Fortuity - Canadian Insurance News and Trends - February 2026

On January 30, 2026, the Supreme Court of Canada issued its decision in Emond v Trillium Mutual Insurance Co., 2026 SCC 3. In a 7-2 decision, the Court ruled in favour of the insurer, finding its duty to indemnify under a guaranteed rebuilding cost endorsement did not extend to costs to comply with conservation requirements where such costs were capped under a compliance cost exclusion. The judgment also provides useful insight for insurers and insureds on the correct application of the principles governing insurance contract interpretation.

Background

The case involved a claim under a home insurance policy. The insureds’ house was damaged in a flood and was a total loss. The insureds wanted to rebuild their house, but to do so, they needed to carry out additional work to comply with a conservation authority’s regulatory requirements. The insurer confirmed coverage for the loss, but there was a dispute over coverage for the increased rebuilding costs required to comply with the conservation authority’s requirements.

The policy was a standard form comprehensive homeowners’ policy. One of the exclusions in the policy stated that the insurer 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 Compliance Cost Exclusion). One of those Additional Coverages stated that the insurer will pay an additional amount up to $10,000 for the increased cost of complying with zoning and construction-related laws.

The policy also included a guaranteed rebuilding cost endorsement (the GRC Endorsement). The GRC Endorsement amended the Basis of Claim Payment provision in the policy and provided that the insurer will pay for insured loss or damage if the insureds repair or replace the damaged or destroyed house on the same location with materials of similar quality using current building techniques. The GRC Endorsement concluded with a statement that “in all other respects, the policy provisions and limits of liability remain unchanged”.

The Court’s ruling and key takeaways

Justice Rowe, for the majority, held that the insureds were not entitled to recover the increased compliance costs beyond $10,000 under the Additional Coverages. The GRC Endorsement merely amended the Basis of Claim Payment provision; it did not remove the Compliance Cost Exclusion. The increased costs that were captured by the $10,000 in Additional Coverage and the Compliance Cost Exclusion were 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.

The majority re-emphasized and further explained the principles governing the interpretation of insurance contracts:

• First, the generally advisable order for interpreting insurance contracts: (1) the insured has the onus of establishing that the claim falls within the initial grant of coverage, (2) the insurer has the onus to establish that one or more exclusions apply to remove coverage, and (3) the insured has the onus to establish that an exception to the exclusion(s) applies.
• Second, where the language of the policy is unambiguous, reading the policy as a whole, effect should be given to that language.
• Third, in the face of ambiguity, other rules of contractual interpretation must be employed to resolve the ambiguity. These rules include, but are not limited to: (1) that the interpretation should be consistent with the reasonable expectations of the parties; (2) it should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the policy was formed; and (3) it should be consistent with the interpretations of similar insurance policies.
• Fourth, if ambiguity still remains after resort to ordinary rules of contractual interpretation, the court must resort to the contra proferentem rule, which provides that, as the insurer is the drafter of the policy, the ambiguity must be resolved in a manner favourable to the insured. This means that interpretations which result in broader coverage, narrower exclusions, and broader exceptions are favoured.

With respect to the fourth point above, despite being previously addressed by the Supreme Court of Canada, lower courts and counsel continue to frequently misstate or misapply this rule as being a primary rule of interpretation, rather than one of last resort applied only where an ambiguity cannot be resolved through application of other rules of contractual interpretation.

The majority held that, reading the policy as a whole, it was unambiguous that the Compliance Cost Exclusion applied despite the GRC Endorsement. The insureds’ arguments, even taken at their highest, did not raise any ambiguity. It was therefore unnecessary to resort to the third point above in applying other rules of contractual interpretation to resolve an ambiguity.

With respect to which costs the Compliance Cost Exclusion applied, the majority similarly held that the policy was unambiguous. The costs that the Compliance Cost Exclusion applied to were 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. The insureds were only entitled to coverage for up to $10,000 for those costs, under the exception to the Compliance Cost Exclusion and the Additional Coverages.

Notably, the majority held that even if there was an ambiguity in determining which costs the Compliance Cost Exclusion applied to, it would necessarily be resolved against the insureds, because the interpretation in favour of the insureds would be contrary to the reasonable expectations of the parties and to commercial reality.

The majority also addressed what is often referred to as the nullification of coverage doctrine. This doctrine is often referred to by Ontario courts, but courts in other provinces, including British Columbia, have expressed doubt as to its existence as an independent doctrine. The majority held that the doctrine operates apart from the rules of interpretation, as its rationale is about fundamental fairness considerations specific to the insurance context. The doctrine applies “in the extreme and specific scenario where coverage is nullified, such that the insurer is pocketing a higher premium without any material risk”.

The majority held that the nullification of coverage doctrine did not apply because the Compliance Cost Exclusion did not nullify the benefit provided by the GRC Endorsement. Its effect was that the insureds would recover less than they would have without the exclusion, but it did not nullify the benefit of the GRC Endorsement, allowing them to recover amounts exceeding the policy limits in the event that the covered rebuilding costs exceeded those limits.

Both justices in the minority held that the Compliance Cost Exclusion applied despite the GRC Endorsement, but disagreed with the majority on what costs it applied to. One agreed with the majority that the Compliance Cost Exclusion applied, but found it ambiguous and interpreted it to only apply to costs of complying with laws that came into existence after the policy was last renewed. The other held that it was ambiguous whether the Compliance Cost Exclusion was displaced by the GRC Endorsement, but that reasonable expectations resolved the ambiguity and that the Compliance Cost Exclusion applied, but only to costs of compliance with laws that came into existence after the policy was last renewed.