Guaranteed Replacement Insurance Coverage 2023 ONCA

In Trillium Mutual Insurance Company v. Emond, 2023 ONCA 729, the Court of Appeal for Ontario addressed the interpretation of a Guaranteed Rebuilding Cost Coverage endorsement in a home insurance policy. The crux of the dispute was the interpretation of an exclusion clause for “increased costs of repair or replacement due to the operation of any law regulating the zoning, demolition, repair, or construction of buildings”.

The insurance policy at issue was a standard form policy and therefore its interpretation has the potential to affect countless people across Ontario. Property owners often only involve lawyers once insurance problems arise and litigation is on the table. Property owners can be proactive by contacting their insurer or a licensed insurance broker to get advice on their insurance needs, and hopefully avoid the need for more costly legal advice in the future.

Guaranteed Rebuilding Cost Coverage (sometimes referred to as Guaranteed Replacement Cost) is an insurance coverage that ensures the person making the claim will be able to rebuild following a loss, even if the cost exceeds the insurance policy limit. This provides peace of mind in the event of unexpected rebuilding expenses or a change the market (e.g., increases in labour or material costs such as what we saw during the peak of the Covid-19 pandemic). The other common insurance coverage available is Actual Cash Value (“ACV”) coverage which provides the replacement cost, less depreciation. ACV can result in a cash shortfall if the insured person wants to replace the property that was damaged or destroyed.

The Emonds owned a home on the Ottawa River which was deemed a total loss following a flood. A judge accepted the Emond’s position that the Guaranteed Rebuilding Cost Coverage was intended to guarantee the costs of rebuilding their home on the same location, using materials of similar quality and current building techniques, without any limitation of coverage resulting from the operation of any rule, regulation, by-law, or ordinance. However, the insurer Trillium Mutual appealed the judge’s decision on the basis that the judge misinterpreted a policy exclusion which did not permit the Emonds to recover increased replacement costs caused by “the operation of any law regulating the zoning, demolition, repair, or construction of buildings”. The property was located within the jurisdiction of the Mississippi Valley Conservation Authority (the “MVCA”), which regulates development and activities in or adjacent to nearby rivers, lakes, shorelines, hazardous lands, and wetlands. Beyond the typical rebuilding costs, the Emonds faced major costs associated with complying with applicable environmental and conversation legislation (e.g., specific studies/testing, drainage/septic requirements, etc.). Multiple construction cost estimates were obtained and the estimates obtained by the Emonds and Trillium Mutual differed by upwards of $600,000.

The Court of Appeal relied on the principles for interpreting insurance policies as summarized by the Supreme Court of Canada in Ledcor v. Northbridge, 2016 SCC 37. These principles include:

• Giving effect to the meaning of the contract as a whole.
• If there is some ambiguity in the contract’s language:
  • interpreting the contract consistently with the reasonable expectations of the parties (where the language supports such an interpretation);
  • avoiding unrealistic results or those not contemplated in the commercial atmosphere where the insurance policy was agreed to; and,
  • interpreting the contract consistently with similar insurance policies.
• If ambiguity remains, then the contra proferentum principle applies, meaning that the contract will be interpreted against the insurance company.
• Clauses granting coverage should be construed broadly and clauses excluding coverage construed narrowly.
• Endorsements to the insurance policy should be read together with the rest of the policy because endorsements are generally not self-contained from rest of the policy.
• The onus rests on an insurer to establish that an exclusion of coverage applies.

The MVCA had a detailed regulatory regime which the Emonds were required to follow if they rebuilt their home. For example, this could include things such as using a different, more expensive septic system design than what was present prior to the flood.

The Court of Appeal approvingly cited decisions from other provinces which decided against holding insurers responsible for compliance with laws enacted after the property was built or correcting deficiencies and failures to comply with the laws which existed at the time of the loss. There is a reluctance by the courts to turn insurers into guarantors of construction defects and building code violations. Essentially, these types of added costs were not taken into account by the insurer at the outset of the insurance contract and are therefore not covered under the policy.

The Court of Appeal concluded that the Emonds had coverage for floods as an insured peril and the GRC part of their insurance policy provides coverage to rebuild the property after the flood using similar materials and current building techniques without any deduction for depreciation. However, there was an exclusion for “increased costs” (i.e., those over and above the cost to replace the dwelling as it was, using current building techniques) to comply with “any law”. The phrase “any law” is broad and included by-laws and regulations such as those enforced by the MVCA. Therefore, the Emonds did not have coverage for fixing deficiencies or making enhancements to comply with the MVCA’s by-laws and regulations as they currently exist (beyond a specific $10,000 policy endorsement that was available to them).

It is important to assess your insurance needs on at least an annual basis. Those insuring residential or other properties should consider whether GRC coverage suits their needs, but also whether there are serious potential exclusions that need to be considered. If you find yourself in a dispute with your insurance company, you can contact the litigation lawyers at Perley-Robertson, Hill & McDougall LLP/s.r.l.

This publication is intended as a general discussion of certain legal issues and/or developments and should not be relied upon as legal advice. Should you require legal advice, please kindly contact a member of our law firm.