SCC on Exclusion Clauses and the “Nullification” Doctrine: Emond v. Trillium Mutual Insurance Co., 2026 SCC 3

SCC on Exclusion Clauses and the “Nullification” Doctrine: Emond v. Trillium Mutual Insurance Co., 2026 SCC 3

In Emond v. Trillium Mutual Insurance Co., 2026 SCC 3, the Supreme Court of Canada confirmed that courts must not apply exclusion clauses in a way that would nullify the coverage an insured purchased—even where the exclusion’s text is clear. As the Court put it, even when unambiguous, a provision should not be applied “to the extent it would completely defeat the very objective of having purchased the relevant coverage and render it nugatory.”

At the same time, the Court emphasized that the nullification doctrine is an exceptional constraint engaged only after the contract has been properly interpreted and only in the “extreme and specific scenario” where enforcement would erase the purchased benefit—i.e., where the insurer would be “pocketing a higher premium without any material risk.”

The Three‑Step Framework for Insurance Contract Interpretation—Reaffirmed

The Court reaffirmed the familiar Ledcor sequence and clarified how endorsements fit within that analysis:

1. Give effect to clear language, reading the policy as a whole.
2. If ambiguous, resolve using ordinary rules of contractual interpretation (reasonable expectations, commercial realities, and harmony with similar policies).
3. If ambiguity persists, apply contra proferentem (coverage provisions broadly; exclusions narrowly).

Crucially for endorsements, the Court stressed: “Endorsements do not change the generally advisable order. They are not self‑contained and standalone contracts disconnected from the insurance policy of which they form a part.” Endorsements amend the underlying policy but remain “built on its foundation

Where the Nullification Doctrine Fits

The Court located the nullification doctrine after the policy is interpreted. If clear language, read in context, would erase the purchased coverage, a court may refuse to apply the exclusion to that extent. But because the doctrine is exceptional, it does not prevent exclusions from limiting or reducing coverage; it operates only to stop exclusions from eliminating the benefit for which the insured paid.

Facts and Policy Structure

The Emonds carried a standard‑form homeowners’ policy with a Guaranteed Rebuilding Cost (GRC) endorsement. The base policy excluded “increased costs of repair or replacement due to operation of any law … except as provided under Additional Coverages,” which included a $10,000 allowance for compliance costs. The GRC endorsement amended the Basis of Claim Payment and concluded: “in all other respects, the policy provisions and limits of liability remain unchanged.”

Following a 2019 flood, rebuilding the home required additional work to meet local conservation authority requirements. The dispute was whether those compliance costs were payable under the GRC endorsement notwithstanding the exclusion (beyond the $10,000 additional coverage).

The Majority (Rowe J., Wagner C.J. and Martin, Kasirer, Jamal, O’Bonsawin & Moreau JJ. concurring): Exclusion Applies; No Nullification

Outcome. The appeal was dismissed with costs. The compliance‑cost exclusion applied; only the $10,000 additional coverage for compliance costs was payable.

Key holdings and quotes:

• Endorsement integrates with the policy. Because the GRC endorsement “simply amends the basis of claim payment provision in the base policy by extending the amount payable beyond the amount of insurance,” all policy exclusions continue to apply unless expressly altered. The endorsement’s own closing sentence—“in all other respects, the policy provisions and limits of liability remain unchanged”—confirmed that result.
• “Any law” captures conservation authority requirements. The exclusion’s phrase “increased costs … due to operation of any law” unambiguously covers the added costs required by the conservation authority. The majority added that the words “due to” link the increase to the operation of “any” law, with no temporal limitation.
• How to measure “increased costs.” The “increased costs” are the difference between rebuilding as previously stood (disregarding current legal requirements) and rebuilding as modified to comply with applicable laws; the time the law came into force is irrelevant to this comparative exercise.
• Nullification not triggered. Although nullification can, in principle, constrain an unambiguous exclusion, the bar is high and not met here. The GRC endorsement still delivers its primary benefit—replacement cost above the stated limit—“subject to exclusions.” Reducing value is not the same as erasing the benefit.

The Dissents (Karakatsanis J.; Côté J.): Ambiguity Resolved for the Insured

Two partial dissents would have required broader coverage for the Emonds’ compliance costs, but on different interpretive routes:

Karakatsanis J. (in part): Resolve Ambiguity for the Insured

Justice Karakatsanis agreed that the exclusion applies to the GRC endorsement, but found the phrase “increased costs” ambiguous as to whether it barred costs tied to pre‑existing legal requirements at the time of the last renewal. On ordinary meaning and commercial reality, a reasonable homeowner would read the exclusion as only carving out post‑issuance legal changes. As she explained, a home insurance seeker would not expect an exclusion grouped with future, uncontrollable risks—“war, nuclear incidents, radioactive contamination, pollution, latent defects, animals, and crime”—to vitiate coverage for existing regulatory requirements.

Result proposed: Pay compliance costs associated with laws existing at the last renewal; exclude only costs from laws enacted after that date.

Côté J. (in part): Restore Application Judge’s Declaration—with a Temporal Limit

Justice Côté would have set aside the Court of Appeal and largely restored the application judge, holding that the GRC endorsement’s promise of guaranteed rebuilding cost should be read to cover compliance costs except those resulting from rules or by‑laws not in effect at the time of last renewal. She underscored the consumer‑protection purpose of guaranteed replacement cost, noting that such coverage is meant to provide “peace of mind.”

What Emond Adds to the Law—With Practical Implications

1. Nullification doctrine clarified (and narrowed in application).
   Nullification can limit unambiguous exclusions—but only after faithful interpretation and only where applying the exclusion would erase the purchased benefit. This keeps the doctrine exceptional and consistent with concerns about standard‑form policies and bargaining power.
2. Endorsements ride on the policy chassis.
   Endorsements amend the policy; they do not become parallel contracts. If an endorsement does not expressly displace an exclusion, the exclusion remains operative. Drafting tip: if the business intent is to carve out an exclusion for an endorsement benefit, the policy should say so explicitly (e.g., “Clause X does not apply to Section Y endorsement”).
3. Compliance‑cost exclusions: “any law” means any law—without time limits.
   Absent explicit temporal wording, exclusions for “increased costs … due to operation of any law” capture compliance‑driven cost increases regardless of when the law came into force. If parties want a time‑of‑issuance reference point, the policy must state it.
4. Standard of review and methodology.
   Interpretation of standard‑form policies is a question of law reviewed for correctness; courts seek harmony among policy parts and prefer commercially sensible outcomes.

Key Takeaways (Updated)

• Exclusions cannot nullify coverage—full stop. Even unambiguous exclusions cannot be enforced to the point of erasing the coverage an insured specifically purchased.
• But exclusions can (and routinely do) limit coverage. Limitation is permitted; nullification is not. The bar for nullification is high and triggered only after faithful interpretation.
• Consumer context still matters. The dissents foreground reasonable expectations and commercial realities in the consumer setting, illustrating how ambiguity (even subtle) should break in favour of insureds

Conclusion

Emond recalibrates the balance between endorsements and exclusions by affirming the consumer‑protective nullification doctrine while constraining its use to truly coverage‑erasing outcomes.

For insurers, the message is a drafting one: if an endorsement is meant to sit outside an exclusion, say it expressly.

For policyholders and brokers, the lesson is to read endorsements in the context of the entire policy and to watch for broad “any law” compliance‑cost exclusions that may materially reduce the practical value of a rebuilding guarantee. The decision ensures that insurance contracts are read coherently and commercially, with nullification available only as a last‑resort safeguard against policies made valueless by their own exclusions.