Case Comment: A Narrow Interpretation of the Coverage Available Under a Builder’s Risk Insurance Policy – Pre-Eng v. Intact.

The Ontario Superior Court of Justice has applied a narrow interpretation of the coverage afforded by a builder’s risk insurance policy, based on its analysis of the wording of the policy at issue.

In Pre-Eng v. Intact, 2019 ONSC 1700, the Ontario Superior Court considered whether losses caused by the negligent work of a builder hired to renovate the roof of an existing school, resulting in rain damage to the wooden floor of a gym below, were covered by an All Risk Builder’s insurance policy (the “Builder’s Risk Insurance”). It concluded that these damages were not covered as it adopted a narrow interpretation of the property insured. There was also a Commercial General Liability (“CGL”) policy in place and the court described the two policies as “complementary”, despite the fact that a builder’s risk insurance policy provides first party coverage and a CGL policy covers third party liability. The Court in Pre-Eng noted that builder’s risk and CGL insurance served different purposes, with the purpose of builder’s risk insurance being to ensure that a builder had sufficient insurance to repurchase new materials incorporated into a project and complete its work in the event of an unforeseen loss or failure. According to the Court, this purpose did not require a builder to “insure the entire structure before undertaking his small task”.

Property Insured

At issue in this case was the scope of the property insured. The Builder’s Risk Insurance policy described the insured property as follows:

1. At the “project site”, provided that the value of the described property, whether owned by you or by others, is included in the amount of insurance:

• property in course of construction, installation, renovation, reconstruction or repair other than property described in 3.A(b),all to enter into and form part of the completed project including expendable materials and supplies, not otherwise excluded, necessary to complete the project [emphasis added];

The CGL policy contained an exclusion clause as follows:

“Property damage” to:

(5)     That particular part of real property on which the Named Insured or any contractor or subcontractor working directly or indirectly on the Named Insured’s behalf are performing operations, if the property damage arises out of those operations; or

(6)     That particular part of any property that must be restored, repaired or replaced because the Named Insured’s work was incorrectly performed on it.

The Builder’s Risk Policy insurer took the position that its policy covered only the portion of the property actively under construction, renovation or repair. The insurer argued that the property under construction was the school roof, not the gym floor. The CGL insurer took the position that the Builder’s Risk Insurance policy covered all damage caused at the “Project Site”, which included the entire school.

Conflicting Jurisprudence

The Court in Pre-Eng reviewed conflicting case law in relation to the proper scope of builder’s risk insurance, and considered policies with wording that was “substantially the same” as the policy at issue. A review of the excerpts of the policies described in the decisions examined in Pre-Eng finds that they were reasonably analogous to the wording under consideration in Pre-Eng.

In Medicine Hat College v. Starks Plumbing & Heating Ltd., 2007 ABQB 691, the Alberta Court of Queen’s Bench held that damage to a penthouse mechanical room through an explosion caused by improper reconnection of a gas line was covered under a builder’s risk insurance policy as “property in the course of construction”, although the contractor had not been hired to do any work on the penthouse. The Court reasoned, as a logical extension of the Supreme Court of Canada’s holding in Commonwealth Construction that each trade and sub-trade had an insurable interest in the entire project where a new structure was being constructed, that trades and sub-trades also had an insurable interest in the entire interconnected structure (and not merely the new addition being worked on) where an addition to an existing structure was being constructed.

In William Osler Health Centre v Compass Construction et al., 2015 ONSC 3959, the Ontario Superior Court of Justice declined to follow Medicine Hat College. The Court held that the builder’s risk insurance policy at issue covered only flooding damage to a hospital kitchen under renovation which was caused by negligent plumbing work carried out in the kitchen, but did not cover flooding damage to other areas of the hospital. The Court held that it would be commercially unreasonable to expect a contractor or subcontractor to obtain insurance coverage for the entire hospital in order to carry out work in one area:

The Hospital insured itself to a limit of $162.5 million for a premium of $122,000. Compass’ total profit for the job is likely to be around $60,000. It would make no commercial sense to expect Compass to obtain $122,000 worth of insurance to insure the entire Hospital in these circumstances [emphasis added].

Considering the reasoning in Medicine Hat College, the Court in William Osler Health Centre held that the wording of the builder’s risk insurance policy at issue stipulated that only the insured’s actual interest in the property insured would be covered by the policy. In other words, a contractor’s “insurable interest” in an existing structure as a whole, as referenced in Medicine Hat College, merely permitted the contractor to obtain insurance on the property as a whole and did not determine the scope of coverage for a given insurance policy. The Court held that any insurable interest of the contractor in the Project Site as a whole was not in fact insured by the specific policy at issue in William Osler Health Centre.

Commonwealth Construction is a frequently cited case that considered whether an insurer could bring a subrogated claim against an insured under the policy at issue. In Commonwealth Construction, the extent of coverage available for the loss event was not at issue, because the applicable builder’s risk insurance policy was taken out in respect of a new plant being constructed, such that the entire Project was property in the course of construction.

In Team Mechanical Construction Limited v. Viking Fire Protection Inc., 2017 CarswellNfld 370, the Newfoundland and Labrador Supreme Court (Trial Division) rejected the reasoning in William Osler Health Centre and adopted the reasoning in Medicine Hat College. The Court held that damage caused throughout a health sciences complex by the negligent installation of a water treatment system was covered by a builder’s risk insurance policy. In particular, the Court held that “[a]n insurer issuing a Builders [sic] Risk Insurance Policy for an existing structure undergoing renovation, must be clear if “Property Insured” is limited to specific areas of the building, or is limited to new work only.” According to the Court, a plain reading of “property in the course of construction, installation, reconstruction or repair” insured by the policy included the entire complex and was not limited to any specific area, though works were occurring only in certain areas of the complex.

However, the Newfoundland and Labrador Court of Appeal reversed the trial decision in Team Mechanical and adopted the reasoning in William Osler Health Centre, holding that the term “property insured” covered “loss or damage to new property related to the construction project only, and [did] not cover loss or damage to pre-existing property not directly involved in the project [emphasis added].” In the Court of Appeal’s view, the interpretation in William Osler Health Centre accorded more with the parties’ reasonable expectations and produced a commercially realistic result.

In Pre-Eng, the Ontario Superior Court of Justice noted that there was no factual basis to distinguish William Osler Health Centre, and held that it was not commercially viable to require a contractor to obtain builder’s risk insurance to cover an entire building while working on only one part, nor was this necessary in order to fulfil the purpose of builder’s risk insurance. Further, the Court followed the Newfoundland and Labrador Court of Appeal’s reasoning in holding that there was no ambiguity regarding property “under construction” in the Builder’s Risk Insurance policy at issue, such that property damaged as a result of construction, but not under construction, was not covered.

Conclusion

Pre-Eng is one of a growing number of cases which have moved away from the broader interpretive approach in Medicine Hat College.  The courts have instead adopted the narrower interpretation applied in William Osler Health Centre. Owners, general contractors and subcontractors should be aware of this judicial trend when reviewing builder’s risk policies and obtaining insurance coverages on construction projects and should carefully review the scope of the property covered under the policy at issue.

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