The Court of Appeal's decision in Constructions Reliance Inc. (Constructions Reliance du Canada Ltée) v. Compagnie d'assurances Temple1 recently ruled on the interpretation of "completed operations hazard" in a wrap-up insurance policy.
Wrap-up insurance is frequently obtained in large construction projects to cover the civil liability of the various parties involved, including the general contractor, subcontractors and consultants, for a single premium.2
Typically, such policies exclude property damage caused to the project during construction. This exclusion avoids duplicate coverage, since wrap-up insurance usually complements a builder's risk insurance policy, which covers damage to the property under construction.
The Temple Insurance Company ("Temple") issued a wrap-up insurance policy and builder's risk insurance policy (the "Wrap-Up Policy" and the "Builder's Risk Policy" respectively) covering the period from March 22, 2010 to July 22, 2011 in respect of the conversion of a former factory into a new condominium development (the "Project"). The Builder's Risk and Wrap-Up Policies were later extended to November 1, 2011.
As per usual, the Wrap-Up Policy excluded property damage caused to the Project during construction.
On September 29, 2011, the architect responsible for supervising the work issued a Certificate of Substantial Performance of the Project. At the same time the architect issued a schedule of further works to be completed. Once finalized, completion would be certified.
The Builder's Risk Policy expired on November 1, 2011 and was not extended. A standard property insurance policy was then issued by the Missisquoi Insurance Company ("Missisquoi") on behalf of the syndicate of co-owners of the Project(i.e., the condominium association, that being the co-owners).
The Wrap-Up Policy, on the other hand, was extended untilJanuary 1, 2012, and twice more thereafter until March 1, 2012.
On November 14, 2011, while performing the painting job on the Project, an employee of the paint subcontractor struck the head of a sprinkler and caused water damage. On that date, the building in question was substantially occupied by the co-owners.
After indemnifying its policyholder, Missisquoi, the insurer of the co-owners, brought a subrogated claim against the general contractor, the paint subcontractor,3 the subcontractor's civil liability insurer as well as Temple. Only the claim against Temple was the subject of the Court of Appeal's decision.
The Superior Court decision
Temple denied that the damage was covered by the Wrap-Up Policy. Temple argued that the work associated with the Project, in particular the paint job, had not been completed and therefore the exclusion for property damage caused to the Project during construction applied.
The Superior Court accepted this argument.4 It dismissed the claim against Temple, finding that there was no coverage under the Wrap-Up Policy.
The Court of Appeal decision
The general contractor and the subcontractor's insurer appealed the dismissal of the claim against Temple. The appellants accepted that their claim resulted from damage to property forming part of the Project. They therefore accepted that if the exclusion in the Wrap-Up Policy applied, their claim had to fail.
However, the appellants argued that the exclusion did not apply. The Wrap-Up Policy stated that the exclusion for property damage caused to the Project during construction was subject to a "completed operations hazard" exception, which the appellants relied upon in this case. In short, the exception ultimately allows the exclusion to be set aside when the claim arises from work that is completed or deemed to be completed.
The Wrap-Up Policy defined the completed operations hazard as follows:
19. Completed Operations Hazard
As used in this policy means liability arising out of the Insured's Work in connection with the Insured Project because of Bodily Injury or Property Damage, but only if such Bodily Injury or Property Damage results from an Occurrence after the Insured's Work has been completed or abandoned.
The Insured's Work shall be deemed completed at the earliest of the following times:
(a) when all of the Insured's Work to be performed under the Insured's Contract is completed;
(b) when all of the Insured's Work to be performed for the Insured's Project is completed;
(c) when that portion of the Insured's Work out of which the Bodily Injury or Property Damage arises has been put to its intended use by other than another Contractor or Subcontractor engaged in performing operations for the Named Insured as part of the same Insured Project;
(d) when the Insured's Work has been accepted by or on behalf of the Owner.
Pursuant to this clause, the policyholder's work was deemed to be completed at the earliest of the four (4) situations described in paragraphs (a), (b), (c) and (d) above.
The appellants relied on paragraphs (c) and (d) of the exception.
In respect of paragraph (c), the appellants argued that the work had been "put to its intended use" because the co-owners were in occupation of the Project at the time of the damage. However, the Court Appeal rejected this argument, finding that the paint job was still in progress, and therefore could not have been put to its intended use at that time.
In respect of paragraph (d), the appellants argued that the work had "been accepted by or on behalf of the Owner" because the certificate of substantial performance of the Project had been issued. The Court of Appeal also rejected this argument, finding that (i) there was no evidence that the paint job (as distinct from the Project as a whole), had been accepted by or on behalf of the owner at the time of the incident, and (ii) the certificate issued by the architect was supplemented by a list of deficiencies, specifying that much of the paint job was incomplete or needed correction. The Court of Appeal reasoned, it cannot be concluded that the architect had accepted the work by the date of the incident.
Based on the Court of Appeal's reasoning (although subject to the language of the relevant policy), the issuance of a certificate of substantial performance of the work by the professional responsible for supervising the work and the occupation of the building cannot establish de facto the application of completed operations coverage in a wrap-up policy.
The Court of Appeal's decision also illustrates the complementary nature of builder's risk and wrap-up policies. Just a few days before the incident, the Builder's Risk Policy expired. A standard insurance policy was purchased from Missisquoi for the sole benefit of the co-owners. As a result, Missisquoi had the right to pursue a subrogated claim against the general contractor and the paint subcontractor.
If the Builder's Risk Policy had been extended, the general contractor and the paint subcontractor would not have been subject to the subrogated claim at all. In fact, the builder's risk insurer has no right of subrogation against the general contractor or the subcontractor responsible for the damage.5
This decision of the Court of Appeal serves as a reminder to developers and general contractors of the importance of maintaining the complementary coverage associated with builder's risk and wrap-up policies until a construction project is delivered in full.
1 2020 QCCA 947.
2 GCAN Insurance Company v. Concord Pacific Group Inc. et al., 2007 BCSC 241, at paras. 11 and 12.
3 The proceedings against the paint subcontractor were stayed given its bankruptcy.
4 Compagnie d'assurances Missisquoi v. Constructions Reliance Inc. (Construction Reliance du Canada Ltée), 2018 QCCS 1049.
5 See, in particular, Commonwealth Construction Co. Ltd. v. Imperial Oil Ltd.,  1 S.C.R. 317.
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