In 1048977 B.C. Ltd. v Aviva Insurance Company of Canada, 2025 BCSC 1532, the BC Supreme Court conducted a thorough analysis of how to calculate loss of business income for a business that has yet to open, and provided insight on conduct that may lead to a finding of a breach of an insurer’s duty of good faith.
The plaintiff company was working toward opening a restaurant and special event business in South Surrey when, in August 2016, a land subsidence caused by construction on a neighbouring property halted its progress. In December 2016, the plaintiff’s property was further damaged by a flood caused by burst pipes. Ultimately, the business never opened. The plaintiff sold its property in December 2017.
Aviva, the plaintiff’s insurer, paid the plaintiff approximately $1 million for business losses incurred during the 12-month period after the subsidence.
The plaintiff commenced a claim alleging that Aviva had undervalued the business’ income loss and that Aviva ought to have compensated it for an indemnity period lasting until 12 months after the flood. In addition, the plaintiff claimed that Aviva had breached its duty of good faith in contractual performance by way of its conduct while adjusting the plaintiff’s claim and in the course of the subsequent litigation. The plaintiff said that because of Aviva’s conduct, the plaintiff had been forced to sell its property for a price that was below its full value.
Business Income Loss
Aviva argued that even absent the subsidence and flood, it was unlikely that the plaintiff’s business would ever have opened. Alternatively, Aviva said that it had adequately compensated the plaintiff for business income loss.
The Court applied the Ontario Court of Appeal’s decision in Murano v Bank of Montreal, 1998 CanLII 5633 (ONCA) to quantify the plaintiff’s lost profits in this situation in which no evidence of past earnings was available. Murano indicated that in such circumstances, the courts ought to globally assess the evidence and then make any necessary adjustments to account for the likelihood of hypothetical events occurring.
The Court determined that the plaintiff’s business plan was likely to lead to the opening of the business and that when the subsidence occurred, the business was on track to open within a few months. The plaintiff had hired numerous key staff members and had completed substantial renovations to its property. Aviva argued that the plaintiff was under financial strain that would have prevented it from opening in any event, but the Court was not persuaded. The Court found that absent the subsidence and the flood, the business would have opened by October 1, 2016.
With regard to the length of the indemnity period, Aviva initially took the position that the subsidence and the flood were part of the same occurrence, but conceded in submissions that they were separate occurrences. The Court considered the evidence before it relating to the length of time necessary to repair the plaintiff’s property after the flood, and determined that the appropriate indemnity period was between October 1, 2016 (when the business would have opened) and December 21, 2017 (12 months after the flood).
Both parties adduced evidence from both an expert in the operation of restaurant and special events businesses and an expert in forensic accounting to support their positions on the quantum of the plaintiff’s business income loss. The plaintiff claimed that it had lost approximately $9.5 million during the 14-month indemnity period. Aviva argued that the plaintiff’s business would have operated at a loss of approximately $130,000 or, at best, earned a profit of approximately $500,000 during the indemnity period.
The Court had multiple issues with Aviva’s expert evidence relating to projected restaurant revenues and the extent of the renovations still needed before the plaintiff business could have opened. Instead, the Court adopted the plaintiff experts’ approach and considered, for example, the table turn rates of South Surrey restaurants with similar characteristics to the one the plaintiff had been planning. However, the Court found that the plaintiff’s valuation of its losses was too high because it failed to apply contingencies to account for the fact that the plaintiff business had neither an established record of performance as a restaurant, nor any events booked for after its planned opening. The Court held that Aviva had failed to provide adequate compensation to the plaintiff for business income loss under its insurance policy. After conducting a thorough analysis, the Court ordered Aviva to pay an additional amount of approximately $2.3 million to the plaintiff.
Bad Faith
The plaintiff alleged that Aviva had breached its duty of good faith in numerous ways throughout the adjustment process and during the litigation. Aviva took the position that its conduct had not caused the plaintiff to suffer any losses; rather, it was the plaintiff’s “foolhardy business plan” that had caused its lenders to foreclose leading to the sale of the plaintiff’s property.
The Court found that while there were deficiencies in Aviva’s handling of the repairs to the plaintiff’s property leading to delays, they did not amount to bad faith. It further found that the fact that Aviva had canceled and then reinstated Aviva’s insurance policy three times during the claim period did not constitute a breach of the duty of good faith. The Court also commented that an insurer’s conduct in the course of litigation may result in cost consequences but ought not to form part of a plaintiff’s bad faith claim against its insurer.
However, the Court held that Aviva did breach its duty of good faith when it canceled the plaintiff’s policy in November 2017 on the basis that the plaintiff had accepted an actual cash value settlement rather than continuing with repairs to its property. Aviva’s adjuster had known that if the plaintiff accepted the settlement, it was highly likely that this would result in the cancellation of its policy. Aviva did not warn the plaintiff about this likely consequence. In addition, the Court held that Aviva had breached its duty of good faith by failing to assess the business loss evidence in a balanced manner. Aviva had relied entirely on the accountant it had hired itself, despite knowing that some of its assumptions were speculative, and had refused to meaningfully consider the accounting evidence provided by the plaintiff.
Importantly, however, the Court concluded that Aviva’s breach did not lead the plaintiff to incur any compensable losses. It found that the plaintiff had not established that absent Aviva’s conduct, it would not have been in the position in which it found itself in December 2017. Each party blamed the other for the delays in the repairs at the plaintiff’s property, but the Court rejected both arguments. The Court found that there was insufficient evidence to support the plaintiff’s assertion that the cancellation of its insurance policy contributed to the decision to sell its property. Further, the Court dismissed the plaintiff’s claim for punitive damages.
This decision provides a helpful and detailed breakdown of how loss of business income is to be quantified in circumstances where the business in question has not yet opened. It highlights the importance of conducting balanced assessments of the evidence and communicating openly and honestly with insureds during the claims adjustment process in order to avoid a finding of bad faith. At the same time, it emphasizes that a finding of bad faith will not necessarily result in an award of either compensatory or punitive damages.