On November 3, 2023, the Ontario Court of Appeal released its decision in Trillium Mutual Insurance Company v. Emond, 2023 ONCA 729, allowing an appeal from a lower court declaration that an insurer was required to fully cover the replacement costs of its insureds’ flooded property, inclusive of any additional costs to comply with local conservation authority regulations and municipal by-laws which came into effect after the original construction of the premises.
The insureds lived in a home along the Ottawa River, which was under the jurisdiction of the Mississippi Valley Conservation Authority (“MVCA”).
The insureds, the Emonds, purchased a standard form homeowners insurance policy (the “Policy”) from the defendant insurer, Trillium Mutual Insurance Company (“Trillium”). On April 29, 2019, the insureds’ home was severely damaged by a flood, and the home was deemed a total loss.
Trillium acknowledged coverage for the loss under the Policy, but there was a dispute as to what, if any, costs of “replacement” were excluded from coverage under the policy.
Relevant Policy Provisions:
This action concerned the interpretation of three portions of the Policy:
- a Guaranteed Rebuilding Cost Coverage endorsement to pay for the insured to replace a dwelling with materials of similar quality using current building techniques (the “GRC”);
- an exclusion for “increased costs of repair or replacement due to the operation of any law regulating the zoning, demolition, repair, or construction of buildings” (the “Exclusion”);
- a Building By-Law and Code Compliance Coverage endorsement (the “BBCC”) that provides for payment of up to $10,000 for increased costs of demolition, construction, or repair to comply with any law regulating the zoning, demolition, repair, or construction.
History of the Litigation:
After the flood, Trillium took the position that the GRC applied to replace their home with materials of similar quality using current building techniques, but that the additional costs to be incurred to comply with the conservation authority and local bylaws and regulations enacted after the original construction of the house were excluded from coverage by the Exclusion.
However, Trillium acknowledged that notwithstanding the application of the Exclusion it was required and agreed to pay the additional $10,000 to cover such costs under the BBCC endorsement. Trillium sought and received reconstruction estimates in the amount of $553,000 to $613,000.
The insureds rejected these estimates and took the position that since the reconstruction of their home required compliance with the conservation authority, municipal and other building code regulations, that Trillium was required to fully compensate for these increased costs. In their view, these additional compliance costs could have amounted to $700,000 above the cost of replacing the home. The subsequent reconstruction estimates procured by the insureds were between $925,0000 and $1,253,000.
As the parties continued to dispute the estimates and valuation of the replacement costs, the insureds brought an application for a declaration that the GRC entitled them to recover the total costs of rebuilding their home, without any limitations of coverage for compliance costs.
It is important to note that that the parties sought only an interpretation of the provisions of the Policy. Neither party sought quantification of the loss and neither party provided evidence to enable the court to determine the exact compliance costs.
The Application Judge’s Decision:
The application judge accepted the insureds’ position that the GRC was intended to guarantee the cost of the complete rebuild, and rejected Trillum’s position that the GRC did not include coverage for increased costs to comply with “any law”.
Relying on the authority of Wigle v. Allstate Insurance Co. of Canada, 1984 CanLII 45 (ONCA), the application judge held that limitations on endorsements such as the GRC that are not clearly apparent should be set out in the endorsement itself. Since the GRC did not purport to limit compliance costs, in her view, the GRC covered all of these costs.
Furthermore, the application judge found that the Exclusion did not apply to the fact scenario. She found that the term “law” in the Exclusion was restricted to statutes, and did not include rules, regulations, or bylaws such as those of the conservation authority.
Finally, the application judge found that on Trillium’s interpretation of the Policy, almost all of the compliance costs would be excluded from the coverage. Given that Trillium knew the Emonds’ home was not new, that it was located within the MVCA’s jurisdiction and that the plaintiffs were required to comply with the MVCA’s regulations and other bylaws, to grant Trillium’s interpretation would “render nugatory the coverage for the most obvious risks” for which the policy was issued.
On this basis, the insureds were entitled to recover the entire cost of rebuilding their home without any limitation of coverage resulting from the operation of any rule, regulation, or bylaw.
The Ontario Court of Appeal began their decision by reviewing some of the basic principles applicable to the interpretation of contracts of insurance, including the general principles and objectives of replacement cost insurance. Citing the decision of Laskin J.A. in Carter v. Intact Insurance Company, 2016 ONCA 917, the Court noted that:
“Replacement cost insurance, in effect, insures depreciation: the difference between replacement cost and actual cash value. So, under replacement cost insurance, if insureds do indeed repair or replace their damaged property, they are entitled to recover from their insurer the full cost of the repairs or the replacement. They can replace “old” with “new”. In that sense, even though replacement cost insurance makes insureds better off and violates the indemnity principle, it is justifiable, because without it, many property owners would be unable to cover the shortfall caused by the depreciation of their damaged or destroyed property.”
The ONCA then examined the case law surrounding what constitutes “increased costs,” as used in the Exclusion. The Court of Appeal found that “increased costs” are those that exceed the amount payable by the insurer to replace the dwelling as it was. This was found to necessarily include expenses caused by a “law” enacted after the dwelling was originally built that requires features of the house to be enhanced or that they pertain to correcting deficiencies in the building as it stood at the time of the loss.
While no Ontario case law was cited on this point, the Court of Appeal cited with approval the decision of the British Columbia Supreme Court in Fabian v. BCAA Insurance Corporation, 2022 BCSC 552. In that case, “increased costs” excluded, by a similar exclusion to the one at present, the costs to add a sprinkler system and other items that were not part of the home before it was destroyed, but were then required by a bylaw.
The Court accordingly held that the application judge had erred in her narrow interpretation of the words “any law” to only statutes, and not bylaws or regulations. The Court found that the common understanding of the word “law” includes both legislation and rules of subordinate authority such as bylaws and regulations. Similarly, the inclusion of the word “any” was found to be “all-embracing and without limitation or qualification”.
After reviewing the MCVA regulation policies the Court was satisfied that the regulations provided a detailed regulatory scheme that must be followed within the conservation authority’s jurisdiction. They were not optional, and the plaintiffs were required to comply with them when rebuilding their home.
On the basis of the above, the Court found that the Exclusion applied to the increased costs to demolish and replace the home to the extent they were due to the operation of “any law,” including the MVCA regulations.
Therefore, the Court of Appeal disagreed with the conclusion that the Exclusion did not limit the Emonds’ coverage under the Policy.
The Court distinguished the Wigle decision relied upon by the application judge. In Wigle, the insured was injured in a motor vehicle accident by an unidentified automobile. The insured had purchased a standard automobile insurance policy and an additional underinsured motorist endorsement. The insurer attempted to deny coverage under the endorsement on the ground that there was no indemnification where an injury resulted from an unidentified automobile. Furthermore, there was no exclusion clause elsewhere in the policy that purported to exclude injuries from unidentified automobiles from coverage. 
In contrast, the Policy in this decision set out a clear Exclusion for the increased costs associated with the operation of any law, except as to the additional coverage provided in the BBCC. Here the exclusion for costs associated with legal compliance was explicit in the Policy and clearly applicable to the GRC.
The Court also rejected the Emonds’ submission that because the BBCC was not included on the Declaration Page, it did not apply to this Policy. Finally, the ONCA rejected the submission that the application of the Exclusion would result in the nullification of coverage. While the operation of the Exclusion may have denied the insureds some funds, it did not render nugatory coverage for the most obvious risks for which the endorsement was issued, which were depreciation and inflation and not bylaw compliance costs.
The Ontario Court of Appeal Panel, in a unanimous decision, overturned the application judge’s decision. The Panel held that the GRC, the Exclusion and the BBCC were all part of the Policy of insurance, the terms of which should be read as a whole.
The Court also found that that the Exclusion excluded coverage for increased costs “over and above the cost to replace the dwelling as it was using current building techniques” to comply with “any law”. “Any law” was not restricted to only statutes, but also applied to any bylaws or regulations such as the MVCA regulations in issue here.
Furthermore, the ONCA found that notwithstanding the application of the Exclusion, the BBCC provided up to $10,000 to pay for those excluded costs.
The Court of Appeal noted that the parties did not seek quantification of the loss and no quantification by the court was possible as the parties did not provide information as to the requirements of the MVCA and other bylaws and the associated costs of compliance with these regulations. The issue of quantification was remitted back down for determination.
Conclusion and Takeaways:
At its broadest, this decision affirmed the position of the case law that endorsements, including exclusions from or limitations on coverage, must be read together with the policy of insurance as a whole.
More narrowly, this decision provides helpful clarification on the meaning of “increased costs” and “any laws” within the context of a standard form homeowners insurance contract.
“Increased costs” are those that exceed the amount payable by the insurer to replace the dwelling as it was. This implies any costs resulting from laws enacted after the dwelling was originally built that require features to be enhanced or correcting deficiencies in the building as it stood at the time of loss, are not compensable as replacement costs.
Furthermore, the ONCA rejected an interpretation of the term “any laws” that was restricted to only statutes, and found that this all-encompassing term applied to all legalisation and any other subordinate authority such as municipal bylaws or regulations.
 Trillium Mutual Insurance Company v. Emond, 2023 ONCA 729 (CanLII), at para 5.
 Ibid, at para 27.
 Ibid, at para 28.
 Ibid, at para 30.
 Ibid, at para 62.
 Ibid, at paras 66-67.
 Ibid, at para 78.
 Ibid, at para 81.
 Ibid, para 89.