The discoverability principle should be read into a policy of indemnity insurance, such that the limitation period does not commence until the extent of the loss arising from an incident covered by the policy is quantifiable

Stuart Estate v. Royal and Sun Alliance Insurance Co. of Canada, [2004] N.S.J. No. 87, Nova Scotia Supreme Court

An elderly widow lived alone in the family home following her husband’s death. A smell of oil became apparent in the basement of the house in 1984. In 1998, when the widow moved out of the house, and the house was prepared for sale, a massive amount of oil contamination was discovered in the basement. A remediation Order for over $100,000 was issued to the widow by the Province. The insured petitioned the court for a declaration of entitlement to benefits under her policy of insurance for the cost of the remediation order. The insurer denied that it was liable for payment of benefits on the basis that the claim was statute barred since the insured first noticed the smell of oil in 1984, and did not commence a claim until 1998. The court determined that there were two issues to consider: whether the discoverability principle could be read into a contract of insurance; and whether the discoverability principle would extend the limitation period to 1998.

MacDonald A.C.J.S.C. relied upon Callaghan Contracting Limited v. Royal Insurance Co. of Canada (1989), 97 N.B.R. (2d) 381 for the proposition that in determining whether the discoverability principle applies to a contract, one must distinguish between service contracts and contracts of indemnity. In a contract of indemnity, the insurer owes an obligation to compensate an insured for damages that have actually been suffered. Therefore, no cause of action arises until the extent of the loss is quantifiable, because the reimbursement obligations of the insurer have not “crystallised”. Crystallisation of damages occurs when the material facts on which the claim is based have been discovered, or ought to have been discovered through the exercise of reasonable diligence.

In determining whether the insured had acted reasonably, MacDonald A.C.J.S.C. noted that the insured was not seeking to be compensated for an oily smell, but was seeking to be indemnified for a major remediation project resulting from contaminated soil. On this basis, he determined that the material fact was that there was an environmental catastrophe in the basement, and that the material fact was not discoverable until 1998 when the remediation Order was made. The court noted that reasonable diligence in the 1980’s and even in the 1990’s was not the same as today. Although the mere smell of oil is a scary spectre in today’s world, everyone is much more conscious of and alert to this type of problem than they were in the 1980’s and early 1990’s. The trial judge therefore determined that the claim for insurance proceeds was not barred by contract or statute.

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