Supreme Court Of Canada Clarifies Nullification Of Coverage Doctrine

On January 30, 2026 the Supreme Court of Canada released its long-awaited decision in Emond v. Trillium Mutual Insurance Co. The Court had to consider the relationship between a homeowner's property policy's Guaranteed Rebuilding Cost ("GRC") endorsement and its by-laws exclusion. Both kinds of clauses are common in homeowner's policies and certain other property insurance products.

As is typical, in Emond, the by-laws exclusion restricted coverage for any additional costs that an insured would incur to comply with any laws regulating zoning, demolition, repair or construction of a building. Thus, where a property policy covers the replacement of a home with one of like kind and quality, the by-law exclusion would exclude any additional costs that have to be incurred so that the property meets current by-laws.

The issue in Emond was whether the GRC endorsement displaced the by-laws exclusion, which would then entitle the insureds to recover the full cost of rebuilding their home in a manner that complied with current regulatory requirements. The Court of Appeal had found that the exclusion applied to limit the coverage under the GRC.

A majority of the Court dismissed the insureds' appeal, finding that the GRC endorsement was subject to the by-laws exclusion. This meant that the insureds only had access to $10,000 of coverage for additional compliance costs, which was far short of what they needed to rebuild their home in accordance with current by-laws.

The Court also clarified how endorsements to insurance policies are to be interpreted, as well as the nullification of coverage doctrine.

Facts

Stephen and Claudette Emond (the "Emonds") own a home along the Ottawa River within the jurisdiction of a local conservation authority. In September 2018, Trillium Mutual Insurance Company ("Trillium") issued a policy to the Emonds that insured their home against direct physical loss or damage, subject to various terms, including a by-laws exclusion.

In April 2019, the Emonds' home was destroyed by flooding. Trillium acknowledged coverage, but only for the cost to rebuild a home of like kind and quality to the Emonds' prior home, plus $10,000 for any costs to comply with current by-laws. However, the Emonds' evidence was that the additional costs to comply with by-laws would be significant, and should be covered under the policy's GRC endorsement. This endorsement provided for recovery of full replacement costs, even where those costs exceeded the policy limits, but stated that all other policy provisions continued to apply.

The Emonds further asserted that applying the by-laws exclusion to the GRC endorsement would deprive that endorsement of any meaningful effect. In other words, that interpretation would nullify the GRC coverage purchased.

Trillium relied on the by-law exclusion, which excluded coverage for "increased costs of repair or replacement due to operation of any law regulating the zoning, demolition, repair or construction of buildings and their related services", subject to certain exceptions. Among these exceptions was the Building By-law and Code Compliance Coverage ("BBCC") provision which provided limited coverage of up to $10,000 for increased compliance costs.

Majority Decision

Writing for the majority, Justice Rowe began by restating the established framework for interpreting insurance contracts, set out in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. Specifically, he confirmed that the burden is initially on the insured to establish that a loss falls within a policy's initial grant of coverage. If that burden is met, the insurer then bears the burden of demonstrating that an exclusion applies. If an exclusion has been triggered, the insured must then show that an exception to the exclusion applies, to bring a claim back into coverage. He added that despite this framework, a court should interpret the policy as a whole even when trying to understand the meaning of an exception to an exclusion.

Applying these principles, Justice Rowe first concluded that the by-laws exclusion was unambiguous. The reference to "any law" encompassed statutes, regulations, and even rules enacted by subordinate authorities, such as conservation authorities. Thus, additional compliance costs were excluded from coverage, subject to an exception for $10,000 in such costs, as discussed above.

Justice Rowe rejected the insureds' argument that the by-laws exclusion only barred coverage for costs incurred to comply with building regulations (etc.) enacted after the policy (and any subsequent renewal) was issued. The exclusionary language used imposed no temporal dimension.

Justice Rowe held that the GRC endorsement did not displace the by-laws exclusion. Although the title of the endorsement was "Guaranteed Replacement Cost", the use of the word "guarantee" was not what mattered most. A court must consider all the words used in the endorsement (and in the rest of the policy). That included the text of the endorsement stating that all other policy provisions remained unchanged. Therefore, the by-laws exclusion (and the CCEE) continued to apply, capping coverage for additional compliance costs at $10,000.

Although it was unnecessary for him to do so, in the alternative, Justice Rowe stated that if he had found the words "increased costs" in the exclusion were ambiguous, he would have found for Trillium. This is because in Justice Rowe's view, neither the Emonds nor Trillium would reasonably expect Trillium to agree to unlimited coverage for additional compliance costs. Justice Rowe asserted that before issuing a policy, it would be too onerous for an insurer to assess its exposure to such costs, so no insurer would agree to sell such coverage.

Finally, Justice Rowe rejected the Emonds' reliance on the nullification of coverage doctrine. He explained that nullification is a narrow doctrine, engaged only in exceptional circumstances where the practical effect of a contractual provision is to render illusory specific coverage that has been purchased. For instance, if an insurer charges an enhanced premium for a particular kind of additional coverage, it cannot then add a separate exclusion barring all such coverage. Importantly, Justice Rowe confirmed that an insured can rely on the nullification doctrine, even if the policy language is otherwise clear.

In Emond, applying the by-law exclusion did not render the GRC endorsement meaningless. The endorsement continued to provide substantial value by permitting recovery of replacement costs beyond the policy limit and without deduction for depreciation. While the exclusion reduced the overall amount payable, it did not nullify the principal benefit of the endorsement.

Dissent of Karakatsanis

The sole ground on which Justice Karakatsanis (and Justice Cote) dissented concerned Justice Rowe's obiter remarks regarding the reasonable expectation of parties had he found that the words "increased costs" were ambiguous.

For Justice Karakatsanis, the issue of reasonable expectations was not obiter, because she concluded that the by-laws exclusion was ambiguous as to whether "increased costs" implied a temporal dimension. Having found an ambiguity, Justice Karakatsanis found that the parties' reasonable expectations were that the insurer would pay the costs of complying with any laws existing at the time the insurance contract was put in place (i.e., issued or last renewed).

Justice Karakatsanis disagreed with Justice Rowe's claim that it would be too onerous for an insurer to predict its exposure to compliance costs. Unlike other kinds of excluded risks (e.g., war, nuclear incidents), the requirements to comply with by-laws in effect at the time a policy is put in place will be precisely knowable by insurers, who are generally sophisticated when it comes to the requirements, costs (etc.) of construction. By contrast, especially in the homeowners' context, insureds are typically much less sophisticated. They would be much less likely to expect that their insurance policy would not cover the costs to rebuild their home to comply with regulatory requirements existing when the policy was put in place.

Justice Karakatsanis therefore concluded that the by-laws exclusion did not limit Trillium's responsibility to cover all costs of complying with regulatory requirements in effect when the policy was placed.

Dissent of Cote

Similarly to Justice Karakatsanis, Justice Cote held that the policy covered the full costs of complying with regulatory requirements in effect when the policy was placed.

However, Justice Cote arrived at that result by also focusing on the GRC endorsement. She found that the words "In all other respects, the policy provisions and limits of liability remain unchanged" could reasonably mean that the GRC endorsement takes precedence and only those parts of the policy not amended or displaced by the GRC continue to apply. Moreover, she found that the word "guaranteed" in the GRC "covers the field with respect to the cost of rebuilding, guaranteeing it and displacing exclusions that would otherwise impinge upon that broad guarantee." This meaning was not contradicted by the language in the GRC. In addition, the GRC stated that the insurer will pay to repair or replace the building "using current building techniques", which Justice Cote interpreted to mean that they must comply with applicable laws. She also noted that most of the exclusions in section 4 of the policy (where the GRC endorsement was found) essentially duplicated those found in section 1 of the policy (the base policy), but the by-law exclusion was only found in section 1. She found that it was reasonable to understand that "the section 4 list of exclusions that is specific to endorsements would trump the lists in section 1". Thus, she found that the policy was ambiguous.

The parties' reasonable expectations justified a result in the Emonds' favour. The evidence showed that the Emonds had purchased a "top of the line" policy. The parties would therefore have expected that the GRC endorsement would cover all construction costs, including additional compliance costs, absent clearly applicable exclusions. Justice Cote found that because the GRC endorsement's list of exclusions failed to list the by-laws exclusion, that exclusion did not clearly apply. Moreover, the GRC endorsement's general reference to other policy terms continuing to apply was not clear enough to exclude by-law costs.

Justice Cote emphasized that guaranteed replacement cost insurance is intended to provide insureds with peace of mind and full replacement following loss. In her view, insurers bear the responsibility for drafting clear, intelligible policies and ensuring that coverage limitations are transparently communicated, particularly considering the unequal bargaining power inherent in insurance contracts.

Conclusion

Emond is a detailed decision by the SCC. The Court had not addressed coverage issues in depth for many years. It is an important read for insureds and brokers alike, as the terms used in Trillium's policy are common in the homeowner's market. Justice Rowe's interpretation of Trillium's by-laws exclusion confirms that in similar policies, coverage for the common and significant risk of additional compliance costs will be excluded or severely limited. This poses an exposure for brokers to potential negligence claims, unless they diligently explain to their insureds the risks associated with these kinds of policy provisions and identify any broader coverage that may be available for purchase.

In many respects, Justice Rowe's decision is well-reasoned. For instance, he properly interpreted the policy's co-insurance clause, rejecting Trillium's incorrect interpretation. On nullification, Justice Rowe rejected the arguments of Trillium and several insurer association interveners, who had argued that this doctrine can only apply if the policy language is ambiguous. As Justice Rowe properly noted, if that argument was correct, the nullification doctrine would lose almost all its force. The entire purpose of that doctrine is to avoid a type of bait-and-switch: A policy that includes a particular coverage but then adds a separate exclusion that purports to exclude the insurer's responsibility in every feasible circumstance that the coverage could be relied on. Even where the exclusion is clear, this mischief must be addressed.

However, the differences in opinion between the majority and the dissents illustrate the kinds of problems that result when a court opines on the parties' reasonable expectations, absent clear evidence led on this issue. The majority suggests that no insurer would generally be able to predict the cost of insuring all additional compliance costs, but the dissents state that, generally, this risk can be predicted and is part of the bargain. The latter position accords with reality. However, this still does not lead to the conclusion that in all cases, the parties reasonably expect that code upgrade costs are (or are not) intended to be covered.

In Cabell v. The Personal Insurance, a decision followed in Emond, the Ontario Court of Appeal explained that a judge can decide the reasonable expectations of the parties absent industry evidence. However, that does not mean that proceeding without evidence, as appears to have happened in Emond, is advisable. In our view, one cannot make broad generalizations about reasonable expectations of this kind, with respect to underwriting intent. The reality is that different insurers offer vastly different scopes of coverage for by-law/code compliance. Some insurers are unwilling to insure additional compliance costs beyond a specific limit, and they communicate this to insureds (and their brokers) by way of a clear exclusions. Other insurers choose to provide full replacement cost coverage including all additional compliance costs.

It is unclear which group Trillium would fall into, although it appears they intended to provide broader coverage. Justice Cote noted that: "Trillium acknowledged that the valuation of the property at the time of securing insurance coverage was based upon the costs per square foot based upon current building standards". In the absence of clear evidence, it would have been better for the majority to avoid addressing this issue, given that it was obiter dicta.

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