The Court of Appeal for Ontario finds that a guaranteed rebuilding cost coverage endorsement does not necessarily require an insurer to pay the increased cost of rebuilding in compliance with building regulations enacted after original construction.
The fundamental principle of insurance is indemnity, meaning an insurance policy exists to place the insured in the position they were in before the loss. Theoretically, this is done by providing money to the insured that is equivalent to the value of the loss. But, since most property depreciates over time, actual cash value is often not enough to fully fund replacement. This is why replacement cost coverage exists. It allows someone whose property has been destroyed to replace their property, even if the cost of replacing or repairing the property is more than it was worth when it was destroyed.
However, replacement cost home insurance policies often contain exclusions for increased costs required to comply with new building regulations that did not exist at the time the home was originally built. Is an insurer still required to pay the full cost rebuilding a home under such a policy, or are they entitled to rely on the increased compliance cost exclusion, which at first glance appears to potentially defeat the purpose of replacement cost insurance all together? This is the issue the Court of Appeal for Ontario considered in Trillium Mutual Insurance Company v. Emond, 2023 ONCA 729.
In Trillium,the Emonds had purchased a standard form residential homeowners’ policy from the appellant, Trillium Mutual Insurance Company. The insured home was severely damaged in a flood and deemed a total loss. However, the home was located in the catchment area of the Mississippi Valley Conservation Authority (the “MVCA”) and subject to building regulations set out by the MVCA. Since the time the home was originally built, the MVCA had enacted new building regulations which substantially increased the cost of rebuilding.
The policy included a guaranteed rebuilding cost coverage endorsement, but also included an exclusion limiting the cost of compliance with laws regulating repair and construction of buildings to $10,000.00. The actual cost of compliance with the environmental regulations was estimated to be up to $600,000; more than the actual cash value of the home. The parties could not agree on the correct interpretation of policy and the Emonds made an Application to the court seeking a declaration that they are entitled to recover the costs of rebuilding their home on the same location and with materials of similar quality using current building techniques, without any limitation of coverage resulting from the operation of any rule, regulation, by-law, or ordinance, arising from the flood.
The Application was successful at first instance, where the Application judge held that the insurer could not rely on the exclusion.
However, the insurer appealed and the Court of Appeal for Ontario was required to consider the principles of contractual interpretation to determine how a guaranteed rebuilding cost coverage endorsement and an exclusion limiting coverage for increased building costs to comply with new building regulations to $10,000 ought to be reconciled. The relevant principle identified by the court is that where the language of the insurance policy is unambiguous, effect should be given to that clear language, reading the contract as a whole.
Justice Thorburn, in writing for a unanimous panel which also included Justices Lauwers and Zarnett, considered the clear and unambiguous language of the policy, read together with the endorsement, and found that the guaranteed rebuilding cost coverage endorsement requires an insurer to indemnify the Emonds for 100% of the cost to rebuild the insured dwelling as it was. However, the increased cost of repair or replacement, beyond rebuilding the house as it was, due to MVCA regulations, is excluded.
The Court of Appeal noted this interpretation is supported by how insurers price a policy. An insurer does not and practically cannot account for changes in building requirements since a house has been built and the associated cost of compliance with these requirements in addition to rebuilding the house as it was, if a house is destroyed. It merely accounts for the replacement value of a house as it is. Insurers can then provide a set amount of additional coverage for the cost of compliance, which was the case here as the policy allocated $10,000.00 to the cost of compliance with new building regulations.
The Court of Appeal also recognized that Insurance policies should not be interpreted in a manner that would nullify coverage for the most obvious risks for which a policy was issued, contrary to the reasonable expectations of the insured. The Court held that permitting an insurer to rely on an exclusion limiting liability for increased costs required to comply with new building regulations does not nullify guaranteed rebuilding cost coverage as an insured is still permitted to recover the cost of rebuilding their house as it was, even if that cost exceeds the initial cost of construction. It simply is not entitled to the additional cost of compliance with new building regulations that the house was never in compliance with.