Builders’ risk insurance is a keystone of every large construction project; it serves to protect those involved in the project and the value of the project itself, subject to the specific wording of the policy. Courts have recognized that broad builders’ risk policies provide certainty and stability in construction projects by among other things, reducing the need for litigation.
In a recent Ontario Superior Court of Justice decision (Fluid Hose & Coupling Inc. v. Allianz Global Risks US Insurance Company et al.),[1] while acknowledging that every case will turn on its facts and the specific wording of the policy in issue, Justice Schabas confirmed that the Canadian courts’ approach of broadly interpreting coverage under builders’ risk policies, is consistent with the recognized public policy objectives behind them. This coverage determination is especially crucial when an insurer attempts to bring a subrogated claim against parties involved in the project, which is typically prohibited where the party is itself insured under the policy.
Summary of the facts
Fluid Hose & Coupling Inc. (Fluid Hose) was a supplier in a project for the construction of a residential high-rise building in Toronto (the project).
Fluid Hose was several levels down the construction pyramid: RioCan were the owners and developers of the project and contracted with PCL Constructors Canada (PCL) to provide general contractor and construction management services for the project. PCL in turn contracted with Malfar Mechanical Inc. (Malfar) to supply and install mechanical, plumbing and fire protection for the building, including HVAC cabinets and heat pumps. Malfar in turn subcontracted with HTS Engineering Ltd. (HTS) to purchase HVAC cabinets and heat pumps required for the building. HTS then contracted with Omega Heat Pumps Inc. (Omega) for custom heat pumps, which fulfilled its contract by working with its sister company, Sigma Convector Enclosure Corp. (Sigma), to manufacture and supply the HVAC cabinets and heat pumps. These custom HVAC cabinets and pumps were manufactured using ball valves supplied by Fluid Hose to Sigma.
The Builders’ Risk Insurance Policy for the project (the policy) was issued by Allianz Global Risks US Insurance Company (Allianz) and specifically named RioCan and PCL as insured parties, along with the following parties: “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 Certificate(s) attached.”
Further, “subcontractor” was defined broadly under the policy to mean “(i) 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 the Declarations. ‘Contractor’ and ‘Subcontractor’ shall not include consulting engineers or consulting architect.”
On June 8, 2020, a water leak occurred from an HVAC cabinet on the 32nd floor of the project building, resulting in damage costing approximately $420,000 to repair. The cause of the water leak was determined to be a 1/2 inch ball valve in the water supply line for the heat pump in a particular unit. Allianz paid for the repairs. Allianz subsequently commenced a subrogated action (naming RioCan and other named insured as plaintiffs) in the Ontario Superior Court of Justice for damages against, among others, Fluid Hose, pursuant to the policy (the subrogated action). Fluid Hose disputed liability for the leak, alleging that the valve’s failure resulted from improper installation by either Sigma or Malfar.
In response to the subrogated action, Fluid Hose brought an application for a declaration that the subrogated action is barred against it (on the basis that it is insured under the policy) and that Allianz is obligated to indemnify it for any amounts found to be owing in the subrogated action and for the costs of defending the action.
The Court’s ruling
Justice Schabas began his reasons by observing general legal principles regarding builders’ risk policies, which are a “unique species of insurance contract, providing broad coverage to complex construction projects, protecting those involved in the project and the value of project itself, subject to the specific wording of the policy.” Like insurance policies generally (which are frequently standard form), coverage under these policies should be “interpreted broadly, and exclusions clauses narrowly”, and reference should be made to the Supreme Court of Canada’s decisions in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.[2] and Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada[3] for the principles of contractual interpretation applicable to builders’ risk policies.
Justice Schabas also noted that coverage is not unlimited and must respect the contract. While some courts have limited coverage to parties who are an “integral and necessary part of the construction process itself” and excluded parties are “collateral to that process”, each case turns on its facts and the specific wording of the policy in issue.
In this case, in determining whether Fluid Hose was a “subcontractor” (and therefore an insured) under the policy, Justice Schabas emphasized the broad definition of “subcontractor” under the policy, which extended “well beyond” subcontractors who contracted with the contractor to include contracts “derived” from contracts with the contractor that were in connection with the project (like suppliers to subcontractors such as Fluid Hose). Notably, Justice Schabas observed that, unlike the other cases cited by counsel for Allianz, 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”. Interpreting coverage under the policy to include Fluid Hose was also consistent with the policy as a whole and with regard to its purpose:
- the description of “property insured” and associated provisions were drafted broadly to include property “owned by the Insured or in which the Insured had an insurable interest” (like the HVAC units RioCan purchased)
- the general construction contract between RioCan and PCL obligated RioCan to obtain a builders’ risk policy “covering all risks of physical loss or damage to the Project” with coverage representing “100% of the total contract price” and
- the policy clearly stated that Allianz was required to pay a loss regardless of how it happened and regardless of who caused it (in fact, Justice Schabas observed that one of the very purposes of comprehensive builders’ risk policies is to avoid disputes about potential liability amongst various subcontractors, having regard to the nature of complex construction sites)
Accordingly, Justice Schabas found that the policy unambiguously and clearly included suppliers such as Fluid Hose within the definition of “subcontractor”, and that Fluid Hose was therefore insured under the policy.
In response to arguments from counsel for Allianz, Justice Schabas disagreed that his interpretation would render the policy unlimited in scope, rather finding that case law supported the purpose of such policies as providing “broad coverage” and that courts should give effect to that purpose and read them expansively as long as they do not “disregard or do violence to the policy’s language and ordinary meaning”.
Justice Schabas concluded with a caution to insurers: “if an insurer is prepared to provide a very broad policy, as it has done here, and which it presumably priced accordingly, it must live with the consequences.”
Takeaways
Courts have repeatedly recognized the benefits of builders’ risk policies in the construction industry, in simplifying insurance coverage, providing stability, and reducing litigation (especially in complex construction projects involving numerous parties). Accordingly, while ordinary rules of contractual interpretation still apply to builders’ risk policies, as standard form contracts which serve an important purpose, courts appear to be protective of maintaining their broadest interpretation in determining coverage. Insurers, owners, contractors, subcontractors, and suppliers alike should be keenly aware of these considerations, both in initiating and/or defending litigation (subrogated claims in particular) and in commercial negotiations before, during, and after construction.
[1] Fluid Hose & Coupling Inc. v. Allianz Global Risks US Insurance Company et al., 2025 ONSC 2517.
[2] Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37.
[3] Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33.
