Do your clients understand bylaw coverage gaps?

A rare decision by Canada’s Supreme Court to review a civil case in 2024 highlights a key coverage point brokers can use in conversations with clients.

The case, Trillium Mutual Insurance Company v. Emond, centred around a couple whose home on the Ottawa river was destroyed, and later sued when their insurer deemed the policy’s guaranteed replacement cost (GRC) endorsement did not cover costs to meet regulatory standards or by-law changes enacted since the home was built.

While lower courts initially found for the couple, the Supreme Court determined the policy did not entitle the family to those additional rebuilding costs in a Feb. 2026 decision. GRC endorsements generally apply to homes that are destroyed by catastrophic events, such as flood or fire.

Related: Supreme Court takes GRC flood-loss case

While most policies include replacement cost coverage, extra rebuilding costs required to meet current building codes or safety standards are often capped under separate by-law coverage, leaving homeowners exposed, says Daniel Ivans, who provides commentary for rate aggregator Rates.ca.
 
“By-law coverage isn’t standardized across policies,” says Ivans. “Some insurers include it automatically with a set cap, while others require homeowners to add it separately.

“How much coverage is needed can also vary based on where a home is located since rebuilding requirements can change depending on local building codes, zoning rules, or environmental regulations. Higher limits are often available, but those options aren’t always reviewed upfront.” 

He lists some gaps in by-law coverage that homeowners might not be aware of, or don’t fully understand:

• By-law coverage does not equal replacement cost. Replacement cost generally covers the rebuilding of a home to the state it was in before the loss. By contrast, by-law coverage is used when further upgrades are required to ensure the rebuilt home meets building code changes, and new zoning rules or safety regulations enacted since the home’s construction. 
• When by-law coverage is included automatically, it often comes with a preset limit. But those default limits might not be reflective of current costs to rebuild, and could fall short when current regulations and rebuilding requirements are taken into account. 

Related: Top court sides with insurer in GRC debate

• Limit adjustments are not automatic. “Even when local rules or standards have changed over time, by-law coverage limits typically remain the same unless they are reviewed and updated,” notes Ivans. 
• Homeowners will be on the hook for any costs exceeding the limits in the by-law policy. So, the difference between the policy limit and the excess costs due to regulatory upgrades become the homeowner’s responsibility, even if the insureds believed they had full replacement coverage. 

“Rebuilding after a total loss isn’t about restoring what was there before; it’s about meeting today’s standards,” says Ivans. “That’s when by-law limits tend to show up as an issue because the rules and requirements at the time of a rebuild may be very different from when the policy was first set up or fully understood.”