The "Underinsurance" Trap: Why Canadian Property Owners Are Falling Short in 2026

 Date: February 7, 2026

Topic: Insurance Claims / Construction Inflation

Key Legal Context: Emond v. Trillium Mutual Insurance Co. (SCC, 2026)

In the wake of a record-breaking year for insured losses—surpassing $8.5 billion in 2024 alone—a quiet crisis is emerging across Canada. While wildfires in Jasper and floods in Toronto have dominated the headlines, a secondary disaster is unfolding in the fine print of insurance policies: Underinsurance.

Due to a relentless spike in construction materials and labor costs, which have risen approximately 67% over the last five years (vastly outpacing the 18% general inflation rate), many Canadian property owners are discovering too late that their coverage limits are woefully inadequate. This gap between policy limits and actual rebuilding costs has triggered a surge in disputes, making valuation the new battleground for public adjusters.

The Mechanism of Disaster: The Co-Insurance Penalty

The most dangerous aspect of underinsurance is not simply running out of money to rebuild; it is the Co-Insurance Clause.

Found in nearly all commercial and many residential policies, this clause requires the policyholder to insure their property to a specific percentage of its replacement value (typically 80% or 90%). If inflation drives the real cost of rebuilding up, but the policy limit remains static, the property becomes "underinsured."

When this happens, the insurer effectively views the policyholder as a partner in the risk. The penalty is calculated using a brutal formula:

$$\frac{\text{Did Carry}}{\text{Should Have Carried}} \times \text{Loss} = \text{Payout}$$

The Trend: Public adjusters are seeing insurers apply this penalty aggressively. A business owner who insured their warehouse for $2 million (based on 2021 valuations) might find that, in 2026, the replacement cost is $3 million. If they suffer a partial loss of $500,000, the co-insurance penalty could slash their payout by nearly 33%, leaving them with a massive bill just to effect repairs.

The "Guaranteed" Coverage Myth: The Emond Bombshell

For years, homeowners believed they were immune to this problem if they purchased a Guaranteed Replacement Cost (GRC) endorsement. This rider promises that the insurer will pay the full cost to rebuild the home, even if it exceeds the policy limit.

However, a landmark ruling by the Supreme Court of Canada in early 2026, ** Emond v. Trillium Mutual Insurance Co. **, has fundamentally altered this landscape.

In this case, the Supreme Court ruled that a GRC endorsement does not override specific exclusions in the base policy—specifically, the "Compliance Cost Exclusion." This exclusion limits coverage for increased costs due to bylaws, zoning changes, or building code updates.

Why it matters:

In 2026, you cannot rebuild a home to 1990s standards. You must comply with modern energy codes, conservation authority requirements, and safety bylaws. These upgrades can cost hundreds of thousands of dollars.

• Before Emond: Public adjusters often successfully argued that GRC covered these costs as part of "replacing" the home.

• After Emond: Insurers are now emboldened to cap these costs at the standard policy sub-limit (often a meager $10,000 or $25,000), even if the GRC endorsement is present.

How Public Adjusters Are Fighting Back

Faced with the double threat of inflation-driven co-insurance penalties and the Emond ruling, public adjusters have shifted their strategies to protect policyholders.

1. Forensic Valuation Disputes

Public adjusters are no longer accepting the insurer’s "standard" software estimates (often generated by programs like Xactimate) as gospel. These programs sometimes rely on regional averages that lag behind real-time inflation.

• Strategy: Public adjusters are hiring independent quantity surveyors and utilizing real-time contractor bids to prove the "Should Have Carried" amount is lower than the insurer claims, or that the actual loss value is higher, thereby mitigating the math of the co-insurance penalty.

2. "Technique" vs. "Law" Arguments

In the post-Emond landscape, public adjusters are parsing the language of construction meticulously.

• Strategy: If a cost increase is due to a "law" (e.g., a zoning setback), it might be excluded. However, if the increase is due to "current building techniques" (e.g., using modern trusses instead of hand-framed roofs because that is the industry standard), public adjusters argue this falls under the GRC endorsement and outside the compliance exclusion. This subtle distinction can save a policyholder tens of thousands of dollars.

3. Maximizing "Soft Cost" Coverage

With hard construction limits under pressure, adjusters are digging into other buckets of coverage. They are aggressively valuing "soft costs" such as architectural fees, debris removal, and engineering permits—ensuring these are paid out fully under their specific sub-limits rather than being lumped into the general building limit where they might be capped.

Conclusion

The era of "set it and forget it" insurance is over in Canada. The convergence of 67% construction inflation and restrictive court rulings has created a precarious environment for property owners.

For public adjusters, the role has evolved from simple claims handling to complex forensic accounting and legal interpretation. Their primary goal in 2026 is ensuring that inflation—a force the policyholder cannot control—does not become a tool for the insurer to dilute their promise to pay.