On March 6, 2019, the Court of Appeal of Newfoundland and Labrador clarified the question of whether damage to property during a construction project is covered by the Builder's Risk policy or the General Liability policy held by a contractor. The answer is; it depends. In Dominion of Canada General Insurance Company v Viking Fire Protection Inc.1 the three-panel decision written by O'Brien J.A. poignantly begins with:
[w]hen water inadvertently escapes from a sprinkler system during construction, the law of gravity will determine its flow. The law of contract will determine whether the property which is damaged as a result of the flowing water is insured under a policy of insurance.2
1. Factual background
This case involves a renovation at a hospital complex in St. John's, Newfoundland and Labrador. Viking Fire Protection Inc. (Viking) was hired as a sub-contractor on the project. Towards the end of the construction work, water from a sprinkler system (the responsibility for which lay within Viking's scope of work), escaped and caused a flood throughout the property. The flood was not confined to the space where the work was being done, but also damaged other areas of the hospital. The parties agreed that damage to the property where the project was taking place (New Property) was covered by the Builder's Risk policy. The appeal in Dominion focused on whether the Builder's Risk policy coverage extended beyond damage to the New Property3 and included damage to the hospital complex generally, and outside of the area where the work was taking place (Pre-Existing Property). The trial judge of the Supreme Court of Newfoundland concluded that the Builder's Risk policy covered damage to both the New Property and Pre-Existing Property. The Dominion of Canada General Insurance Company appealed.
2. The policy
As is typical with any large-scale construction project, the contractor was required to have Builder's Risk Insurance (BRI). The BRI policy covered specific property, defined in the policy as the "property insured." Under the BRI policy, the limit of the coverage was 1.1 times the value of the work, being CA$688,961 in this case.4 The term "property insured" was set out in Clause 2 of the BRI, as "the following property at the project site", meaning:
- Property in the course of construction, installation, reconstruction or repair [...]; and
- Property to "enter into and form part of the completed project [...]"5
Clause 2 of the BRI also provided examples of what property is insured under the policy, including, "expendable materials and supplies [...] necessary to complete the project; and "temporary buildings and scaffolding [...] site preparation and similar work [...] to the extent that replacement or restoration is necessary to complete the project."6
O'Brien J.A. noted that the BRI policy language differentiates between the property insured and the project site, meaning there is a distinction between where the work is done and what areas are covered by the policy itself.7
Courts in Canada have come to different conclusions on this issue of whether BRI will cover damage to Pre-Existing Property. O'Brien J.A. discussed in detail the two conflicting decisions with similar fact scenarios. In Medicine Hat College v Starks Plumbing and Heating Ltd.8, the Alberta Court of Queen's Bench concluded that the BRI at issue in that case covered Pre-Existing Property on the basis that contractors "have an insurable interest in the project in which they [are] working." In William Osler Health Centre v Compass Construction Resources Ltd.,9 the Ontario Superior Court of Justice came to the opposite conclusion, noting that damage to Pre-Existing Property is better covered by a General Liability policy than a BRI policy.
3. BRI does not cover damage to Pre-Existing Property
O'Brien J.A. applied the principles set out in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co.,10 to determine that the BRI policy does not cover damage to the Pre-Existing Property.
O'Brien J.A. determined that the policy language in the BRI policy was unambiguous. In reviewing the definition of "property insured", the Court came to the conclusion that the definition in Clause 2 of the BRI clearly intended that the policy cover:
[p]roperty actually being constructed, installed, repaired etc., as part of a construction project, while the project is a work in progress ("in the course of construction"), in circumstances where the property is intended to be incorporated into the project ("all to enter into and form part of the completed project"), and includes property required for project completion ("expendable materials and supplies" ... and "temporary buildings, scaffolding" etc... necessary to complete the project").11
Logically applying the above means that the BRI policy is not so broad to encompass coverage for the entire project site. Importantly, the BRI policy even limits the extent to which "property required for project completion" (i.e. materials) are covered; specifying that the policy will apply only if the materials are required to complete the project. If such material is damaged at the end of a project, the sub-contractor will likely need to look outside of the BRI to their own insurance policies to cover the loss.
Although O'Brien J.A. did not find that there was ambiguity in the BRI policy, he touched on the potential sources of ambiguity. Firstly, that there was no exclusion clause to exclude the Pre-Existing Property from coverage. In dismissing this as an ambiguity, O'Brien J.A. noted there was no need for an exclusion clause because the proper starting point for analysis was whether the policy would include insurance coverage for Pre-Existing Property. Concluding that, if the Pre-Existing Property did not fall within the definition of "property insured" then the policy would not cover it, given that "an exclusion clause is used to exempt property which would otherwise be included in the definition." Secondly, the BRI policy did not define property insured by way of delineating areas of the building where the work is taking place. In dismissing this area of potential ambiguity, O'Brien J.A. held that because the definition of "property insured" was so clear, there was no need for the BRI policy to define an area within the property that was going to be covered.
The Court held that given the size of the BRI policy, the logical conclusion was that the BRI policy was intended to cover losses in the event of severe damage to the project, such that there would be sufficient assets to complete the project. If the BRI policy was intended to cover losses throughout the entire hospital complex, the amount would be grossly inadequate, which was consistent with the conclusion made in William Osler. Furthermore, the use of the BRI policy to cover losses on the Pre-Existing Property would result in the depletion of the policy funds, which would, in turn, shrink the amount of available funds in the event of loss or damage on the New Property, thereby placing the completion of the project at risk.
Shortly after the Dominion decision was issued, the Ontario Superior Court of Justice applied the same logic in Pre-Eng v Intact.12 In this case, the Court determined that damage to the gymnasium floor caused by the roofing contractor was covered under the Commercial General Liability policy with Intact, and not by the BRI policy issued by Northbridge, since the BRI policy covered the project work and not the whole of the project site.
The Dominion decision serves to clarify the scope of BRI for insurers, contractors and owners. When insurers issue BRI policies, they ought to make sure that "property insured" is clearly defined to limit the potential for litigation in this regard. Take heed that "property insured" and "project site" are not always the same when it comes to your insurance.
For contractors, it is crucial to know under which policy you are operating in the event of damage on a construction project. Given that most parties to a construction project will have both BRI and General Liability Insurance, parties to a construction contract ought to be keenly aware of the location of the damage that has resulted and under which policy to claim the loss.
Dominion has re-stated the purpose of BRI, which is to protect against losses on the project, and not the project site.
1 2019 NLCA 13. ["Dominion"]
2 Ibid., at para 1.
3 "new property" is defined in Dominion, at para 10 as property, "which was directly used in and incorporated into the construction project."
4 Dominion, para 14.
5 Ibid., at para 59-60.
6 Ibid., at paras 59-60.
7 Ibid., at paras 64-65.
8 2007 ABQB 691.
9 2015 ONSC 3595. ["William Osler"]
10 2016 SCC 37 ["Ledcor"]
11 Dominion, supra note 1, at para 71.
12 2019 ONSC 1700.
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