In the 7-1-1 decision, the court was split on whether the policy’s coverage terms were ambiguous
The Supreme Court of Canada has dismissed an appeal by homeowners who claim their insurance company owes them full rebuilding costs after a flood destroyed their home, in a split decision that clarifies how to determine when an insurance contract is ambiguous.
Friday’s 7-1-1 decision in Emond v. Trillium Mutual Insurance Co. also provides guidance on when the nullification of coverage doctrine justifies departing from unambiguous contractual terms.
Justice Malcolm Rowe wrote the decision for the majority. In separate dissents, Justices Andromache Karakatsanis and Suzanne Côté said they each would have allowed part of the homeowners’ appeal, but for different reasons.
Joseph Obagi of Connolly Obagi LLP, one of the lawyers who represented the homeowners, told Canadian Lawyer on Friday that “the majority missed an opportunity to hold insurance companies to a higher standard in writing their insurance policies and advertising them to the public.”
“The main takeaway is that homeowners in Canada have to be very, very vigilant in reviewing their insurance policy because even if their policy on the declaration page uses language like ‘guaranteed replacement cost coverage,’ they may not actually have guaranteed replacement cost coverage,” Obagi adds.
“That is something that I think most homeowners across the country might find concerning because most consumers are not lawyers who are going to review the minutiae of the policy.”
The case involves Stephen and Claudette Emond, who owned a house on the Ottawa River in an area under the jurisdiction of the Mississippi Valley Conservation Authority, a public body that regulates development activities in or near rivers. In the spring of 2019, the Emonds’ house was destroyed by a flood. At the time, the Emonds’ house was insured by Trillium Mutual Insurance Co., and rebuilding meant paying extra costs to comply with conservation authority rules.
The Emonds held a comprehensive insurance policy that covered the home against direct physical loss or damage. However, certain circumstances were excluded from coverage.
The policy stated that Trillium would not generally cover compliance costs, which are costs incurred from complying with laws or regulations, with some exceptions. One of these exceptions is that the insurer would pay an additional amount up to $10,000 for increased costs related to complying with zoning and construction laws.
The policy also included a guaranteed rebuilding cost endorsement, which stated that Trillium would pay for insured loss or damage if the policyholders repaired or replaced their damaged or destroyed house at the same location, using current building techniques and similar-quality materials.
The Emonds argued that this GRC endorsement allowed them to recover the total costs of rebuilding their house, including those for complying with the conservation authority’s requirements.
The Ontario Superior Court of Justice agreed, but the Ontario Court of Appeal sided with Trillium, ruling that the insurance company is not liable for the Emonds’ compliance cost beyond the $10,000 provided for in the policy’s compliance cost exception. The Emonds appealed.
Writing for the majority, Rowe said that when the insurance contract is read as a whole, it unambiguously states that Trillium would not cover compliance costs beyond the $10,000, despite the presence of the GRC endorsement.
The justice referred to the high court’s 2016 decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., which laid out a “generally advisable” order for interpreting insurance contracts. First, the policyholder must establish that the claimed damage or loss falls within “the initial grant of coverage.” Second, the insurer must establish that one of the exclusions to coverage applies. If the insurer is successful, the parties then move on to the third step, where the onus shifts back to the policyholder to prove that an exception to the exclusion applies.
Endorsements, like the one that the Emonds argued should allow them to recover all the costs of rebuilding their house, including those related to compliance, “do not change the generally advisable order” outlined in Ledcor, Rowe wrote.
“Aspects of the endorsement that affect coverage are considered as part of the coverage conferred by the insurance contract, aspects that create exclusions are considered later, followed by any exceptions to the exclusions created,” the justice said.
Rowe wrote that ambiguity in insurance contracts arises when there are multiple reasonable yet differing interpretations of a policy, like when a provision that is unclear in isolation is later read in the context of a full contract, and goes on to emit more than one reasonable possible meaning.
To resolve ambiguity, courts should use other rules of contract interpretation, such as interpreting the contract in a way that is consistent with the reasonable expectations of the parties and that will not yield unrealistic results. If ambiguity persists, the court must resolve it in favour of the insured.
Rowe also provided guidance on the nullification of coverage doctrine, where courts decline to apply exclusion clauses in insurance contracts if the effect would virtually cancel out the contract’s coverage. The justice wrote that he would prefer not to disturb the status quo, stating that courts should continue to follow the doctrine “even when the language of the provision is unambiguous at the first stage of the Ledcor analysis.”
The Emonds had argued that the court interpreted their insurance policy in a way that allowed Trillium to avoid covering compliance costs, effectively nullifying the coverage provided by their GRC endorsement.
However, Rowe disagreed, noting that the policy still covers rebuilding costs minus the extra compliance expenses. Thus, the purpose of the Emonds’ policy was not defeated.
In her dissent, Karakatsanis wrote that she would have ordered Trillium to pay for the costs of complying with any laws that existed at the time the policy was last renewed. However, she would not order the insurance company to pay the increased costs for laws that came into force after the renewal date.
Unlike the majority, she found the policy’s terms ambiguous.
The Emonds “reasonably understood that the ‘guaranteed’ rebuilding endorsement covered all compliance costs except ‘increased costs’ to comply with laws that arose after they paid their premium and Trillium issued their policy,” the justice wrote. She added that “adopting Trillium’s interpretation and excluding all costs of complying with all laws that apply post-construction risks rendering coverage illusory, especially for older homes.”
Côté also found that the Emonds’ appeal should have been allowed in part. Like Karakatsanis, Côté found the policy terms ambiguous and said she would have resolved the ambiguity in favour of the Emonds.
“What these reasons should make clear is the need for insurers to draft insurance policies and endorsements with care and with a view to the understanding of the average person,” the justice wrote. “They must be attentive to ambiguity not only in the text of their insurance policies, but also in the relationship between their constituent parts – such as the underlying policy and any endorsements.
“They must also be cognizant of the principle that, if it is ambiguous whether an exclusion in the underlying policy applies to an endorsement, then the exclusion must be set out in the endorsement itself, or it will not apply.”
Counsel for Trillium did not respond to a request for comment.
