Executive Summary: Key Legal and Evidentiary Issues

• The central dispute was whether a compliance cost exclusion in a home insurance base policy applies to limit a Guaranteed Rebuilding Cost ("GRC") endorsement purchased by the homeowners.

• Flood damage in April 2019 destroyed the insureds' home, which was located on the Ottawa River within the Mississippi Valley Conservation Authority's jurisdiction, requiring additional work and costs to comply with that authority's regulations for rebuilding.

• The insurer acknowledged coverage but refused to pay the increased costs of compliance, citing a base policy exclusion that limits such recovery to $10,000 under an exception.

• Structural ambiguity arose from the fact that the compliance cost exclusion in Section 1 was not reproduced in Section 4 or the GRC endorsement itself, despite other exclusions being carried forward.

• Application of the nullification of coverage doctrine was debated, with the insureds arguing that enforcing the exclusion would virtually nullify the GRC endorsement coverage.

• The contra proferentem rule and whether coverage provisions should be interpreted broadly and exclusions narrowly in the context of standard form insurance contracts were central interpretive issues.

The facts of the case

In September 2018, Stephen and Claudette Emond entered into a home insurance contract with Trillium Mutual Insurance Company for their house, which was built on the Ottawa River in 1968. The Emonds purchased a "comprehensive form" policy described by a Trillium representative as "top of the line" coverage. In addition to the base policy, the contract included two endorsements: a Guaranteed Rebuilding Cost ("GRC") endorsement and a Water Protection endorsement. The base policy insured their dwelling up to a limit of $585,092.

In April 2019, the Emonds' home was destroyed by a flood and was deemed a total loss. The property was located within the area of jurisdiction of the Mississippi Valley Conservation Authority ("MVCA"), which is empowered under the Conservation Authorities Act to regulate development activities in or adjacent to rivers, such as the Ottawa River. To rebuild their home, the Emonds would need to carry out additional work to comply with the MVCA's regulation policies.

The policy terms and endorsements

The base policy, in Section 1, stated that the house was insured against direct physical loss or damage, subject to a number of exclusions. One of these was the "compliance cost exclusion," which stated that Trillium does not cover "increased costs of 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 exception referred to—the "Building By-Law & Code Compliance Coverage" ("BBCC")—provided that Trillium would pay an additional amount of up to $10,000 for the increased cost to comply with zoning and construction-related laws.

The GRC endorsement amended the "Basis of Claim Payment" provision in the base policy and promised to pay for insured loss or damage if the insureds repaired or replaced the damaged dwelling on the same location "with materials of similar quality using current building techniques within a reasonable amount of time after the damage." The GRC endorsement provided that the cost of repairs or replacement was payable "even if it is more than the amount of insurance" shown on the declaration page. The endorsement concluded with the statement that "in all other respects, the policy provisions and limits of liability remain unchanged." Section 4 of the policy, where the GRC endorsement was located, listed 14 exclusions applicable to optional endorsements but did not include the compliance cost exclusion found in Section 1.

The dispute and proceedings below

Trillium acknowledged coverage for the flood loss but refused to pay the increased costs of compliance with the MVCA's regulation policies, relying on the compliance cost exclusion. The Emonds brought an application for a declaration that the GRC endorsement entitled them to recover the total costs of rebuilding their house without any limitation from the compliance cost exclusion.

The application judge (Ryan Bell J.) allowed the Emonds' application and made the declaration the Emonds sought. She rejected Trillium's position that the compliance cost exclusion contained in the base policy limited the GRC endorsement. She also applied the nullification of coverage doctrine, concluding that applying the compliance cost exclusion as requested by Trillium would nullify the GRC endorsement coverage and would be contrary to the reasonable expectations of an ordinary person.

The Court of Appeal for Ontario (Thorburn J.A., with Lauwers and Zarnett JJ.A. concurring) allowed Trillium's appeal and ordered that the cost of replacement payable under the insurance contract does not include the compliance costs, with the exception of the $10,000 extended under the BBCC. The Court of Appeal concluded that the base policy specifically excludes coverage for "increased costs" of repairs due to the operation of "any law," and that the word "law" includes "both legislation and rules of subordinate authority such as by-laws and regulations."

The Supreme Court's ruling

The Supreme Court of Canada dismissed the Emonds' appeal, with Justices Karakatsanis and Côté dissenting in part. The majority, comprising Chief Justice Wagner and Justices Rowe, Martin, Kasirer, Jamal, O'Bonsawin, and Moreau, held that the insureds are not entitled to recover the increased compliance costs, other than $10,000 under the applicable exception. The majority found that 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 majority further held that applying the compliance cost exclusion does not nullify the purpose of the GRC endorsement, which is to permit recovery of replacement costs even when they exceed the amount of insurance.

The dissenting opinions

Justice Karakatsanis, dissenting in part, would have allowed the appeal in part. She concluded that the compliance cost exclusion applies, but its effect is limited to excluding costs required to comply with laws that did not exist at the time the parties entered into or renewed their contract. She would have substituted a declaration that the Emonds' policy covers the costs of rebuilding their home on the same location, with materials of similar quality using current building techniques, but excludes legal compliance costs that arose after its issuance.

Justice Côté, also dissenting in part, would have allowed the appeal in part, set aside the judgment of the Court of Appeal, and restored the application judge's declaration with the alteration that the coverage does not include increased costs resulting from the operation of any rule, regulation, by-law, or ordinance not in effect at the time that the insurance policy was last renewed. She emphasized that guaranteed replacement cost insurance is meant to provide insureds with peace of mind, and that insurers bear the responsibility for drafting intelligible and accessible insurance contracts that are considerate of the unequal bargaining power in standard form contracts.

Conclusion

The Supreme Court of Canada ruled in favour of Trillium Mutual Insurance Company, dismissing the Emonds' appeal and affirming the Court of Appeal's judgment. The Emonds' policy coverage for rebuilding costs does not include the increased compliance costs associated with the conservation authority's requirements, with the exception of the $10,000 provided under the Building By-Law & Code Compliance Coverage clause. No specific total dollar amount for the compliance costs in dispute was determined, as the case focused on interpreting the scope of coverage rather than quantifying the exact damages.