Canada: Clarifying Coverage For Regulatory Compliance Costs In Insurance Claims For Property Loss Caused By Environmental Hazards

Also authored by: Minki Jeong

In a recent Court of Appeal for Ontario decision in Trillium Insurance Company v. Emond, 2023 ONCA 729 ("Emond"), Justice Thorburn provided useful guidance on the interpretation and application of coverages and exclusions in a residential property insurance policy relating to reconstruction and regulatory compliance costs, following a property loss caused by flooding within a regulated floodplain hazard.

BACKGROUND

On April 29, 2019, a flood destroyed the respondents' home located within a regulated area in the geographic jurisdiction of the Mississippi Valley Conservation Authority ("MVCA"). As a result of the respondents' property being located in such a regulated area, any "development" as defined in section 28 of the Conservation Authorities Act, R.S.O. 1990, c. C27 was subject to permitting requirements set out in the MVCA's regulatory regime and policies. Prior to the home's destruction, the respondents had purchased a residential homeowner's insurance policy from the appellant insurer. The policy included:

1. a Guaranteed Rebuilding Cost Coverage endorsement to pay the insured to replace a dwelling with materials of similar quality using current building techniques ("GRC");
2. 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 ("Exclusion Clause"); and
3. a Building By-Law Code Compliance Coverage endorsement ("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.

The insurer did not contest coverage for the loss under the GRC, but contested that it was responsible for covering costs of obtaining a development approval permit from MVCA, among other "compliance costs," including costs of surveys and engineering reports, which collectively would increase rebuilding costs by a significant margin.

The homeowners brought an application in the Superior Court of Justice seeking an interpretation of the policy and declarations that their entire rebuilding cost, including compliance costs, were covered under the policy.

THE APPLICATION JUDGE'S DECISION

The application judge concluded that the Exclusion Clause did not apply to the MVCA regulation policies. She found that the term "law" in the Exclusion Clause was restricted to statutes and did not include rules, regulations, by-laws, or ordinances, such as the MVCA regulatory regime. She held that the insurer did not discharge its onus to prove the Exclusion applied. The application judge concluded that the respondents were entitled to recover the cost of rebuilding their home on the same location and with materials of similar quality using current building techniques without any limitation of coverage resulting from the operation of any rule, regulation, by-law, or ordinance.

COURT OF APPEAL FOR ONTARIO'S DECISION

The insurer appealed. It argued, among other things, (i) the GRC is part of the Policy of insurance and the Policy should be read as a whole with all of its terms, including the Exclusion; (ii) the words "any law" in the Exclusion include subordinate legislation such as by-laws and regulations; (iii) the BBCC confirms this interpretation, specifically providing that only up to $10,000 will be paid by the insurer to comply with laws, by-laws, and regulations.

Justice Thorburn held that the policy provides for coverage in the event of property loss due to flooding. She then found that the term "any law" in the Exclusion Clause was not limited to statutes, referring to both dictionary definitions and numerous judicial decisions, holding: "the term 'law' includes any rules of conduct laid down by a legislative authority by way of statute, regulation, ordinance, by-law or some other form of prescribed method" (para. 66). Justice Thorburn also noted the qualifier "any" supported an expansive interpretation of the term "law."

Looking at the MVCA regulatory regime and policies, Justice Thorburn held that "...they are a de facto legislative scheme that are captured by the term 'any law'" (para. 72). Accordingly, the Exclusion for compliance costs was applicable to the GRC coverage and excluded from coverage costs related to compliance with the MVCA regulatory regime and policies.

As the BBCC operated as an exception to the Exclusion Clause, Justice Thorburn held that notwithstanding the Exclusion Clause, the BBCC provided for coverage up to $10,000 to pay for costs of compliance with the MVCA regulatory regime and policies, which the insurer had conceded.

TAKEAWAY FOR PROPERTY OWNERS

Owners of property located within an area regulated by a local conservation authority (such as a floodplain, erosion hazard limit, or wetland buffer zone) should take care to ensure they understand what costs are covered or excluded from their home insurance policies in the event of a hazard damaging the property and requiring repair or reconstruction. Property owners should be aware that repair or reconstruction within regulated areas will likely require a development approval permit from the conservation authority, which may require a variety of expert studies or reports in order to obtain. Property owners would be prudent to make inquiries of their insurer or insurance broker to determine whether coverage for these compliance costs is included or excluded, or if an extension of coverage for these compliance costs could be added in exchange for an increased premium.

TAKEAWAY FOR INSURERS

To avoid ambiguity and the costs of coverage disputes, insurers might consider reviewing the terms of any existing standard residential insurance policy to ensure coverages and exclusions relating to reconstruction and regulatory compliance costs are clear on the plain wording of the policy. While this decision found that the term "any law" in the context of this policy is not limited to statutes, it may be prudent to specify or clarify this meaning in any similar coverage provisions or exclusion clauses.