Supreme Court rules on exclusion clause in insurance case

The Supreme Court of Canada has dismissed the appeal of homeowners and sided with their insurance company over its obligations in the wake of the total loss of their home.

The case dates back to 2019 when a flood destroyed Stephen and Claudette Emond’s home along the Ottawa River. They had home insurance, and their policy included a guaranteed rebuilding cost coverage (GRC) endorsement, which entitled them to the full cost of rebuilding their home.

Their home fell within a conservation authority, and the dispute arose over whether the insurance company was obligated to cover the additional building requirements imposed by it, given the compliance cost exclusion.

The Trillium Mutual Insurance Company granted the Emond’s $10,000 under a limited exception. 

The couple contested the interpretation of the contract and sought a declaration that the guaranteed rebuilding cost coverage entitled them to recover the total cost of rebuilding, with no limitation on coverage for meeting legal requirements.

The Ontario Superior Court ruled in the Emond’s favour, finding that the GRC should include the compliance costs. The Ontario Court of Appeal overturned this.

In its 7-1-1 decision, the Supreme Court found that the GRC endorsement in a standard insurance contract does not override the contract’s compliance cost exclusion. Drawing on the three-step process outlined in the 2016 Ledcor decision, the Court said insurance contracts need to be read as a whole.

“The GRC endorsement does not allow the Emonds to circumvent the compliance cost exclusion appearing elsewhere in the insurance policy,” Justice Malcolm Rowe wrote for the majority. 

“The Court of Appeal was therefore correct to conclude that the replacement cost of their home should be calculated in reference to that exclusion.”

He referred to the “generally advisable” order in which to interpret insurance contracts from Ledcor. First, the onus is on the insured to establish that the loss or damage falls within the coverage. Second, the insurer must establish that one of the exclusions applies to the coverage. Third, if the insurer can establish the exclusion, the onus shifts to the insured to prove that an exception to the exclusion applies.

Rowe said contracts must be read as a whole, so that the standard contract and the GRC are one document and don’t stand alone. As a result, the compliance cost exclusion applies to the entire contract and falls within the first two steps of the Ledcor process.

“Endorsements are not self-contained and standalone contracts disconnected from the insurance policy of which they form a part,” he wrote. 

“It follows that endorsements do not change the generally advisable order. 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.”

To that end, the guarantees in the GRC are intended to cover things such as inflation or changes in construction techniques, but not the compliance costs imposed by the local conservation authority.

The decision also held that, as the first stage of the interpretive analysis, where the language of the insurance contract is unambiguous, it should be treated as clear, reading the contract as a whole. This should not encourage reading any provisions in isolation, as the Court says the Emonds did in their arguments.

Justice Andromache Karakatsanis and Justice Suzanne Côté each penned a separate dissent. They felt there was ambiguity in the language around the GRC, but would have limited the compliance costs to the last policy renewal. Côté sided closer to the trial court decision.

The Insurance Bureau of Canada, which intervened in the case, welcomed the decision.

“This ruling provides important clarity on how insurance policies are intended to operate,” the Bureau said in a statement.  

“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.” 

The IBC added that 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.

Brian Cameron, a partner with Oatley Vigmond, who represented the Ontario Trial Lawyers Association (OLTA) as intervenors in the case, says the decision is a bit of a mixed bag.

“It’s repeating and reminding people how to interpret contracts of adhesion,” he says. 

“I don’t agree with the way they ultimately did it in terms of the application of principles, but the principles seem a little stronger than they were before. There is also some utility in having them all in the same place.”

Cameron also notes that the decision’s reminder that these contracts are supposed to be interpreted through the lens of a lay reader is helpful for people who enter into them.

“The Court also clarified one thing that I’ve often found confusing, which is that before you got to that interpretive view, you would need to find ambiguity in that contract,” he says. 

“OTLA’s position was that you don’t need an ambiguity first; it’s a first-order interpretive principle about how a regular person has understood this. Given the contract as a whole, using the words in the ordinary, grammatical meaning, it’s pretty clear that you don’t need to have an ambiguity first.”

That will be helpful moving forward. While it didn’t help the Emonds, it didn’t make things worse. He is also going to wait to see how lower court judges interpret the decision.