How “Guaranteed” is Guaranteed Replacement Cost? The Ontario Superior Court weighs in

December 8, 2022 | Sean McGarry

One of the most important decisions homeowners have to make in purchasing their insurance is whether to seek “Guaranteed Replacement Cost” or “GRC”. GRC clauses act to ensure that a building is completely replaced even if the cost of that replacement exceeds the policy limit, subject to certain conditions.

The guaranteed nature of this coverage was at issue in a recent decision of Emond v. Trillium Mutual Insurance Company.[1] In Emond, the subject policy had GRC but also included an exclusion with a $10,000 sublimit for zoning related expenses. The precise wording of the exclusion was as follows:

“the 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”

The exclusion then allowed for an exception with the applicable sub-limit.

The insured’s home was rendered a total loss by a flood. The home was located on the Ottawa River, so its rebuilding was subject to some substantial compliance costs including under the Conservation Authorities Act.[2]

This gave rise to a potential conflict. If the insured was to have their home rebuilt, had the insurer guaranteed its total cost under GRC or was that guarantee subject to the zoning exclusion/sublimit? The motion judge’s decision was solely on whether the insured or the insurer was responsible for those expenses that exceed the sublimit.

The motion judge focused on the wording on the exclusion and found that its use of the words “any law” only applied to acts of parliament and not to regulations or by-laws. The policy made reference to by-laws and regulations elsewhere in the document and so its failure to include those terms in the exclusion – given general principles to interpret exclusions narrowly – was fatal to its application. “Any law” did not include the zoning restrictions and therefore the exclusion did not apply.

The motion judge also applied the nullification of coverage doctrine. Even if the exclusion had applied it would have been invalidated. In essence it was “inconsistent with the main purpose of insurance coverage”. It ought to have been clear to the insurer that any rebuild would require substantial zoning costs, and thus the expectations of the insured that their property would be replaced was not being met.

Accordingly the insured was successful on both grounds. We understand a notice of appeal has been filed.

Underwriters will find two areas of concern in this decision. First, many policies use the term “any laws” in a broad sense to include the application of governmental rules like by-laws or regulations. This decision suggests that this interpretation of the exclusion could be found to be too broad in other contexts. Second, any exclusions or limits to home policies with GRC clauses might be called into question by the motion judge’s interpretation of the nullification of coverage doctrine. Clear and precise rewording of policy language may be needed to address these risks in standard policies.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Insurance Defence team.

[1] 2022 ONSC 5519

[2] R.S.O. 1990. c. C. 27

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