The Supreme Court of Canada recently released its decision in Emond v Trillium Mutual Insurance Co, 2026 SCC 3 (Emond), offering important clarity on how insurance policies are interpreted when endorsements that add to the protection provided collide with coverage exclusions.
In Emond, the Supreme Court found that a guaranteed rebuilding cost endorsement did not extend to the costs associated with compliance with laws or regulations (such as environmental or conservation requirements) because those costs were clearly excluded under the policy.
Why this matters now: For homeowners, this decision highlights the real risk of coverage gaps as rebuilding costs rise and regulatory requirements become more complex, particularly in environmentally regulated areas. On a broader level, this decision underscores the need to consider coverage holistically, as endorsements that enhance coverage may not override exclusions or expand coverage, with potentially significant results for policyholders.
Background
How the Coverage Dispute Arose
The Emonds' home was located on the Ottawa River and was destroyed by flooding in 2019. While their insurer, Trillium Mutual Insurance Company, agreed to pay rebuilding costs, the parties disagreed whether Trillium was required to pay additional rebuilding costs associated with current regulatory requirements.
Because the Emonds' home was located in the jurisdiction of a conservation authority, rebuilding the home required additional work to comply with environmental and land-use regulations, which significantly increased the cost of rebuilding. The Emonds believed their policy covered these costs—Trillium disagreed.
The Insurance Policy and Competing Interpretations
The Emonds' insurance policy provided comprehensive coverage for damage to their home and included an optional Guaranteed Rebuilding Cost Coverage Endorsement (GRC Endorsement). The GRC Endorsement required Trillium to cover the repair or replacement of the home at the same location, with materials of similar quality using current building techniques.
Relying on this endorsement, the Emonds sought the full rebuilding costs of their home, including the additional cost of work to comply with the requirements of the conservation authority.
Trillium took a different view. Trillium pointed to an exclusion for costs of repair or replacement based on any zoning or construction-related laws and to an "Additional Coverage" wording under which Trillium agreed to pay an "additional amount up to $10,000" for increased costs associated with bylaw compliance (together, the Compliance Cost Provisions). Trillium took the position that these provisions limited coverage for bylaw compliance to $10,000, notwithstanding the GRC Endorsement.
The Lower Court Proceedings
The application judge agreed with the Emonds and held that the GRC Endorsement required Trillium to cover all rebuilding expenses, in essence finding that the GRC Endorsement overrode the Compliance Cost Provisions.
Trillium appealed. The Ontario Court of Appeal allowed the appeal and found that coverage for complying with the conservation authority's requirements was limited to $10,000 through the Compliance Cost Provisions. According to the Court of Appeal, the GRC Endorsement increased the amount available for covered losses, but did not override specific exclusions in the policy to create additional coverage.
The Supreme Court Decision
The Emonds appealed, setting the stage for a definitive ruling on how endorsements interact with exclusions.
In a 7-1-1 decision, the Court dismissed the Emonds' appeal and upheld the Court of Appeal's finding that coverage for complying with the conservation authority's requirements was limited to $10,000.
The majority of the Supreme Court of Canada concluded that the wording of the Emonds' insurance policy was clear and unambiguous. The Supreme Court confirmed that where the language of an insurance contract is unambiguous, effect should be given to that clear language, reading the contract as a whole. In keeping with prior decisions, they reiterated that this means giving the words of the contract "their ordinary meaning, 'as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law'." As noted by the majority, this approach furthers consumer protection, which is a key objective of insurance law, particularly in the field of automobile and home insurance.
The view of the Trillium policy as clear and unambiguous was not unanimous. Justice Karakatsanis found ambiguity in the phrase "increased costs". Justice Côté identified textual ambiguity in the words "current building techniques" as well as structural ambiguity arising from the relationship between the GRC Endorsement and the underlying policy. Both dissenting Justices found that given the reasonable expectations of the parties and the commercial context of the policy, the Costs Compliance Provisions did not serve to limit Trillium's liability to $10,000.
Even though the majority of the Court found the Emonds' policy unambiguous, their decision also considered the question of when ambiguity exists in insurance policies. In short, the majority did not accept that differing interpretations, even if reasonable, give rise to ambiguity. Indeed, the Court noted that by their nature, insurance policies often contain multiple, sometimes overlapping coverages, exclusions, conditions, and endorsements. According to the majority, these features, do not necessarily give rise to ambiguity. Instead, ambiguity exists only if the potentially ambiguous provisions may have more than one reasonable meaning when reading the contract as a whole, with the goal of the interpretive exercise being a search for "harmony rather than discord."
In finding that the GRC Endorsement did not override the Compliance Cost Provisions, the majority of the Supreme Court concluded that while the GRC Endorsement increased the amount the insurer could be required to pay to rebuild the home, it did not expand the scope of coverage. In other words, the endorsement removed the dollar cap on covered rebuilding costs, but did not supersede limitations on what constituted covered rebuilding costs. Because the Compliance Cost Provisions expressly limited coverage for additional costs required to comply with laws or regulations (such as conservation authority requirements), the GRC Endorsement did not apply to those costs.
How Endorsements Fit into Insurance Policies
In Emond, the Supreme Court confirmed that endorsements must be interpreted within the well-known framework for interpreting insurance policies:
- Where the language of the insurance contract is unambiguous, effect should be given to that clear language, reading the contract as a whole;
- In the face of ambiguity, the court cannot rely on the language alone. Instead, it must move to a second stage and employ other rules of contractual interpretation to resolve that ambiguity; and
- If ambiguity still remains after the two first stages, the court must have resort to the contra proferentem rule at the third stage.
The Supreme Court emphasized that endorsements are not standalone contracts "disconnected from the insurance policy" and must be read together with the rest of the policy. Under this approach, if an endorsement affects coverage, exclusions or exceptions, it does so as part of the overall policy, not in isolation.
The Doctrine of Nullification: A Narrow Exception
Finally, the Supreme Court addressed the doctrine of nullification, which applies only in the insurance context. The doctrine of nullification can prevent an insurer from relying on an exclusion that, if applied, would effectively wipe out the coverage the insured reasonably expected to receive.
The Supreme Court described nullification as a very narrow doctrine, reserved for extreme cases, while noting that courts must be alert to the inequitable bargaining power favouring insurers. Nullification applies only where enforcing an exclusion would virtually eliminate the coverage under the policy, leaving the insurer with a premium but no real risk. In Emond, the Supreme Court confirmed that the doctrine is not triggered simply because coverage is reduced or limited.
In Emond, the Supreme Court found that the policy still provided substantial rebuilding coverage, even though the GRC Endorsement did not supersede the Compliance Cost Provisions. As a result, enforcing the Compliance Cost Provisions did not undermine the fundamental purpose of the policy.
Why This Matters
This decision reinforces an important takeaway for homeowners, developers, and businesses alike: insurance policies, including endorsements that add or expand coverage, must be read as a whole. Policyholders must therefore be conscious about how endorsements in their policy, which they may may have negotiated to address specific risks, may be limited by exclusions elsewhere in the policy.
For insurers, this decision underscores the critical importance of drafting clear and precise policy language to avoid ambiguity and minimize disputes. This ruling highlights the need to ensure that endorsements, exclusions, and limitations are consistent and unambiguously defined within the policy as a whole.
If you have questions about how this decision may affect your insurance coverage or risk planning, our team would be pleased to help.
