arnold J. referred to Peace Hills General Insurance Company v. Doolaege, 2005 ABQB 217. The latter held that the duty included a party’s right to know of and respond to representations made to the umpire by a third party.
Wawanesa urged Arnold J. to apply to low level of procedural fairness for appraisal and dispute resolution process given to similar provisions in Madhani v. Wawanesa Mutual Insurance Company, 2018 ONSC 4282 paras 40-46, in which the Divisional Court decision underlined that: the appraisal/umpire process is not an arbitration, there is no requirement to hold a hearing, the requirement to provide a written decision did not require that the umpire provide reasons, the process is not adjudicative in nature and the process is based on discussion and sharing of expertise.
Despite this distinction, Arnold J. held that the duty had not been met in the circumstances. It distinguished the Umpire’s approach from that in Madhani v. Wawanesa Mutual Insurance Company. The Umpire had requested various written materials, including a statement from each appraiser as to the differences between their appraisal reports and prepared a written decision.
Arnold J. considered each of the factors, determining in some instances that the factor urged only a moderate duty of fairness. Arnold J. did note that the Umpire’s initial e-mail to counsel disclosed a process of collecting information which included an interview of appraisers and thereby created expectations regarding the procedure to be followed.
“[89] Based on the process outlined in the email, I find that New Dawn would have the legitimate expectation that [the Umpire]’s contact with, or interviews of, any individual aligned with a party would be limited to the two appraisers. I do not agree that contacting Nicholas Charlton and Shane Walker, two individuals working for Northbridge, and not sharing the information obtained, was a reasonable extension of the steps already provided for. While it is true that the umpire put New Dawn on notice that he intended to contact Charlton, he did not disclose that he interviewed Shane Walker until after the final decision was reached. In my view, that was a substantial failure to comply with New Dawn’s legitimate expectations”.
Because section 32 of the Insurance Act leaves the procedure to an umpire’s determination, Arnold J. accepted that this suggests deference to such choices and attracts a low level of procedural fairness.
Overall, the five (5) factors lead Arnold J. to conclude that the Umpire owed New Dawn a moderate degree of fairness. His view of the exchanges lead him to conclude that the Umpire breached that duty.
“I find that when [the Umpire] decided to consult Nicholas Charlton of SPECS, a party retained by Northbridge’s insurance adjuster, on standard industry practice when preparing a cost estimate for an insurance loss, the duty of fairness required him to share Charlton’s answers with New Dawn and to provide New Dawn’s appraiser with an opportunity to respond. This was not a minor issue”.
Arnold J. held that failing to share the information obtained or providing New Dawn with “a meaningful opportunity to present its case fully and fairly” infringed the principle of audi alteram partem.
Despite having identified that the standard of review for the Umpire’s decision, Arnold J. expressly declined to consider whether the Umpire’s resulting decision was reasonable. Because the Supreme Court of Canada decisions in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 and Bell Canada v. Canada (Attorney General), 2019 SCC 66 had issued after the hearing before him, he invited submissions. Having received and reviewed the parties’ supplementary submissions, Arnold J. declined to speculate further on whether the outcome was reasonable.
Having determined that procedural fairness had been breached, he chose to refer the ACV issue to a new umpire to be considered. He chose to refer the matter to a new umpire so that the consideration could be made “without the potential influence of the court’s assessment of a previous decision on the same issue that has been set aside on procedural grounds”.
urbitral note – First, Arnold J. did evaluate the five (5) factors for evaluating the content of the duty of fairness. The distinguishing factor appeared to be the legitimate expectations of the parties. Though not expected to conduct an adjudicative process and deferred to for the choice of procedure, an umpire must meet the expectations created by the process chosen and avoid deviating from it in a material way. The deviation occurred by interviewing individuals working on only one party’s behalf and could not be construed as “a reasonable extension of the steps already provided for”.
Leaving the choice of procedure to the Umpire suggested deference and a low level of procedural fairness. Once exercised, however, that choice obliged the Umpire to meet the expectations created.
The decision cautions that an umpire can impose a higher level of duty by the umpire’s own choices of how the process will be conducted.