For most people, reading their insurance policies is the last thing they would do in their spare time. They are long, technical, and often filled with exclusions that make it hard to know what’s actually covered.
The unfortunate reality is that insurance policies are essential for managing risk, and you need to understand how you’re protected before – and not after – a claim is filed.
Fortunately, the Supreme Court of Canada released some helpful guidance on how insurance policies policies should be be drafted and interpreted.
The case and decision
In Emond v. Trillium Mutual Insurance Co., 2026 SCC 3 (CanLII), homeowners lost their house in a flood. Their home insurance policy included a “Guaranteed Rebuilding Cost” endorsement, which they say entitled them to full rebuilding costs of their home.
Here is the first complication — their policy contained an exclusion which excluded additional rebuilding costs that were incurred to comply with government regulations and bylaws.
To make things more confusing – the policy had an exclusion to that exclusion. A third term stated that the insurer actually had to pay $10,000 for rebuilding costs that were needed to comply with government regulations and bylaws.
So – one term says all costs are covered; another term says no costs are covered; and a third term says some costs are covered. How could these three terms possibly fit together?
When they rebuilt their home, the homeowners incurred significant costs for complying with municipal bylaws. They claimed all of them with their insurer. Their insurer said they were not required to pay for all costs. When the homeowners asked a court to sort out the different policies, the insurer took the position that they-re only required to may $10,000 for these costs.
The Supreme Court of Canada sided with the insurer. They found that the policy was amended by the exclusion, which was amended by the “exclusion to the exclusion.” The result was that the insurer must pay the homeowners $10,000, but no more.
Key lessons for interpreting insurance contracts
In coming to this decision, the Court laid out the framework for interpreting insurance policies in three easy steps:
- First, the policyholder must show the loss falls within the basic coverage.
- Then, the insurer can point to any exclusions that might apply.
- If an exclusion is triggered, the policyholder can still argue that an exception restores coverage.
When completing this analysis in its decision, the court left us with five important lessons to keep in mind when interpreting insurance contacts:
Lesson #1: Insurance policies need to be clear
You should not need to be an expert in insurance to understand a policy. The Court confirmed that insurers need to write policies that can be understood by the average person applying for insurance. If an average reasonable person could understand a term in more than one way, the insurer has a problem on its hands.
Lesson #2: Read the whole policy
This case was a perfect example. Policyholders shouldn’t read their policies “term by term.” Unclear terms may become clear when read together with other parts of a policy. Likewise, clear terms may become unclear when read together with other parts of a policy. This is why courts try to interpret unclear terms within the contract as a whole. Policyholders should try to do the same thing.
Lesson #3: Interpretations generally need to be realistic
If a policy can be interpreted in more than one way, a court doesn’t just “flip a coin” to determine what it says. They need to come to an interpretation that would make sense for both parties. The focus for this point is the reasonable expectation of the insurer and the policyholder.
Consider these two extreme examples: Would a single-car auto insurance policyholder pay $10,000 a month for $0 in collision coverage? Would an insurer offer single-car auto insurance policies for $10 a month that have $1,000,000,000 in collision coverage? The answer to both questions is no – and a court should find a “middle ground” interpretation that two reasonable parties would have agreed to.
Lesson #4: A Tie goes to the policyholder
If a court cannot figure out how to interpret a policy in a way that would match the reasonable expectations of the parties, they have a “tiebreaker” rule – the policy will be given the interpretation that is most favorable to the policyholder.
To build off the last example – if a court can’t figure out a “middle ground” on the wording of the policy, They would rule that the insurer did, in fact, offer a single-car auto insurance policy with $1,000,000,000 in collision coverage for $10 a month. If the insurer did a poor job of clearly defining the limits under their own policy, they should be stuck with the consequences.
Lesson #5: An insurer can’t contract out of providing insurance
The Supreme Court reconfirmed that insurer cannot exclude coverage under a policy that would defeat the purpose of the policy in the first place. As an extreme example – an insurer can’t offer a policy for fire damage which buries an exclusion in the fine print for “loss or damage caused by fire.”
The reason for this is common sense – if an insurer is going to charge money for an insurance policy, it needs to take on risk.
Conclusion
While this case involved home insurance, these principles apply to all consumer and commercial policies – including cargo, fleet, and business interruption coverage.
The difference between what you think is covered and what actually is covered can come down to one-or several – terms which are buried in the fine print. The lesson from Emond is that policyholders can’t just stop at an endorsement or exclusion that appears to cover their claim – they need to keep reading.
Insurance may not be the most exciting part of running a business, but understanding it is critical. Before you need to file a claim, take the time to review your policies – ideally, with a broker or specialist. It’s best to understand how or your business is protected before you need to.
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