By: Avi Sharabi and Dimitris Logothetis
Introduction
In Emond v Trillium Mutual Insurance Co[1], the Supreme Court of Canada considered the interpretation of a GRC (Guaranteed Rebuilding Cost) endorsement in a homeowners insurance policy. At issue was whether the policy’s compliance cost (i.e. bylaws, etc.) exclusion applied to the GRC endorsement. In short, the Court found that it did.
The Court’s decision underscores the importance of reading the insurance contract wording as a whole. Parsing out words or phrases in order to attempt to create ambiguity is not the proper method of interpretation and should be avoided. Adherence to the well-established rules of insurance policy interpretation helps both the policyholder and insurer better understand the scope and limitations of the coverage at issue. The Court’s decision also offers a warning to policyholders trying to utilize the nullification of coverage doctrine. The Court’s guidance clarifies that the doctrine should not apply to situations of inconvenience to policyholders.
Facts and Procedural History
The Emonds owned a home on the Ottawa River, built in 1968. The home was within the jurisdiction of a conservation authority. The Emonds had to comply with the conservation authority’s regulation policies.
A flood destroyed the home in April 2019. At the time, Trillium insured the home. The first-party coverage in the policy contained the GRC endorsement, which stated in part that “[i]n all other respects, the policy provisions and limits of liability remain unchanged.” This included the compliance cost exclusion which provided that the policy would only pay up to $10,000 “for the increased cost of demolition, construction, or repair to comply with any law.” Accordingly, Trillium took the position that the increased costs associated with the rebuild complying with the conservation authority’s legal requirements were excluded beyond the first $10,000.
The Emonds brought an application against Trillium before the Ontario Superior Court of Justice on the issue of whether the exclusion applied to the GRC endorsement. The application judge sided with the Emonds. The application judge held that the exclusion did not apply to the GRC endorsement. The exclusion was not explicitly set out in the endorsement itself. The phrase in the exclusion stating that it applied to increased costs related to the operation “of any law” did not apply to the conservation authority’s compliance requirements as those words were limited to statute. The nullification of coverage doctrine applied.
The Ontario Court of Appeal allowed the appeal. It found that the exclusion was unambiguously applicable to the endorsement, because of the language that read “the policy provisions and limits of liability remain unchanged”. The words “of any law” did apply to the conservation authority’s requirements as those words were not limited to statute. The nullification of coverage doctrine was not contravened because limiting coverage was not the same as nullifying it.
Supreme Court’s Decision
The Supreme Court dismissed the appeal. Writing for the majority, Justice Rowe drew on the Court’s previous decisions on insurance contract interpretation. In particular, the Court applied Ledcor Construction Ltd v Northbridge Indemnity Insurance Co[2].
Applying Ledcor, the Court reiterated that the onus is on the insured to establish that the loss claimed falls within the initial grant of coverage. The onus shifts to the insurer to establish that any of the exclusions or other limitations to coverage applies. If the insurer is successful in the second step, the onus shifts back to the insured to prove that an exception to the exclusion/limitation applies. The Court clarified that the generally advisable order does not change when interpreting endorsements. Endorsements are not self-contained or stand-alone contracts.
The Court applied the primary interpretive principle applicable to insurance contracts. That is, where an insurance contact is unambiguous, a court should give effect to that clear language, reading the contract as a whole. Words should be given their ordinary grammatical meaning.
The Court read the words in the endorsement which provided that “[i]n all other respects, the policy provisions and limits of liability remain unchanged.” The Court found those words to be unambiguous and rejected the Emonds’ submissions to the contrary. The Court ruled that since the endorsement was simply an amendment to the base coverage, the exclusions in the policy continued to apply. This included the compliance cost exclusion.
The Court clarified that the nullification of coverage doctrine is subject to a high threshold. It should not apply unless the exclusion completely defeated the GRC coverage rendering it pointless. In this matter, the Emonds still benefited from the endorsement, they were simply inconvenienced by the limitation to one aspect of it.
Takeaways
Emond reaffirms the law on insurance contract interpretation. This includes a clarification that the generally advisable order to insurance contact interpretation does not change whether the wording is in an endorsement or not. The case is also a helpful reminder of the true scope of the nullification of coverage doctrine.
Ultimately, this result demonstrates the importance of reading an insurance contract as a whole. Parties to an insurance contract should not be allowed to successfully argue ambiguity by taking words out of context. The fact is, any words can be found to be ambiguous in an insurance policy if taken out of context, or if they are interpreted by stretching what their plain and ordinary meaning would be to an average person. Such an analysis would be incorrect.
A proper application of the rules of insurance contract interpretation offers a fair balance to policyholders and insurers alike. Forgetting or misapplying these principles can result in overly broad or overly restrictive coverage. Such was not the case herein. The Emonds benefited from the GRC coverage. Trillium benefited from the slight limitation to that coverage appliable to bylaws and the like.
