Overview
In Emond v. Trillium Mutual Insurance Co., the Supreme Court of Canada (SCC) has provided updated guidance on the interpretation of insurance policies. The SCC reaffirmed its longstanding approach that insurance policies, including optional endorsements, must be read as a whole, like other contracts, with effect given to clear and unambiguous language.
Facts
The plaintiffs owned and lived in a home on the Ottawa River, in a catchment area regulated by the Mississippi Valley Conservation Authority, which imposed regulatory requirements that increased rebuilding costs. The house was severely damaged by a flood and deemed a total loss.
The house was insured under a standard-form residential homeowners insurance policy. While the insurer agreed to pay for most of the rebuilding costs under the policy, it denied coverage for certain additional costs necessary to comply with the Conservation Authority’s bylaws, such as increased costs of demolishing and rebuilding the house (compliance costs). The issue before the SCC was whether these additional costs were covered under the policy.
The dispute centred on three clauses of the policy:
- The “Guaranteed Rebuilding Cost” (GRC) endorsement, an optional endorsement that the plaintiffs had purchased. This endorsement covered the cost to replace the plaintiffs’ home with materials of similar quality using current building techniques, even if that cost exceeded the total amount of insurance under the policy. However, the GRC also stated that “in all other respects, the policy provisions and limits of liability remain unchanged.”
- An exclusion from coverage for the “increased costs of repair or replacement due to the operation of any law regulating the zoning, demolition, repair or construction” of the property (the compliance cost exclusion).
- A building by-law and code compliance coverage (BBCC) endorsement that provided up to $10,000 for increased costs of demolition, construction or repair to comply with any law regulating the property.
The homeowners argued that the GRC endorsement guaranteed all rebuilding costs, including the compliance costs. The insurer maintained that, except for the $10,000 provided under the BBCC endorsement, the compliance costs were excluded.
The application judge ruled in favour of the homeowners. The Ontario Court of Appeal overturned that decision, siding with the insurer.
The SCC’s Decision
In a 7-2 decision, the majority of the SCC dismissed the appeal and held that the GRC endorsement did not override the compliance cost exclusion.
Writing for the majority, Justice Rowe reaffirmed the SCC’s longstanding approach to interpreting insurance policies, as set out in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co. Courts must give effect to clear and unambiguous language in insurance contracts, reading the contract as a whole. The words are given their ordinary and grammatical meaning, as understood by the average person applying for insurance. Endorsements are not self-contained and standalone contracts disconnected from the insurance policy. They vary or amend the underlying policy but are still built on its foundation. If the policy is genuinely ambiguous, the court will consider other interpretive tools, such as the reasonable expectations of the parties and the broader commercial context.
The majority also confirmed that endorsements do not alter the “generally advisable order” for interpreting insurance contracts. First, the insured has the onus to establish that the loss falls within the grant of coverage under the policy, including any endorsements; second, the onus shifts to the insurer to establish whether an exclusion applies; and third, if so, the onus shifts back to the insured to prove that an exception to the exclusion applies.
On the facts, the majority concluded that the GRC endorsement amended the basis of claim payment under the policy to extend coverage, even if the cost of replacing the plaintiffs’ home exceeded the amount of insurance they purchased, but that, reading the policy as a whole, the compliance cost exclusion applied to the increased costs of complying with the Conservation Authority’s requirements. As a result, the policy excluded coverage for the compliance costs, except for the $10,000 available under the BBCC endorsement.
The majority also held that the nullification doctrine did not apply in the circumstances. This doctrine provides that even when the language of an exclusion is unambiguous, it will not be enforced if it nullifies the very essence of the insurance purchased. Giving effect to the compliance cost exclusion did not nullify the purpose of the GRC endorsement, which is to allow recovery of replacement costs even when they exceed the insurance limit.
Justices Karakatsanis and Côté each dissented in part. While both agreed with the majority on the general principles governing the interpretation of insurance contracts, both judges found the compliance cost exclusion ambiguous (Justice Côté also found the GRC endorsement to be unclear) and, as a result, held that it should be interpreted in favour of the insureds.
Key Takeaways
- Appellate courts review the interpretation of standard-form insurance policies on a correctness standard, where no deference is applied to the lower court’s decision.
- Insurance policies must be read as a whole, with effect given to clear and unambiguous language.
- Endorsements do not change the generally advisable order for interpreting insurance policies.
Blakes lawyers Jeff Galway, Christopher DiMatteo and Lilian Esene represented the intervenor, the Insurance Bureau of Canada (IBC), in this matter.
For more information, please contact the authors or any other member of our Litigation & Dispute Resolution or Insurance groups.
