Endorsements vs. exclusions: New guidance from Canada’s top Court for insurers and homeowners on interpreting insurance policies

In the recent decision of Emond v. Trillium Mutual Insurance Co., 2026 SCC 3, the Supreme Court of Canada provided important guidance for homeowners and insurers on interpreting home insurance policies, especially with respect to endorsements. Insurance endorsements are often called “riders,” and change the coverage available under an insurance policy, often to add additional coverage.

Background

The Emonds’ house was severely damaged in a flood and was deemed a total loss. The house was located within the jurisdiction of a conservation authority, which has the power to regulate development activities within that area. As a result of the conservation authority’s requirements, the Emonds were required to carry out additional work before they could rebuild their home.

The insureds held a comprehensive home insurance policy with Trillium Mutual Insurance Co., which acknowledged coverage for the loss, but a dispute arose between the parties regarding the costs of rebuilding the house. The policy provided that the house was insured against direct physical loss or damage subject to a number of exclusions. One of the exclusions provided that Trillium did not cover “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,” except as provided under an additional coverages section of the policy. One of the additional coverages stated that Trillium would pay an additional amount up to $10,000 for the increased cost to comply with zoning and construction-related laws.

The policy also included a guaranteed rebuilding cost endorsement which amended the “basis of claim payment” provision in the policy. The endorsement stipulated that Trillium would pay for insured loss or damage if the insureds repaired or replaced the damage or destroyed house on the same location with materials of similar quality using current building techniques. The endorsement concluded by stating “in all other respects, the policy provisions and limits of liability remain unchanged.” The section of the policy in which the endorsement was found contained many of the same exclusions as in the policy itself but did not include the increased costs exclusion.

The insureds brought an application for a declaration that the endorsement entitled them to coverage  for the total costs of rebuilding their house, and that the increased costs exclusion did not apply. In other words, the insureds claimed that Trillium was obligated to cover the increased costs of rebuilding which were necessary to comply with the conservation authority’s requirements. The insureds were successful before the application judge, but that decision was then overturned by the Ontario Court of Appeal.

Interpreting insurance policies and endorsements

The Court confirmed the following “generally advisable” order for interpreting insurance contracts as set out in its previous decisions:

1. First, the insured has the onus of establishing that the damage or loss claimed falls within their policy
2. The onus then shifts to the insurer to establish that an exclusion to coverage applies
3. If the insurer is successful in demonstrating that an exclusion applies, the onus shifts back to the insured to prove that an exception to the exclusion applies

The Court made clear that endorsements do not change this order. While they vary or amend the underlying policy, endorsements are not standalone contracts – they are built on the foundation of the policy. In other words, portions of the endorsement that affect coverage are considered at the first stage, portions that create exclusions are considered second, and any exceptions to the exclusions are considered last.

The Court also affirmed its earlier decisions regarding ambiguous and unambiguous language in insurance policies. Where the language of the policy is unambiguous, that clear language should be given effect, reading the policy as a whole. Other interpretive tools should only be considered where the language in the policy is ambiguous, which will be the case where there is more than one reasonable but differing interpretation of the policy.

Such tools include the reasonable expectations of the parties and interpretations of similar insurance policies. If an ambiguity still remains, then the court must resort to the contra proferentem rule and resolve the ambiguity in a manner favourable to the insured. The Court clarified that in the context of insurance policies, contra proferentem means that interpretations which result in broader coverage, narrower exclusions and broader exceptions are to be favoured, in recognition of the “unequal bargaining power at work in insurance contracts.” This, the Court noted, is because the insurer is the drafter of the contractual language and bears responsibility for residual ambiguity.

The Court also examined the “nullification of coverage doctrine,” noting that Ontario courts have refused to apply exclusion clauses in insurance policies where doing so would essentially nullify the coverage provided by the policy and defeat the purpose for having purchased it. This rule applies even where the language in the policy is unambiguous.

No ambiguity, no coverage for increased costs

The Court applied these principles to the Emonds’ policy. There was no dispute that the total loss of their home as a result of the flood fell within the policy’s coverage, so Trillium had the burden of showing that the increased costs exclusion applied such that it did not have to indemnify the Emonds for the costs of complying with the conservation authority’s requirements.

The Court held that when the policy was read as a whole, it was clear that the increased costs exclusion applied despite the endorsement. The purpose of the endorsement was to extend the amount of coverage payable to the Emonds beyond the amount of insurance they had purchased, but the increased costs exclusion in the policy continued to apply.  Critically, the endorsement specifically provided that “in all other respects, the policy provisions and limits of liability remained unchanged.”

It was also clear to the Court that the conservation authority’s requirements were captured by the exclusion, and that the increased costs of compliance with those requirements beyond the $10,000 additional coverage were excluded from coverage under the policy. While the Emonds argued that the exclusion should not be applied based on the nullification of coverage doctrine, the Court held that the exclusion did not nullify the benefit provided by the endorsement. Even though the compliance costs were not covered above the $10,000 additional coverage, the Emonds would continue to enjoy the benefit of the endorsement, as it still allowed them to recover amounts beyond the policy limits.

Accordingly, Trillium was not required to indemnify the Emonds for the increased costs of rebuilding their home, with the exception of the $10,000 in additional coverage.

Key takeaways

This decision confirms key principles for interpreting insurance contracts in Canada. It makes clear that endorsements operate within an underlying insurance policy and are to be interpreted within the policy as a whole.

The case also clarifies the purpose and extent of guaranteed rebuilding cost coverage – while it may extend the amount of coverage that an insurer must provide to an insured who is rebuilding a home, it will not require an insurer to provide coverage in the face of a clear exclusion in the underlying policy.

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