In Emond v Trillium Mutual Insurance Co., 2026 SCC 3, the Supreme Court of Canada’s most recent insurance coverage decision, the Court’s majority set out the framework for the interpretation of insurance policies generally, and specifically addressed the impact of a guaranteed rebuilding cost endorsement on insurers’ obligations to pay the increased building costs associated with compliance with laws and bylaws.
The appellants were homeowners who had purchased homeowners insurance from the respondent insurer, Trillium. The Emonds owned a home on the Ottawa River. Their home was located in the catchment area of the Mississippi Valley Conservation Authority (“MVCA”), which has a statutory mandate to regulate development and other activities in and adjacent to rivers in the catchment area. The MVCA implements regulation policies to carry out its mandate.
In April 2019, the Ottawa River flooded and the Emonds’ home was severely damaged. It was deemed a total loss. To rebuild their home, the Emonds were required to carry out additional work to comply with the MVCA’s regulation policies. The Emonds and Trillium agreed that the loss of the Emonds’ home was covered by Trillium’s policy, but they differed on the question of the quantum payable by Trillium to compensate the Emonds for the cost of rebuilding their home, and in particular the costs of complying with the regulation policies.
The Trillium insurance policy included the following:
- a guaranteed rebuilding cost endorsement (the “GRC Endorsement”), which amended the basis of claim payment provision for the policy’s dwelling building coverage to provide that Trillium would pay for the replacement cost of a damaged or destroyed building without deduction for depreciation, even if it meant paying more than the policy limit shown on the insured’s declaration page, provided that certain conditions were met;
- an exclusion for the increased costs of repair or replacement “due to the operation of any law” (the “Compliance Cost Exclusion”); and
- a bylaw and code compliance coverage endorsement (the “BBCC Endorsement”), which provided that Trillium would pay up to $10,000 for the increased cost of demolition, construction, or repair to comply with any law.
Lower Court Decisions
The Emonds asked the Ontario Superior Court of Justice for a declaration that they were entitled to coverage for the full costs of rebuilding their home, inclusive of the increased costs associated with compliance with the MVCA’s regulation policies. Trillium’s position was that the costs of compliance with the regulation policies was capped at $10,000 pursuant to the Compliance Cost Exclusion and the BBCC Endorsement. The application judge found in the Emonds’ favour: Emond v Trillium Mutual Insurance Company, 2022 ONSC 5519.
Trillium appealed the application judge’s decision to the Ontario Court of Appeal, which reversed the application decision, holding that the Compliance Cost Exclusion applied to the costs of complying with the regulation policies and that this interpretation did not nullify the benefit provided to the Emonds by the GRC Endorsement: Trillium Mutual Insurance Company v Emond, 2023 ONCA 729.
Supreme Court of Canada
The Emonds were granted leave to appeal to the Supreme Court of Canada. They argued that the GRC Endorsement overrides the Compliance Cost Exclusion because the GRC Endorsement guarantees all rebuilding costs. The Emonds further argued that applying the Compliance Cost Exclusion would nullify the benefit for which they had bargained when choosing to purchase the GRC Endorsement. Trillium took the position that the relevant language in its policy wordings was unambiguous and that read as a whole, the policy made it clear that the Emonds could only recover up to $10,000 to cover the cost of complying with the MVCA regulation policies.
The Supreme Court of Canada dismissed the Emonds’ appeal and found in Trillium’s favour. Writing for the majority, Rowe J noted that endorsements like the GRC Endorsement are not self-contained and standalone contracts; rather, they change, vary, or amend the underlying policy. The majority clarified that when interpreting an insurance policy, while it remains advisable to consider first the policy’s grant of coverage, then its exclusions, and then any exceptions, this interpretive order does not mean that any provision should be read in isolation. For example, an exclusion clause or exception may assist with the interpretation of a coverage-conferring clause.
The majority determined that in the context of the Emonds’ insurance policy, the Compliance Cost Exclusion applied despite the presence of the GRC Endorsement. It stated that the primary benefit of the GRC Endorsement was that it increased the amount payable under the policy’s dwelling building coverage beyond the limit of insurance set out on the declaration page. The presence of this endorsement meant that the Emonds were protected from increases in rebuilding costs due to factors including increased construction costs and inflation. However, the majority held that it was clear from the language of the GRC Endorsement that it simply amended the basis of settlement provision in the policy; therefore, the policy’s exclusions continued to apply.
The majority also addressed the Emonds’ argument that, even if the Compliance Cost Exclusion applied, it only excluded increased costs to comply with any law that came into force after the policy’s most recent renewal. The majority rejected this argument, stating that the language of the Compliance Cost Exclusion did not have a temporal dimension. The words of the provision, excluding “increased costs of repair or replacement due to the operation of any law,” suggest that there is no limitation as to which laws the provision refers to. If Trillium had meant to limit the scope of this exclusion clause, it would have done so explicitly. According to the majority:
[93] The “increased costs” are, instead, the difference between the cost of rebuilding the house as it previously stood, without regard to laws prescribing requirements as to how it must now be built, and the cost of rebuilding the house as modified to bring it into compliance with the applicable laws…
[94] To be clear, this does not restrict the excluded compliance costs to those that arise after the date of construction. The prevailing law at the time of construction is irrelevant to the comparative exercise. The comparison is between rebuilding without regard to compliance with any law, and rebuilding with regard to the contemporary legal requirements.
The majority noted that the Emonds’ interpretation of the Compliance Cost Exclusion would require insurers to determine the state of compliance of each insured property every time each policy was renewed, or else to bear indeterminate liability. This would lead to “unworkable results divorced from the language of the exclusion and the broader context of the policy.”
Finally, the majority addressed the nullification of coverage doctrine, which provides that a provision in an insurance contract will not be applied to the extent that it would completely defeat the very objective of having purchased the relevant coverage and render it nugatory. The majority held that in the Emonds’ policy, the Compliance Cost Exclusion did not nullify the primary benefit of the GRC Endorsement, which was to allow the Emonds to recover the cost of rebuilding their home even if that cost exceeded their insurance limit. This benefit was still available if compliance costs were excluded.
Takeaways
This decision, as a rare insurance coverage decision from Canada’s highest court, will have important implications across numerous areas of insurance law. From a practical perspective, its principles are instructive for insurers facing disputes with insureds over coverage for the costs of complying with legal requirements imposed by bylaws, the BC Building Code, or other legal instruments. The Supreme Court of Canada has now clearly stated that if a policy excludes coverage for these compliance costs (or limits it by way of a bylaw coverage endorsement), the insurer will not be responsible for covering these costs even in the presence of a guaranteed rebuilding cost endorsement.