“Substantial Damage” Is Not a Numbers Game

Earlier this week I made a video about the insurance clause in the OREA APS.

Of course, the Insurance clause requires a determination of "Substantial Damage" in order to be triggered.

One thing my video doesn’t have is a real analysis of what makes damage “substantial”? 

Pordell v. Crowther is a case that deals with exactly that.

The Facts

A fire broke out in a Toronto property two months before closing. The seller hired a contractor and completed repairs.

The buyer, who had been trying to get information about the damage since the fire, ultimately received only a contractor’s estimate and some invoices five days before closing.

The buyer was not comfortable with the information provided and ultimately didn’t close.

Buyer sued for their deposit back, seller countered for damages 

One of the issues is whether the fire caused "substantial damage"? 

The Arguments

Both parties hired structural engineers to give expert testimony.

The seller's position was that repairs cost about $19,000 on a $1.6 million purchase. Just over 1% of the price.

They claimed the damage was cosmetic, and an experienced restoration contractor would have identified any structural issues if they existed.

The buyer's position was that cost wasn't the point.

Fire damage is different. Smoke migrates into walls, heat damages wood and steel, and water used to suppress a fire can cause studs to rot. None of which shows up in a visual inspection or a contractor's invoice.

The buyer's expert pointed to a second restoration quote, nearly $26,000, which proposed opening walls and testing for smoke migration throughout the house. The gap between the two quotes was itself a signal that something warranted a closer look.

The Court's Analysis

Substantial damage is not determined by cost of repair alone. The quality, character, and consequences of the damage must also be considered.

Two very different restoration quotes, one proposing to open walls and test for smoke migration and one not, was evidence that the true scope of damage was genuinely uncertain.

No professional had been retained to properly assess it.

The court found that the buyer could therefore rely on the insurance clause and ultimately ruled in favour of the buyer.

The case itself is worth a read if you're interested in the finer details.

Latest YouTube Video:
What Happens if There's a Fire BEFORE Closing