The Supreme Court of Canada confirmed that a guaranteed rebuilding cost endorsement does not override a clear policy exclusion for regulatory compliance costs. Even where the cost to rebuild increases due to zoning or construction requirements, insurers are only required to pay what the policy expressly allows. Insurance policies must be read as a whole, and where the language is clear, courts will enforce exclusions as written.
In April 2019, the Emonds’ home, located along the Ottawa River, was destroyed by flooding. At the time of the loss, the property was insured under a homeowner’s policy issued by Trillium. Since the home was situated near the river, it fell within the jurisdiction of the Mississippi Valley Conservation Authority (the “Conservation Authority”), which has the authority to regulate development and redevelopment in the area.
As a result, the Emonds were required to complete additional work to comply with the Conservation Authority’s requirements before they could rebuild their home. Although Trillium accepted that the flood damage itself was a covered loss, the parties disagreed on whether the additional costs required to comply with the Conservation Authority requirements were covered under the policy or excluded.
The Insurance Policy
The Emonds’ insurance policy was a standard form policy that insured the home against direct physical loss or damage up to a certain amount, subject to certain exclusions. One of those exclusions stated that the insurer would not cover “increased costs of repair or replacement resulting from the operation of laws regulating zoning, demolition, repair, or construction of buildings” (the “compliance cost exclusion”). The policy also included an exception to the exclusion, providing up to $10,000 in additional coverage for increased costs required to comply with zoning and construction-related laws.
The policy further contained a Guaranteed Rebuilding Cost (“GRC”) endorsement which modified the loss provisions of the base policy and provided that Trillium would pay for insured loss or damage if the insured rebuilt the home at the same location using materials of similar quality and current building techniques. The endorsement concluded by stating that, “in all other respects, the policy provisions and limits of liability remain unchanged.”
Procedural History
The Emonds brought an application for a declaration that the GRC endorsement entitled them to recover the full cost of rebuilding their home, including the costs of complying with the Conservation Authority requirements. The application judge agreed and issued a declaration stating such. Trillium appealed and the Ontario Court of Appeal allowed the appeal, holding that the cost of replacement payable under the policy did not include compliance costs imposed by the Conservation Authority beyond the $10,000 provided by the policy’s exception.
The main question before the Supreme Court of Canada (the “SCC”) was whether the GRC endorsement overrides the compliance cost exclusion, or whether the exclusion continues to apply despite the endorsement.
Holding
The majority of the SCC dismissed the appeal and affirmed the Court of Appeal’s decision, holding that the Emonds were not entitled to recover compliance costs beyond the $10,000 provided by the policy exception. Reading the policy as a whole, the majority concluded that there was only one reasonable interpretation: the compliance cost exclusion applied to the increased costs of complying with the Conservation Authority’s requirements, notwithstanding the GRC endorsement.
Justice Côté and Justice Karakatsanis both dissented. In separate opinions they would have allowed the appeal in part in part.
What the SCC Said
The majority applied the framework for interpreting insurance contracts set out in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. In Ledcor, the SCC endorsed an approach to insurance contract interpretation. First, the insured bears the onus of establishing that the claimed loss falls within the initial grant of coverage. Second, the onus shifts to the insurer to demonstrate that an exclusion applies. Third, if the insurer establishes the applicability of an exclusion, the onus shifts back to the insured to prove that an exception to the exclusion applies. The majority confirmed that this framework applies where endorsements form part of the policy.
Where insurance policy language is unambiguous, courts must give effect to its plain meaning, reading the contract as a whole and interpreting it as it would be understood by the average policy holder. Other interpretive principles are engaged only where the policy language is ambiguous.
If ambiguity exists, courts may consider the reasonable expectations of the parties and avoid interpretations that produce unrealistic results. In Ontario, courts also consider whether an exclusion effectively nullifies the coverage purchased, although this doctrine is only considered after the insurance contract has been properly interpreted.
Applying these principles, the majority found no dispute that the flood loss itself fell within coverage of the policy. The burden accordingly shifted to the insurer. The majority found that, when the insurance contract was read as a whole, the policy was unambiguous in providing that the compliance cost exclusion applied notwithstanding the GRC endorsement.
The GRC endorsement expressly stated that all other policy provisions remain unchanged. As a result, the exclusions continued to apply to in the same matter as the original policy terms.
The SCC further held that the Conservation Authority’s requirements clearly fell within the scope of the compliance cost exclusion, which captured increased costs arising from legal requirements governing construction and redevelopment. Any increased costs of compliance beyond the $10,000 exception were excluded from coverage. The Emonds were therefore unable to satisfy the third step of the Ledcor framework by establishing that an exception to the exclusion applied.
Finally, the SCC rejected the Emonds reliance on the doctrine of nullification of coverage. The primary benefit of the GRC endorsement was that it allowed the insureds to recover rebuilding costs exceeding the policy limits stated on the declarations page. Since that benefit remained despite the application of the compliance cost exclusion, the coverage was not nullified.
In her dissenting opinion, Justice Karakatsanis concluded that the base policy was replete with unclear language which gave rise to ambiguity that should have been resolved in favour of the Emonds, having regard to the reasonable expectations of the parties, the broader commercial context, and established interpretive principles that favour the insured where ambiguity exists. Justice Karakatsanis held that Trillium should be required to cover legal compliance costs arising from laws that were in force at the time the policy was issued or last renewed but not increased costs resulting from laws that came into force after that date.
Justice Côté agreed with the interpretive principles applied by the majority, but disagreed with the majority’s conclusion. Justice Côté found that the GRC endorsement should prevail over the compliance cost exclusion, except in respect of costs arising from new laws introduced after the policy was last renewed. Under her approach, Trillium would be required to provide coverage for increased costs associated with compliance with legal requirements that existed up to the time of the policy’s last renewal. Any additional compliance costs arising from legal requirements introduced after that point and before the loss would remain the responsibility of the Emonds.
Takeaways
Emond is the most up to date Supreme Court decision on the interpretation of insurance policies. Insurance policies must be read as a whole. While a guaranteed rebuilding cost endorsement may increase the amount payable to rebuild, it does not override a clear exclusion for regulatory compliance costs, and the doctrine of nullification does not apply where the policy is unambiguous, and its core purpose remains fulfilled.
