Over the past few decades, Canadian courts have been expanding the scope of coverage under builder’s risk policies. The law has developed to the point that today, if an owner or general contractor of a construction project purchases a builder’s risk policy, that policy by necessary implication will likely include as unnamed insureds all contractors and sub-contractors who supply materials or labour to the project. As a consequence, the builder’s risk insurer in most instances cannot bring a subrogated claim against any of the contractors or sub-contractors involved in the project.
The starting point for this analysis is the Supreme Court of Canada case Commonwealth Construction Company v. Imperial Oil Limited (1976), 69 D.L.R. (3d) 558 (S.C.C.) which held that all contractors and subcontractors have an insurable interest in a construction project, and as a result, they may be considered unnamed insureds in a builder’s risk policy. In that case, de Grandpre J. wrote at 562:
On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in court. By recognizing in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements opening the doors of the job site to the tradesmen, the courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all parties whose joint efforts have one common goal, e.g. the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.
De Grandpre J. further wrote at p. 566:
As already noted, the multi-peril policy under consideration is called in the contract between Imperial and Wellman-Lord a course of construction insurance. In England, it is usually called a “Contractors’ all risks insurance” and in the United States, it is referred to as “Builders’ risk policy”. Whatever its label, its function is to provide to the owner the promise that the contractors will have the funds to rebuild in case of loss and to the contractors the protection against the crippling cost of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset.
It is significant to note that the policy under consideration in Commonwealth Construction listed the named insured as “Imperial Oil… and any of their contractors and sub-contractors.” As a result, the case does not stand for the general proposition that all contractors will be included as unnamed insureds in all builder’s risk policies. Nevertheless, the finding that contractors have an insurable interest in a construction project, and the public policy considerations discussed by the court are significant.
The next significant case on this topic was C.P. Limited v. Base-Fort Security Services (B.C.) Ltd.(1991), 52 B.C.L.R. (2d) 393 (C.A.). In that case, a company hired to provide security services to a construction site sought to be included as an unnamed insured in a builder’s risk policy. The court held that the security company was not an unnamed insured because its services were not an integral part of the project. The court stated that only those persons whose contributions were “an integral and necessary part of the construction process” were included in the definition of insured. This case created an exception which proves the rule that contractors and sub-contractors involved in construction will likely be included as unnamed insureds in a builder’s risk policy.
Next came the B.C. Court of Appeal decision in Sylvan Industries Ltd. v. Fairview Sheet Metal Works Ltd. (1994), 89 B.C.L.R. (2d) 18 (C.A.). This case arose out of a fire at a mushroom barn. The owner Sylvan was indemnified for the loss under its builder’s risk policy. The insurer then brought a subrogated action against the mechanical contractor Zenith and its sheet metal sub-contractor Fairview. The main contract between the owner and Zenith required Zenith to obtain all risk property coverage. Zenith failed to do this; however, the owner did purchase its own builder’s risk policy. The only named insured on this policy was the owner. The policy did not make any express reference to contractors.
The court also looked at what the intention of the insurer and owner had been at the time that the builder’s risk policy was issued, but found the evidence to be equivocal. On the issue of intention, the court held that intention must be looked at in the legal context in which the policy was written. The court then concluded (at para. 17):
Given the special nature of builders’ risk policies, the judicial pronouncements on the commercial necessity for inclusiveness, and the language of this policy, I am of the opinion that the trial judge reached the right conclusion when he found that contractors and subcontractors were unnamed insureds by necessary implication. (emphasis added)
One possibly significant fact in Sylvan was that the two contractors lost some of their own property in the fire, specifically scaffolding and a quantity of sealant. Although this fact did not attract much comment by the court, other cases have held that where the contractor owns property which is part of the entire project, then that property is generally included as part of the “insured property” as specified in the insuring provision of the builder’s risk policy. This was seen in Esagonal Construction Ltd. v. Traina, [1994] I.L.R. 2965 (Ont. Gen. Div.). In that case, the court held that Sacco, a supplier of steel beams to a construction project, was an unnamed insured under a builder’s risk policy. The court concluded that at the time of the loss, Sacco still retained title to the steel beam which it was installing. Because all material on the project was insured by the policy, the policy covered the contractor’s interest in the beam. The court then held that the full benefit of the policy extended to the contractor, and that the word “other” in the waiver of subrogation clause included Sacco. The court’s conclusion in Esagonal was set out as follows (at para 14):
Clearly, Sacco is an “other” against which the insurance company is a subrogee. However, under this particular policy wording the insurance company has apparently undertaken to go not half measure, but full measure. The wording states that “all rights of subrogation are hereby waived” (emphasis added) if the “other” falls within the exception. Thus it is obvious that the insurance company cannot take the position if the exception applies, that it will not subrogate only to the extent of the property value that is covered under clause 1(a)(ii) since it is waiving all rights of subrogation. Thus it would not appear to matter that whether the “other’s” involvement under the policy was $100 and the subrogated loss was $1 million – the “other” is entitled to the $1 million waiver.
Another example where a sub-contractor was found to be an unnamed insured because it owned some of the property insured by the builder’s risk policy was Earl A. Redmond Inc. v. Blair LaPierre Inc., [1995] P.E.I.J. No. 25 (P.E.I.S.C.-T.D.) (QL). In that case, a builder’s risk policy was issued to the owner and general contractor. When a fire damaged the building under construction, the insurer paid the claim, however; the insurer also paid about $6,000 to a sub-contractor who had lost some property in the fire. It was that same sub-contractor that the insurer brought a subrogated action against. Because the sub-contractor was an unnamed insured, the court dismissed the subrogated action.
There is a comment in the Earl A. Redmond case which suggests that unnamed insureds in a builder’s risk policy include not only contractors that are supplying materials to the project, but also those contractors who are supplying labour (at para 17):
…courts have clearly signaled that a property insurer having issued a Builders’ All Risk policy cannot maintain a subrogated claim against a subtrade if the latter contributed materials or labour to the project and the policy contains a waiver of subrogation clause
In 1996, the case Janeland Development Inc. v. Michelin Masonry Inc., [1996] I.L.R. 1-3298 (Ont. Gen. Div.) appears to have further extended the scope of unnamed insureds under a builder’s risk policy. This case involved the collapse of a wall during the construction of a commercial building. The general contractor obtained a builder’s risk policy and after the loss, its insurer brought a subrogated action against the masonry sub-contractor. The policy did not expressly extend to sub-contractors. The court did not focus on whether the sub-contractor owned any of the property or not. Rather, the court simply summarized the law as set out in Sylvan and Esagonal, and then concluded that the sub-contractor was an unnamed insured under the builder’s risk policy. In closing, the court wrote:
This determination is in keeping with the court’s desire to reduce litigation which flows from losses of this type. It also recognizes the reality of complex industrial life and provides comfort and security to owners, builders and sub-contractors involved in commercial projects.
A further case which affirmed all of the foregoing cases is Madison Developments Ltd. v. Plan Electric Co. (1997), 152 D.L.R. (4th) 653 at 660-661 (Ont. C.A.). In this case, the general contractor took out a builder’s risk policy, as he was required to do under the terms of the construction contract with the owner. The builder’s risk policy did not expressly extend to sub-contractors. The contract which the general contactor had with its sub-contractor required the latter to obtain its own insurance to cover its own materials. Notwithstanding this term in the sub-contract, the court still held that both the sub-contractor and its employees were unnamed insureds in the builder’s risk policy.
The court in Madison addressed an argument by the subrogating insurer that the waiver of subrogation clause only extended to sub-contractors when the sub-contractor suffered its own property damage in the loss. This in essence was the principle set out in cases such as Esagonal and Earl A. Redmond. The Ontario Court of Appeal’s response to this argument indicates that property damage sustained by a sub-contractor is not the only thing which will cause the sub-contractor to be deemed an unnamed insured. Rather, the court appears to suggest that all contractors and sub-contractors are unnamed insureds. The court in Madison wrote (at para. 24):
The respondents urge that it is intended to waive subrogation only where the loss is incurred to the subcontractors’ property. Another possible interpretation is that it is a general waiver against persons whose property is covered by the policy. We are not forced to choose between these alternatives, but the latter would be consistent with my express views as to the general intent of the parties to avoid litigation over fire damage occasioned during the course of construction.
More recently, in 529198 Alberta Ltd. v. Thibeault Masonry Ltd., [2001] A.J. No. 1684 (Alta. Q.B.) the court held that a masonry sub-contractor was an unnamed insured in a builder’s risk policy “by necessary implication” even though the policy did not specifically list contractors or sub-contractors as unnamed insureds. The significance of this decision is that it asserts a general proposition that all sub-contractors on all construction projects have the benefit of a builder’s risk policy taken out by the owner or general contractor.
In Thibeault Masonry the plaintiff acted as its own general contractor respecting the construction of a 2 phase condominium complex. Thibeault was the masonry sub-contractor. A fire caused by Thibeault damaged phase 2. The plaintiff had obtained a builder’s risk policy from State Farm. The plaintiff purchased the policy to fulfill a requirement imposed by the bank who was financing the construction project. The policy listed the plaintiff as the named insured, and the bank as the loss payee. The policy did not expressly extend coverage to contractors or sub-contractors. After the loss, State Farm paid out on this policy, then brought a subrogated action against Thibeault. The court concluded that Thibeault was an unnamed insured (at paras. 22 and 27-28):
22. Turning then to the language of the policy, the property coverage – specifically the phrase “buildings while in the course of construction” – is at issue. A plain reading of the phrase “buildings while in the course of construction” would seem to include the work of the Defendant and other subcontractors on the Project. A construction project is necessarily the sum of materials, supplies and labour of the subcontractors performing work on the project. 529 always contemplated that the work on the Project would be completed by subcontractors, and any damage or loss to the property in the course of construction would therefore be at the hands of its subcontractors. Further, the entire value of the Project was insured. It is an agreed fact that the value of Thibeault’s work on the Project was included in that amount. In my opinion this fact and the plain meaning of “buildings while in the course of construction”, are sufficient to find that Thibeault is an unnamed insured under the State Farm Policy, especially in light of the commercial purposes of such policies.
27. A broad interpretation of the property coverages, which includes the work of subcontractors, is in harmony with the commercial context of builders’ risk insurance. Finding that subcontractors are insured under the policy advances its purposes of avoiding multiple coverage and of quickly providing funds for rebuilding without resort to litigation amongst the numerous subcontractors who work on one particular project. If subcontractors are not insureds under builders’ risk insurance policies, the absurd result would be that each subcontractor would be required to carry insurance for the value of the entire project, resulting in unnecessary multiple coverage. Eighteen subcontractors worked on Dana Village Phase II, which, if the Plaintiff’s interpretation is followed, would result in the necessity of the full value of the Project being insured eighteen times.
28. I am also supported in my conclusion by other case law, where subcontractors have been held to be unnamed insureds by necessary implication under builders’ risk insurance, indicating a trend towards broad coverage under builders’ risk policies. See Madison, supra; Sylvan, supra; and Timcon, supra… These cases have found subcontractors to be unnamed insureds by necessary implication based on the policy expressed by Grandpré J. in Commonwealth, supra; the policies’ language extending coverage property owned by others; the fact that the entire value of the projects were insured; the judicial pronouncements on the necessity of inclusiveness; and the industry expectation that the policy covered all those connected with projects who were not named insureds. I have no doubt that the specific language of the policies in these cases may be distinguishable from the State Farm Policy. However, given Supreme Court’s pronouncements regarding the purpose of builders’ risk insurance, I am of the opinion that the principles expressed in these cases are equally applicable to the State Farm Policy.
In light of all the above cases, the emerging trend appears to be that a builder’s risk policy will likely extend to all contractors and sub-contractors involved in supplying materials or labour to the project.
