Regulatory Requirements and Rebuilding Costs: The SCC’s Definitive Word in Emond v. Trillium

The Supreme Court of Canada has released its decision in Emond v. Trillium Mutual Insurance Co., 2026 SCC 3, a case addressing whether a homeowner’s insurance policy must cover additional costs incurred for complying with regulatory requirements when reconstructing a property after a total loss. The ruling provides important guidance on interpreting standard‑form insurance contracts, the relationship between base policies and endorsements, and the proper application of the nullification of coverage doctrine.

Background

Stephen and Claudette Emond’s home on the Ottawa River was entirely destroyed by flooding in April 2019. Since the property was within the jurisdiction of the Mississippi Valley Conservation Authority (“MVCA”), any rebuilding had to comply with the MVCA’s regulatory framework, including permitting and construction requirements.

The Emonds’ standard-form insurance policy with Trillium Mutual Insurance Company (“Trillium”) contained the following key provisions:

1. an optional Guaranteed Rebuilding Cost Coverage endorsement, which required the insurer to pay the cost of replacing the dwelling with materials of similar quality using current building techniques (“GRC endorsement”);

2. an exclusion in the base policy for “increased costs” arising from the operation of “any law regulating the zoning, demolition, repair or construction of buildings” (“compliance cost exclusion”); and,

3. a Building By‑law & Code Compliance exception, which provided limited coverage of up to $10,000 for such compliance costs (“BBCC exception”).

After the loss, Trillium accepted coverage for rebuilding but denied coverage for the additional costs to comply with the MVCA’s requirements on the basis of the compliance cost exclusion. The Emonds estimated that compliance costs could increase the cost of rebuilding the home by up to $700,000.

Lower Court Decisions

The application judge concluded that the Emonds were entitled to recover the full cost of rebuilding, including all compliance costs. The judge accepted the argument that the word “law” in the exclusion referred only to statutes, not to policies or regulations issued by bodies such as the MVCA. The judge also found that because the GRC endorsement did not reproduce the compliance cost exclusion found in the base policy, it did not apply to the GRC endorsement. Finally, the judge held that denying compliance costs would improperly nullify the primary benefit of the GRC endorsement.

We previously wrote an article about the Court of Appeal’s decision, which can be found here: Clarifying Coverage for Regulatory Compliance Costs in Insurance Claims for Property Loss caused by Environmental Hazards.

In summary, the Court of Appeal disagreed with the application judge. It found that compliance costs were not payable by Trillium, except for the $10,000 provided by the BBCC exception. The court held that the compliance cost exclusion for “any law” captured statutes, regulations, bylaws, and subordinate rules, such as the MVCA’s policies. It also concluded that “increased costs” referred to the difference between rebuilding the home as it previously stood and rebuilding it in compliance with current legal requirements. The court found that the GRC endorsement was never intended to override exclusions in the base policy, particularly since it expressly stated that all other policy provisions remained unchanged. Because the core benefit of the GRC endorsement was to remove policy limits, not to guarantee full compliance‑inclusive coverage, the compliance cost exclusion did not nullify the GRC endorsement.

Supreme Court of Canada Decision

Majority Reasons

Justice Rowe, writing for a 7–2 majority, affirmed the Court of Appeal’s decision. The majority emphasized that standard‑form insurance contracts must be interpreted in accordance with the framework established in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, and Sabean v. Portage La Prairie Mutual Insurance Co., 2017 SCC 7. This framework proceeds in three stages: first, where the language of the insurance contract is unambiguous, effect should be given to that clear language, reading the contract as a whole; second, if ambiguity exists, courts apply general rules of contractual interpretation, including whether the interpretation is consistent with the reasonable expectations of the parties and the commercial atmosphere; and, third, if ambiguity persists, the court must apply the contra proferentem rule and resolve the ambiguity in favour of the insured.

The majority held that the compliance cost exclusion in the base policy continued to apply to the GRC endorsement because the endorsement merely amended the rebuilding cost calculation and expressly preserved all other policy provisions.

The court rejected the argument that the term “guaranteed” in the GRC endorsement's heading required the insurer to pay all rebuilding costs, regardless of exclusions. Instead, the term referred only to the absence of a policy limit. The majority also held that the reference to “current building techniques” did not transform the GRC endorsement into a promise to cover all compliance‑related expenditures.

Finally, the majority concluded that the exclusion did not nullify the GRC endorsement. Although the exclusion would reduce the total amount recoverable, it did not undermine the central benefit of guaranteed replacement cost coverage, which is the ability to recover amounts that exceed the stated policy limit.

Dissenting Reasons (Karakatsanis J.)

Justice Karakatsanis would have allowed the appeal in part. Justice Karakatsanis interpreted the phrase “increased costs” as ambiguous and found that the reasonable expectations of an average consumer would favour an interpretation that preserved coverage for compliance costs tied to laws already in force when the policy was last renewed. In Justice Karakatsanis’s view, the exclusion should apply only to compliance costs arising from legal changes that occurred after the renewal date and not to regulatory requirements that the insurer could have considered when underwriting the policy.

Dissenting Reasons (Côté J.)

Justice Côté also would have allowed the appeal in part. Justice Côté found significant structural and textual ambiguities in the policy, particularly because the GRC endorsement did not reproduce the compliance cost exclusion and because Section 4 of the policy omitted that exclusion despite reproducing many others. Justice Côté concluded that the heading “Guaranteed Rebuilding Cost Coverage” would reasonably be understood by policyholders as a promise of comprehensive rebuilding coverage. In Justice Côté’s view, the Emonds’ interpretation better reflected both the reasonable expectations of the parties and the commercial reality that Trillium had underwritten a property known to be subject to MVCA requirements.

Takeaways for Property Owners

Property owners, especially those with homes in high‑risk or heavily regulated areas, should take time to understand how compliance cost exclusions can impact their recovery after a loss. Even if a policy includes a guaranteed or replacement‑cost endorsement, that endorsement may still be subject to exclusions in the base policy unless it explicitly states otherwise. Homeowners should review their policies yearly, seek clarification from brokers about how endorsements and exclusions interact, and evaluate whether their property’s regulatory environment warrants additional or specialized coverage. Owners of older homes should also recognize that compliance‑related expenses could be significant where building standards have changed since the original construction.

Takeaways for Insurers

Insurers should draft their standard‑form policies and endorsements using clear, consistent language that an average person can understand. If the intention is for base‑policy exclusions to also apply to endorsements, this should be explicitly stated in each endorsement to avoid confusion. Insurers should also be aware that headings and marketing terms like “guaranteed” might create expectations that courts will consider when determining ambiguity. When ambiguity arises, courts will follow the contra proferentem rule and favour interpretations that benefit the policyholder. Clear drafting, careful underwriting, and transparent communication with insureds can help prevent disputes of this nature, especially when properties are subject to multiple regulatory regimes that could impact rebuilding costs.