In the spring of 2019, a house on the Ottawa River was deemed a total loss when it was destroyed by a flood. While the homeowners had a comprehensive insurance policy that covered the house against direct physical loss or damage, they did not realize that portions of the rebuilding costs were excluded from coverage. Because their home was a waterfront property, rebuilding meant paying extra costs to comply with conservation laws and regulations (compliance costs) – something not uncommon when it comes to waterfront properties.
The policy stated that the insurer would not generally cover compliance costs, although it provided some exceptions, which included that the insurer would pay up to $10,000.00 for increased costs related to complying with zoning and construction laws. In addition, the policy also included a “guaranteed rebuilding” cost endorsement, which would allow the homeowners to recover the costs of rebuilding their house even if the cost was higher than the base amount covered by their policy. The homeowners argued that the cost endorsement would allow them to recover the total costs of rebuilding their house, including the compliance costs. While the Superior Court agreed with the homeowners, the Court of Appeal sided with the insurer, ruling that the insurer was not liable for the compliance costs beyond the $10,000.00 provided for in the policy’s compliance cost exception. The homeowners appealed.
In the end, the Supreme Court dismissed the appeal in a split 7-1-1 decision. Writing for the majority, Justice Rowe explained that insurance policies must be read as a whole , and found that the language of the policy as a whole was clear. Although the cost endorsement would increase the amount that could be paid to rebuild the house, it did not override the compliance cost exemption. The homeowners had argued that they had understood the rebuilding endorsement to cover the compliance costs, and they were not alone in this. Justice Karakatsanis and Justice Côté agreed in part, with both finding that the relevant policy terms were ambiguous.
In contrast, the majority of the Court found that the policy was not ambiguous. In doing so, Justice Rowe referred to the 2016 Supreme Court decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.which laid out an order for interpreting insurance contracts as follows:
- The Policyholder must establish that the damage or loss falls within the initial grant of coverage;
- The Insurer must then establish if an exclusion to coverage applies;
- The Policyholder must then prove that an exception to that exclusion applies.
When it comes to a cost endorsement such as the one on this particular policy, Justice Rowe held that they “do not change the generally advisable order” outlined in Ledcor. As such, he found that an endorsement would be considered under the first step, as part of the coverage conferred by the insurance contract. Exclusions would be considered later, followed by possible exceptions to those exclusions. Ambiguity in an insurance contract exists where there are multiple reasonable yet differing interpretations of a policy. In these circumstances, Justice Rowe discussed that the courts should use other forms of contract interpretation, such as interpreting the contract in a way that is consistent with the reasonable expectations of the parties and that will not yield unrealistic results. If ambiguity persists, the court must resolve it in favour of the insured.
Another important discussion surrounded the “nullification of coverage” doctrine, which prevents insurance policies from being interpreted in a way that would defeat their very purpose. In other words, the courts have refused to apply exclusion clauses where the effect of the clause would be to virtually nullify the coverage provided by the policy. Justice Rowe stated that this is “settled law in Ontario” (para. 66). The Court confirmed that the doctrine operates outside of the Ledcor framework, meaning that even if the policy wording is clear and unambiguous, the courts may still refuse to apply an exclusion clause if it would virtually nullify the coverage purchased by the insured; however, there is still a high bar for applying the doctrine. On the facts, the Court held that the doctrine did not apply, finding that although the guaranteed rebuilding endorsement was limited by the compliance costs exclusion. This was not the same as a total nullification.
Despite the Court’s majority decision that the policy was not ambiguous in addition to the finding that the nullification of coverage doctrine did not apply, Justice Rowe provided some strong advice to insurers, especially when it comes to the relationship between endorsements and exclusions, stating the following:
“[165] What these reasons should make clear is the need for insurers to draft insurance policies and endorsements with care and with a view to the understanding of the average person. They must be attentive to ambiguity not only in the text of their insurance policies, but also in the relationship between their constituent parts — such as the underlying policy and any endorsements. They must also be cognizant of the principle that, if it is ambiguous whether an exclusion in the underlying policy applies to an endorsement, then the exclusion must be set out in the endorsement itself, or it will not apply.” (Emphasis added)
Justice Rowe summed this up perfectly: if the intent of the insurer is to have an exclusion apply to a specific endorsement, or perhaps all endorsements, the best thing they can do is to specifically set that out in that endorsement. Otherwise, an insurer may have to leave it in the hands of the Court to attempt to interpret ambiguities in the policy, which may result in a finding against the insurer.
Lauren Kolarek is a member of the Appellate Advocacy practice group and author of this blog. If you have a question about a similar file or this decision, please contact Lauren at 416-777-5244.
