When an insurance policy is drafted in clear and unequivocal terms, courts must apply it with full force and refrain from neutralizing its exclusions through the rules of contractual interpretation.
In Emond v. Trillium Mutual Insurance Co., the Supreme Court of Canada reaffirmed the framework that governs the interpretation of insurance contracts.
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The insureds claimed compensation following the destruction of their home by flooding. The insurer acknowledged that the loss was covered but refused to pay the additional costs for rebuilding the home in compliance with conservation authority requirements.
The policy set out an exclusion for “increased costs of repair or replacement due to operation of any law regulating the zoning, demolition, repair or construction,” except as provided under certain additional coverages, including up to $10,000 for compliance costs.
The insureds argued, however, that this exclusion did not apply in the presence of a guaranteed rebuilding cost endorsement, which, they claimed, entitled them to recover the total costs of rebuilding their home, even if such costs exceeded the amounts of insurance provided by the policy.
The Supreme Court rejected this argument. It concluded that the endorsement did not have the effect of setting aside the compliance cost exclusion, which remained fully applicable. A holistic reading of the policy reveals no ambiguity: additional costs arising from legal zoning or building requirements are excluded, except to the extent expressly provided.
The guaranteed reconstruction cost endorsement cannot be used to circumvent an exclusion clearly stated in the policy.
Comments
The Emond decision is consistent with case law on the interpretation of insurance contracts. It is a useful reminder that in the absence of genuine ambiguity, there is no reason to turn to the rules of interpretation or to invoke the reasonable expectations of the insured or the contra proferentem rule, which provides that ambiguity must be resolved in a manner favourable to the insured.
It is only when the language of the insurance policy, considered in its entire context, is reasonably capable of diverging meanings that these interpretative tools are applied. In this case, the text was clear, and the exclusion applied.