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Course of Construction vs. Property or Commercial General Liability – Which Insurance Policy Applies?

Suppose a contractor or subcontractor is involved in a major renovation or expansion project such as work on a hospital, academic institution, or a large industrial or retail facility.  Due to unfortunate circumstances while construction is underway and ongoing, through a fire, a water leak or other catastrophic event, damage to the newly renovated property occurs as well as damage to the existing portion of the property. Which policy of insurance ought to cover the losses in question?

Very recently, court decisions from both Ontario and Newfoundland and Labrador have had to address this issue. As expanded upon below, both cases came to substantially the same conclusion which is that a 'builder's risk' or 'course of construction' policy covers only the newly added portions of the project under construction and other policies would cover damage to the existing property (subject to the terms and conditions of those other policies).  However, those decisions came to the opposite conclusions that had been reached by earlier court decisions from both Alberta and B.C. where the builder's risk policy covered all such damage.  As a result, there are conflicting authorities across Canada as to which policies ought to respond to losses incurred on construction projects.

Builder's Risk or Course of Construction Policies

By way of brief background, 'builder’s risk' insurance, also sometimes known as 'course of construction' insurance, is a specific type of property insurance commonly used on construction projects. It typically covers damage or loss to specific property, namely, property added by contractors to a project under construction which is damaged or destroyed in the course of construction up to and including damage or loss of the construction project as a whole. When a loss occurs, including damage to property during the course of construction of a project, the builder’s risk policy may be called upon to provide sufficient funds to repair the damaged property.

Recent Case Law

In Dominion of Canada General Insurance Company v. Viking Fire Protection Inc., 2019 NLCA 13 (“Viking”) the Court of Appeal of Newfoundland and Labrador posed the issue before it as follows:

When 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.

In Viking, flooding from the sprinkler system under construction was not confined to the new property which had been incorporated into the project, but rather water also flowed into other areas of a hospital complex including nearby rooms and hallways where no construction was taking place. The Court was asked to determine whether the builder’s risk policy covered not only the new property under construction but also damage to the pre-existing property. The Court concluded that it did not. The Court examined not only the wording of the policy itself but also earlier case law form Ontario and Alberta which had come to opposite results. In a lengthy and well-reasoned judgment, the Court concluded that the builder’s risk policy was not ambiguous and the property insured was only property actually being constructed, installed, and repaired as part of the construction project. It also considered and followed an earlier Ontario case in William Osler Health Centre v. Compass Construction Resources Ltd., 2015 ONSC 3959 which had almost identical policy language.  In doing so, it did not follow the result in Medicine Hat College v. Starks Plumbing and Heating Ltd., 2007 ABQB 691 where the Court found that a builder’s risk policy covered damage to not only the property under construction but also existing property.

The Viking case was followed closely on its heels by the Ontario Superior Court of Justice case in Pre-Eng Contracting Ltd. v. Intact Insurance, 2019 ONSC 1700. In that case, a builder was hired to renovate a school. One of the renovations involved repairing the roof over the school gymnasium.  As a result of negligent work, rain spilled through the roof onto the wooden floor of the gym causing significant damages and a delay to the project. The issue was whether the builder's risk policy would cover damage to the gym floor or whether the contractor's commercial general liability policy had to respond to that particular damage. The Court referred to the Viking decision and how that Court had resolved the conflict in the authorities. In the result, the Court agreed with the analysis in Viking and held that the contractor's commercial liability policy had to respond to the damage to the gym floor.

Earlier and Conflicting Case Law

In contrast to the above recent decisions, the Court of Queen’s Bench in Alberta in Medicine Hat College had determined that the loss in question in that case was indeed covered by the builder’s risk policy. The loss in question included damage to a mechanical room which was not then under construction. The Court’s rationale included that “it is not difficult to envisage a situation where the negligence of a trade or sub trade employed to do the new work could easily have the effect of causing damage to all or at least a portion of the existing structure” and to "hold otherwise would be to defeat the reasonable expectation of the parties".

Medicine Hat College relied on the BC decision in Sylvan Industries Ltd. v. Fairview Sheet Metal Works Ltd., (1994) 89 BCLR (2nd) 18 (C.A.) where the BC Court of Appeal came to a similar conclusion.

Conclusion

As such, the practical import of the recent decisions in this area is that all participants in a construction project (owners, contractors and subcontractors) should not solely rely upon or take comfort that a builder's risk or course of construction policy is in place for a construction project. A prudent owner and a prudent contractor and subcontractor should ensure its own property and/or commercial general liability policies (as the case may be) are up to date such that sufficient coverage is in place before embarking on a new construction project.  Either policy may need to respond to a loss occurring on a construction project even where builder’s risk insurance is also in place as the courts have signalled a narrowing of the coverage afforded by the latter policies.  

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This blog is authored by members of the Litigation and Dispute Resolution Department. We follow new and interesting issues emerging in the legal and business communities. The wide range of experience among the members of our litigation group will provide a diverse and insightful examination of current legal trends and topics. Our goal is to provide a source of valuable information and insight on a wide variety of matters for our readers.

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