Builders’ risk policies in the construction industry seek to simplify insurance coverage, provide stability and reduce litigation in complex construction projects, providing broad cover to all those associated with the project.
In an Ontario Superior Court judgment, the Builders’ Risk Insurance Policy for the project expressly named RioCan and PCL as insured parties along with:
“All contractors, sub-contractors, consultants, sub-consultants, architectural consultants, engineering consultants, construction and project managers and/or any other entities with an insurable interest in the project and as per individual Project Certificates(s) attached.”
Subcontractor was defined as:
“(i) any person, firm or corporation entering into a contract with any Contractor, and (ii) any person, firm or corporation entering into a contract with any Contractor, and (ii) any person, firm or corporation entering into a contract derived through any such contract with a Contractor to provide, supply or lease work, services, materials or equipment, or any combination thereof, in connection with the project shown in Declarations. ‘Contractor’ and ‘Subcontractor’ shall not include consulting engineers or consulting architect.”
The description of “property insured” was very broad. The relevant construction contract required the relevant parties to obtain builders’ risk cover for “all risks of physical loss or damage for the Project” with cover representing 100% of the total contract price and requiring an indemnity for a loss regardless of how it happened and regardless of who caused it.
Following a claim for a water leak from an HVAC cabinet in the project building and indemnification by the insurer for repairs, the insurer commenced a subrogated action naming, among others, RioCan and other named insureds as the plaintiffs against defendants including Fluid Hose who was a supplier to subcontractors.
Apart from disputing liability, Fluid Hose sought a declaration that the subrogation action was barred against it because it was an insured under the policy and that the insurer was obliged to indemnify it for any amounts found to be owing in the subrogated action and the costs of its defence.
In considering whether Fluid Hose was a “Subcontractor” and therefore insured, the court took account of the broad definition of “Subcontractor” under the policy, and which extended, the court said, “well beyond” subcontractors who contracted with the contractor to include contracts “derived” from contracts with the contractor that were in connection with the project. That would include suppliers to subcontractors such as Fluid Hose.
Coverage under the policy was not limited to subcontractors “engaged in the construction of the Project” and did not exclude “suppliers whose sole function is material delivery”.
The court said the policy clearly included suppliers such as Fluid Hose within the definition of subcontractor which was therefore insured under the policy and in the circumstances one insured could not be subrogated to a claim against another insured.
The court said that if insurers are prepared to provide a very broad policy as was done in the case, and presumably priced it accordingly, “it must live with the consequences”.
The same result on general principles would follow under South African law.
If insurers wish to provide for subrogation in the circumstances, the policy should expressly and clearly provide for who is immune from subrogated claims.