After Stephen and Claudette Emond’s house on the Ottawa River was damaged in a flood in September 2018 (the house was deemed a total loss), the couple decided they wanted to rebuild.
The house, however, located withing the jurisdiction of a conservation authority, needed additional work to comply with the authority’s requirements. Their next steps included legal proceedings against the insurer who declined to cover these additional costs.
“Their home insurer acknowledged coverage for the loss under the insurance contract, but a dispute arose regarding rebuilding costs, particularly as to whether costs of compliance with the conservation authority’s requirements are excluded,” the summary notes explain in the Supreme Court of Canada case between the Emonds and the Trillium Mutual Insurance Company.
In the case, the couple had a standard form residential insurance policy. The house was insured against direct physical loss or damage, subject to a number of exclusions. “One of these exclusions states that the insurer does not cover increased costs for repair or replacement due to operation of any law regulating the zoning, demolition, repair or construction of buildings and their related services; except as provided under Additional Coverages of Section 1,” the notes continue. The additional coverages exception in question states that the insurers will pay an additional amount, up to $10,000 for the increased cost to comply with zoning and construction related laws. The contract also included a guaranteed rebuilding cost endorsement (GRC endorsement).
This endorsement “provides that the insurer will pay for insured loss or damage if the insureds repair or replace the damaged or destroyed home on the same location with materials of similar quality using current building techniques.” The endorsement also reads that all other policy provisions and limit remain unchanged.
The Emonds’ position
According to the Supreme Court’s reasons for judgement, the Emonds believe that the GRC endorsement entitled them to recover the total costs of rebuilding their house, with no limitation of coverage for the cost of complying with the legal requirements. “If the exclusion were to apply, it would deprive the endorsement of effect,” they say.
“Courts in Ontario have long refused to apply exclusion clauses in insurance contracts where the effect of the clause would be to virtually nullify the coverage provided by the policy,” the documents explain. “This rule is referred to as the nullification of coverage doctrine.”
The Edmonds say the application judge was right to conclude that this is a freestanding rule that continues to apply, even in the face of unambiguous language. “They argue that insurers cannot be allowed to sell insurance products that are rendered valueless by exclusions buried elsewhere in the policy.” It was noted that the GRC endorsement still provides such a benefit. “It is not rendered nugatory,” the reasons for decision state.
The couple also argued that the conservation authority’s requirements applied at the time of policy issuance, making them fall outside of the scope of the exclusion – not a reasonable reading of the policy language, the justices say. “Nothing in its language suggests that it is limited to laws that came into force after the policy was issued,” they write.
Trillium’s position
Trillium, meanwhile, says the nullification doctrine only applies where there is ambiguity in the contractual language. (Although the court ruled in Trillium’s favour, it rejected that argument, saying courts have been clear that it applies, even where the language is unambiguous.)
The mutual insurer in the case also argued that the language of the insurance policy is unambiguous. Reading the provisions holistically, they say the Court of Appeal correctly found that coverage under the policy was limited and that the compliance cost exclusion applies, despite the GRC endorsement.
“The parties to this appeal do not take issue with the settled principles governing the interpretation of insurance contracts,” the reasons continue. “However, they advance different positions on whether the relevant provisions are ambiguous and as to their proper interpretation.”
Lower court rulings
The application judge in the case concluded that Trillium had to pay replacement costs that included the costs of complying with the conservation authority’s requirements, noting that the language of the GRC endorsement was “clear and unequivocal.”
The application judge also disagreed with Trillium that the compliance costs at issue were due to the “operation of any law,” which would be excluded under the compliance cost exclusion.
The Court of Appeal allowed the insurer’s appeal, holding that the cost of replacement payable under the insurance contract does not include the compliance costs, other than the $10,000 extended under the applicable exception.
Unlike the application judge, the Court of Appeal held that the word “law” includes “both legislation and rules of subordinate authority such as by-laws and regulations.” The court also concluded that “current building techniques” refers to construction methods, not requirements.
Citing the Oxford English Dictionary, the reasons for decision documents note that the ordinary meaning of the word technique is a way of carrying out a particular task, especially one that requires skill. “A technique is not equivalent to a legal requirement,” they write.
Supreme Court’s decision
The court’s reasons for judgment, written by Justice Rowe with the majority concurring, say the insureds are not entitled to recover the increased compliance costs, other than the $10,000 under the applicable exception.
“When the standard form insurance contract is read as a whole, the contested language can bear only one reasonable meaning: the compliance cost exclusion applies to the increased costs of complying with the conservation authority’s requirements, despite the GRC endorsement,” the notes state.
The reasons for judgement goes on to say the language of the contract was unambiguous. They also note that sections of an insurance contract should not be read in isolation.
The Emonds’ appeal had two justices dissenting in part. These disagreed with the majority finding that the exclusion applied to limit the GRC endorsement. “Guaranteed replacement cost insurance is meant to provide insureds with peace of mind. They expect that in the event of loss or damage covered by the policy, they will receive not merely a portion of the funds needed to recover from their loss, but a replacement of what they lost. Insurers must meet these reasonable expectations,” Justice Côté wrote, dissenting in part with the majority ruling.
Ultimately though, the majority of justices was found that the text of the GRC endorsement was explicit that the endorsement amends the basis of claim payment formula only. They say it increases the amount payable beyond the face value of the insurance, to provide repairs and replacement, even if these exceed the upper limit of what was insured, thanks to increased costs due to inflation, for example.
“Because the GRC endorsement simply amends the basis of claim payment provision in the base policy by extending the amount payable beyond the amount of insurance purchased by the insureds, the exclusions in the policy continue to apply to the amended provision as they did to the original provision. This is further confirmed by language in the GRC endorsement, which states: “In all other respects, the policy provisions and limits of liability remain unchanged,” they write.
“The GRC endorsement does not allow the Emonds to circumvent the compliance cost exclusion appearing elsewhere in the insurance policy. The Court of Appeal was therefore correct to conclude that the replacement cost of their home should be calculated in reference to that exclusion,” the reasons for judgement states.
They also say that the high bar to show nullification was not met and that the compliance cost exclusion applies, despite the GRC endorsement.
The appeal was dismissed with costs.
Following the decision, the Insurance Portal approached the Insurance Bureau of Canada (IBC), an intervenor in the case, for a discussion about the case and implications for insurers. The industry association declined this request, only issuing a statement saying the IBC welcomes the decision.
“Guaranteed rebuilding cost endorsements are designed to protect homeowners against unexpected increases in construction costs – not to override compliance costs exclusions. This decision reinforces the principle that insurance contracts must be interpreted as written, ensuring consistency, predictability and fairness for all policyholders,” they write.
“Clear coverage boundaries help preserve the long-term sustainability of the insurance system and highlight the importance of homeowners fully understanding their policy’s scope and limitations before a loss occurs.”
