Canada: The Dangers of Promising to Get the Insurance Overview

In Active Fire Protection 2002 Ltd. v. B.W.K. Construction Co.¹, the Ontario Court of Appeal recently decided that a contractor cannot enforce the indemnity provision in a subcontract against its subcontractor when the subcontractor’s negligence caused property damage and the contractor breached its own contractual obligations in failing to obtain property insurance when the loss would have been covered had the contractor done so.

B.W.K. Construction ("BWK") entered into a $2.31 million contract with the Town of Whitby ("Whitby") for renovations and an addition to the Town’s centennial building.

The main contract between Whitby and BWK obliged BWK to obtain at its expense, a policy of all-risks property insurance in the joint names of BWK, Whitby and the consultant/architect.

BWK was also obligated to incorporate the terms and conditions of the contract documents into written agreements with subcontractors.

BWK entered into a subcontract with Active Fire Protection ("Active Fire") to provide a fire protection system for the building. The general conditions of the main contract, including BWK’s property insurance obligations, were incorporated by reference into the subcontract.

The subcontract obligated BWK to maintain fire insurance upon all work incorporated into the project and all materials on the premises. The subcontract contained a standard indemnity provision by which Active Fire agreed to indemnify BWK against any loss in connection with the performance of the work.

Contrary to its obligations under the main contract, BWK did not obtain all-risks property insurance, nor did BWK procure fire insurance as stipulated under the subcontract.

Active Fire had purchased a "protective services package" insurance policy under which it was the named insured which provided cover for "bodily injury, personal injury, property damage and failure to perform insurance". The insuring provision obligated Active Fire’s insurer to pay on behalf of Active Fire "all sums which the Insured shall become obligated to pay by reason of the liability imposed by law upon the Insured or assumed by the Insured under contract" because of property damage.

Prior to completion of the project, a flood occurred in the basement of the centennial building when the main intake connection on the sprinkler system installed by Active Fire failed. Active Fire admitted that it was negligent in installing the connection and that its negligence caused the flooding; it did not admit however that it was responsible for the payment of any damages resulting from the flooding. BWK paid Whitby’s lossses resulting from the flood, and then sought to recover this sum from Active Fire pursuant to the indemnity provision in the subcontract.

Judge Logan of the Ontario Superior Court of Justice dismissed BWK’s claim.² He concluded:

"An agreement made by a contractor with the owner to obtain "all-risks" property insurance protects the sub-contractor or the owner from claims for its own negligence. This rule follows from the principle of law that a party cannot benefit from its own wrong. If the sub-contractor was held liable, it would be deprived of the insurance that was supposed to have been taken out in its favour. It would make no business sense for each sub-contractor to have to obtain its own insurance."

The issue on appeal was effectively "who should pay": was BWK entitled to claim against Active Fire for the losses caused by the flood given Active Fire’s insurance and indemnification obligations under the subcontract and its admitted negligence?

The Court of Appeal held that BWK undertook to obtain insurance for the entire construction project both in the main contract and in the subcontract, and that it admitted that, had it done so, the insurance would have responded to the loss. Accordingly, BWK assumed the risk as a matter of contract. Its commitments to obtain the requisite insurance (all-risks property insurance under the main contract and fire insurance under the subcontract) operated as a voluntary assumption of the risk of loss or damage caused by the perils that should have been insured against.

Owners and Contractors often want to avoid the duplication of insurance costs by taking on insuring obligations themselves. In those circumstances, they should do what the can to protect themselves with contractual language, but their best defence is to comply with their contractual obligations to procure and maintain insurance on a project. If they don’t, they may bear the risk of loss themselves and may not be able to rely on otherwise enforceable indemnitities.

Footnotes

^{1 [2005] O.J. No. 2892.}

2 [2004] O.J. No. 5087 (Ontario Superior Court of Justice

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