GRC policies do not cover increased compliance costs: Appeal Court

A Guaranteed Replacement Cost (GRC) home insurance policy does not provide coverage for increased regulatory compliance costs required for the rebuild, the Court of Appeal for Ontario has ruled, thus reversing a lower court decision last October that found otherwise.

“The [home insurance policyholders] may…recover the costs of rebuilding their home, without any deduction for depreciation, even if the amount exceeds the [GRC] policy limit,” the Court of Appeal for Ontario explained in a unanimous decision released last Friday.

“The home is to be built on the same location, with materials of similar quality using current building techniques, but without full coverage for ‘increased costs’ to comply with any law regulating the construction or repair of the home.

“This excludes full coverage for [conservation authority policies] and other regulations and bylaws enacted after the [policyholders’] original dwelling was built that would require fixing deficiencies or making enhancements to any features of the home as it stood before the loss occurred.”

Stephen and Claudette Emond lived in a home on the Ottawa river that flooded in April 2019. Their home, declared a total loss, was located in the catchment area of the Mississippi Valley Conservation Authority (MVCA), which regulates development and activities in or adjacent to rivers, lakes, shorelines, hazardous lands, and wetlands.

The MVCA had changed its regulations for building homes in the area before a flood destroyed the Edmonds’ home. The Edmonds insisted their GRC home insurance policy included the additional costs to rebuild their home to comply with the MVCA’s updated regulations.

Related: GRC policy includes increased compliance costs for rebuild, court rules

Trillium Insurance sold the GRC policy to the Edmonds. It included an exclusion 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.”

A lower court judge found the term “any law” in the policy exclusion referred only to legal statutes. Therefore, it did not apply to MVCA “regulations” affecting the zoning, demolition, repair, or construction of newly constructed buildings.

Trillium appealed the ruling, telling the Appeal Court it would have a wide-reaching and detrimental effect on the insurance industry in Canada.

In a unanimous 3-0 decision, the Appeal Court agreed with Trillium that the phrase “any law” in its GRC policy exclusion included regulations. “The plain meaning of the word ‘law’….includes both legislation and rules of subordinate authority such as bylaws and regulations,” the appellate court ruled.

GRC policy exclusions for “additional costs” required to comply with updated building regulations are intended to prevent insurers from bearing the costs of replacing buildings without the same deficiencies that existed before the regulations were changed, the court found.

“In Roth v. Economical Mutual Insurance Company…the Alberta Court of Appeal considered whether an insurance policy covers costs associated with fixing pre-existing deficiencies discovered as a result of, but not caused by, an insured peril,” the Ontario Court of Appeal wrote. “Extending coverage in such cases would require that the insurer determine in each case whether the property complied with all relevant bylaws….

“Quite apart from the fact that this would be practically impossible in most cases, it would also effectively turn an insurer into a guarantor of construction defects and building code violations.”

Feature image courtesy of iStock.com/Andrii Yalanskyi