Can’t always get what you want: SCC to consider interpretation of insurance contracts in Trillium Mutual Insurance Company v Emond

In Trillium Mutual Insurance Company v Emond, 2023 ONCA 729 [Trillium], the Court of Appeal for Ontario (“ONCA”) upheld a term in an insurance policy which substantially limited the insured’s recovery of rebuilding costs arising from compliance with regional building regulations. On appeal by leave [41077], the Supreme Court of Canada (“SCC”) will likely provide further clarity on the interpretation of insurance contracts, building upon its recent jurisprudence on the topic of contractual interpretation.

Facts

The plaintiffs purchased from the defendant a standard form home insurance policy for their property located on the Ottawa river. The policy included a “Guaranteed Rebuilding Cost Coverage” endorsement (“GRC Endorsement”), which provided coverage for the cost of rebuilding a dwelling with materials of a similar quality using current building techniques (Trillium, paras 2, 5). Due to its location, the insured property was subject to the regulations of the Mississippi Valley Conservation Authority Regulations Policies (“MCVA Regulations”).  Within the plaintiffs’ coverage period, their dwelling was damaged by flooding and written off as a total loss (Trillium, para 3).

Following the flooding, the plaintiffs began rebuilding their dwelling. However, because the plaintiffs’ home was built prior to the enactment of the MCVA Regulations, rebuilding was costly. The estimated cost of re-building their home in compliance with MCVA Regulations was more than double that originally contemplated by the defendant insurer (Trillium, paras 14-15). Accordingly, a disagreement arose between the parties regarding the quantum of compliance costs the plaintiffs were entitled to under their policy.

Whereas the plaintiffs contended that they were entitled to the full cost of rebuilding their dwelling, the defendant argued that they were not liable for the additional costs required for compliance with MCVA Regulations (Trillium, paras 4, 6-7). The defendant cited a clause contained in the plaintiffs’ policy (“Exclusion Clause”) which precluded “increased costs of repair or replacement due to the operation of any law regulating the zoning, demolition, repair, or construction of buildings” (Trillium, para 5). Additionally, the plaintiffs’ policy featured a Building By-Law and Code Construction Endorsement (“BBC Endorsement”) which provided for coverage of up to $10,000 for increased construction costs stemming from compliance with any law including by-laws, building codes, ordinances, or other regulations (Trillium, para 25).

 

Judicial History

On application to the Ontario Superior Court of Justice, Ryan Bell J. interpreted the Exclusion Clause narrowly, holding that the limitation on increased costs arising from the operation of “any law” applied only to increased costs arising from statute. The Exclusion Clause did not, in her opinion, apply to by-laws, regulations, city codes, or ordinances (Trillium, para 28). Accordingly, she held the Exclusion Clause did not preclude the plaintiffs’ compliance costs.

Ryan Bell J. further noted that allowing the defendant’s interpretation of the Exclusion Clause would render the plaintiffs’ policy “nugatory.” When the defendant sold the plaintiffs their policy, Ryan Bell J. noted, the defendant knew i) the age of the plaintiffs’ home, ii) where the plaintiffs’ home was located, and iii) that the plaintiffs’ home was subject to MCVA regulations (Trillium, paras 30-31). Accordingly, she concluded that denying coverage for compliance costs would have the effect of nullifying the plaintiffs’ insurance against the “most obvious of risks” (Trillium, para 30).

 

Issues on Appeal

On appeal to the ONCA, the central issues were:

  1. Whether the application judge erred in holding that the plaintiffs were entitled to full coverage for compliance costs under the GRC Endorsement, and
  2. Whether excluding coverage for compliance costs would have the effect of nullifying the plaintiffs’ insurance coverage.

 

Decision

On the first issue, Thorburn J.A. (writing for a unanimous bench) held that the application judge erred in concluding that the Exclusion Clause did not preclude the defendant’s liability for compliance costs, subject to the $10,000 covered under the BBC Endorsement (Trillium, para 80).

Thorburn J.A. began by recounting the principles of insurance contract interpretation to guide her interpretation of the plaintiffs’ policy. As set out by the SCC in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC 37 [Ledcor], effect should be given to unambiguous terms in insurance contracts. Where ambiguity exists, the ordinary principles of contractual interpretation apply (Ledcor, para 49). To solve ambiguities, interpretations must be consistent with the reasonable expectations of the parties, avoid unrealistic or commercially unreasonable results, and be consistent with the interpretation of similarly worded agreements (Ledcor, para 50). It is only once these principles have been exhausted that courts may resort to construing agreements contra proferentem (Ledcor, para 51).

Turning to the Exclusion Clause, Thorburn J.A. interpreted the term “any law” broadly to include by-laws, regulations, building codes, and ordinances; the term was not, in her opinion, limited to statute. In arriving at this conclusion, emphasis was placed on the broad meaning of the phrase “any law” as generally understood, noting that it does not feature any qualifying or limiting language (Trillium, paras 86-87). A broad interpretation of the Exclusion Clause was further supported by the language of the BBC Endorsement, which, while using the term “any law”, expands on this phrase to include regulations, by-laws, ordinances, and statute (Trillium, para 68). With respect to the MVCA Regulations specifically, Thorburn J.A. noted that regardless of what level of authority these regulations stem from, they operate as a de facto legislative scheme (Trillium, paras 71-72).

Flowing from her analysis of the Exclusion Clause’s interpretation, Thorburn J.A. therefore concluded that the plaintiffs’ compliance costs were precluded by the Exclusion Clause, save for the $10,000 allowed under the BBC Endorsement (Trillium, para 86). In reaching this conclusion, Thorburn J.A. emphasized the ONCA’s decision in Pilot Insurance Co v Sutherland, 2007 ONCA 492 [Pilot Insurance v Sutherland] in which the Court held that insurance contracts—including all endorsements—must be interpreted as a whole (Trillium, para 79).

On the second issue, Thorburn J.A. concluded that the operation of the Exclusion Clause did not in effect nullify the plaintiffs’ insurance policy (Trillium, para 90). While the operation of the Exclusion Clause denies the plaintiffs some recovery, the plaintiffs remain entitled to coverage exceeding their base policy (Trillium, para 88). Therefore, the Exclusion Clause did not, in the Court’s opinion, render the plaintiffs’ coverage “nugatory” (Trillium, paras 89-90).

As such, the plaintiffs were entitled to recover the costs of rebuilding their dwelling, save for a $10,000 limit on recovery for compliance costs (Trillium, para 92).

 

Analysis

On appeal, it is likely the SCC will seize the opportunity to further clarify the interpretation of standard form insurance contracts. In particular, this appeal presents an opportunity for the SCC to opine on the interpretive principles articulated by the ONCA in cases such as Pilot Insurance v Sutherland at para 21, RBC Travel Insurance Company v Aviva Canada Ltd., 2006 CanLII 32594 (ONCA) at para 11, Sam’s Auto Wrecking Co Ltd v Lombard General Insurance Company of Canada, 2013 ONCA 186 at para 37, and Carter v Intact Insurance Company, 2016 ONCA 917 at paras 20-24.

The plaintiffs have taken the position in their written submissions that the broad surface-level meaning of the GRC Endorsement’s title, in isolation, should preclude the defendant from reigning in coverage in other parts of a policy. In particular, the plaintiff suggests the word “guarantee” in the GRC Endorsement’s title leads the average consumer to believe its coverage features no limits or exclusions. This proposition appears flawed for a variety of reasons. Apart from belying the basic principles of contractual interpretation by which agreements must be interpreted as a whole, the plaintiffs’ contention appears to overstate the principle that insurance contracts are interpreted as the “average person” would understand them (National Bank of Greece (Canada) v Katsikonouris, [1990] 2 SCR 1029, page 1043). The plaintiffs’ submissions appear to suggest that the “average person” principle allows Courts to wholly ignore entire sections of agreements where a subsequent section—in complete isolation—gives off a certain aspirational impression, even where this impression is tempered by other sections of the agreement. This contention suggests that the “average person” is one who does not read agreements in their totality, one which should not be adopted as a guiding principle for interpreting agreements.

It is undoubtedly important that the Court recognizes and affirms appropriate protections for consumers in the insurance setting. As insurance policies often take the form of contracts of adhesion, consumers have little to no bargaining power in the process of purchasing their policies and face informational disadvantages which can be exacerbated by malicious or deceiving contracting practices. Accordingly, Canadian courts have developed a series of principles to level the playing field for consumers. However, these concerns should not serve as a basis to undermine the fundamental principles of contract law which serve to allow parties to enter into meaningful agreements which reflect their legitimate interests and expectations. The plaintiffs’ contention distinctly undermines these principles and would have a catastrophic impact on contractual relations in Canada.

Patrick Weston

Patrick is an avid mooter and will be representing Osgoode as an oralist at the 2025 Phillip C. Jessup International Law Moot. He will be returning as a summer student to Osler, Hoskin & Harcourt LLP where he intends on pursuing a career in litigation.

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