Claims By Equipment Supplier And Consultants Fall Within All Risk Insurance Umbrella
The owner and general contractor on a building project typically provide an “insurance umbrella” for the project. That umbrella will usually be referred to in the insurance clause in their building contract. That clause will provide that the owner or contractor will take out an All Risk Insurance policy which will apply to the project. That insurance clause, and the insurance policy taken out by one of them as a result of that clause, are of vital concern to all the subcontractors and other participants in the project, as they may be sued as a result of damage occurring during the project and they will want to have protection under the insurance.
There are a number of contract law and insurance law principles that apply to this situation. Often, those principles do not all arise or are not applicable in one situation. However, recently in DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., the Ontario Superior Court applied all of those principles to arrive at the conclusion that a subcontractor, equipment supplier and consultants could not maintain third party claims because all the claims fell within the insurance umbrella.
DCMS was the owner and developer of a retirement residence. It hired a concrete forming contractor, Outspan Concrete Structure, to do the concrete forming work on the project. Outspan hired Caribbean Tower Cranes (CTC) to provide a crane and crane operator. CTC in turn hired Magna Tech to inspect the crane before and after erection at the project site. Magna Tech was owned by a Mr. Perri. Magna Tech in turn hired a professional engineer, Lee, to review and supervise the inspection reports.
During the project, the crane fell onto and significantly damaged the partially completed residence.
The contract between DCMS and Outspan stated the following regarding the “All Risk Property Insurance” which DCMS was to take out and maintain during the project:
“All Risks Property Insurance, subject to the exclusions of the policy, against all risks of physical loss or damage occurring, including but not restricted to: earthquake, flood and will cover all materials, property, structures and equipment purchased for, entering into, or forming part of the work while at the site of the work and during construction, erection and installation. ..
The insurance shall cover the Owner on its behalf, the construction manager acting as agent or representative of the owner, all consultants and engineers (except for their professional liability), trade contractors, subcontractors and others having an insurable interest in the work, engaged in or connected with the construction, site preparation and related operations all as related to the project. …” (emphasis added)
The All Risk insurance policy which DCMS took out with Aviva stated that: “The Insurer hereby waives the transfer of such [subrogation] rights…of any Insured included in this policy against any other Insured…..” That policy named DCMS as the Insured, did not define or extend the meaning of Insured, and in particular, did not provide an expanded definition of Insured to include subcontractors or anyone else.
The insurer, Aviva, paid the loss arising out of this incident and then commenced an action in DCMS’s name against all the other participants in the project, including Outspan, CTC, Magna Tech, Perri and Lee. That action was discontinued by DCMS against Outspan and CTC, but those companies had in the meantime been third partied by Magna Tech, Perri and Lee. Outspan and CTC brought a summary judgment motion to dismiss the third party claims against them and to be removed entirely from the action.
The motion judge granted the summary judgment motion. So far as Outspan was concerned, it was a party to the building contract which contained the insurance clause and was entitled to enforce that clause. Under that clause, DCMS had agreed to take out all risk insurance and had thereby assumed the risk of loss falling within the policy.
CTC was also entitled to the benefit of the insurance clause in the contract between DCMS and Outspan, for three reasons:
- The Third Party Beneficiary Rule: CTC was performing part of the work referred to in the DCMS-Outspan contract. Therefore, it was entitled to the protections contained in that contract to the same extent as Outspan, under the third party beneficiary principles stated by the Supreme Court of Canada in such cases as in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd.: “(1) the parties to the DCMS agreement intended to extend its benefit to CTC given that it is a “subcontractor” within the meaning of the insurance covenant; and, (2) the activities performed by CTC were within the scope of the DCMS agreement as it supplied the crane for the project which Outspan was required to provide under the DCMS agreement.”
- The No Liability Rule. Outspan and CTC could not be third partied by the other defendants since those other defendants were not liable to DCMS as they were themselves protected under the Third Party Beneficiary Rule: “…there can be no claim for contribution against Outspan and CTC by the other defendants as they are protected from liability by reason of the agreement between DCMS and Outspan.” This principle (that a defendant cannot assert a claim for contribution and indemnity if that person is not liable to the plaintiff) was stated by the Supreme Court of Canada in Dominion Chain Co. v. Eastern Construction Co.
- The No Subrogation against An Insured/Uninsured Interest Rule: Outspan and CTC were unnamed insureds under the Aviva policy because they had “an insurable interest in the construction project.” Accordingly, under basic insurance principles, Aviva could not maintain a claim against other insureds under the policy, even though those insureds were unnamed. In arriving at this conclusion, the court applied the principles stated by the Supreme Court of Canada in Commonwealth Construction Co. v. Imperial Oil Ltd. and sometimes this rule is referred to as the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.. As the Supreme Court said in that case, the “ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole” creates an insurable interest of all participants in the project.
This case provides a neat cross-reference to three contract and insurance principles that operate in the context of building projects. It is always a question of interpreting the building contract and/or the insurance policy taken out in respect of the project. But if the language of the building contract and policy reflect that intention – and the insurance policy should be written to reflect the insurance deal in the building contract – then it is logical that all three of these principles should either support (or contradict) the same conclusion, namely that the subcontractors and other persons engaged on the project are (or are not): carrying out the work of the general contract; not liable (or are liable) because the general contractor is not (or is) liable to the owner; or (or are not) engaged in the same project as the general contractor.
The factual matrix of the third party claims in this action was important. The damage occurred when the crane was on the site. Would the same result have occurred if the damage occurred off the site or arose from the supply of defective materials by a supplier? Would the language of the contract between the owner and DCMS (which referred to “equipment purchased for, entering into, or forming part of the work while at the site of the work”), or the Aviva policy have precluded such a claim? In other cases, suppliers have been found not to be unnamed insurers and not to fall within the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.
One aspect of this decision seems somewhat ironic. In applying the No Liability Rule, the court held that the other defendants, Magna Tech, Perri and Lee. were not liable to DCMS. Based on that finding, DCMS’s claim against those parties – which apparently were the only claims left by DCMS -must be dismissed. That result would seem to bring the action to an end. Yet, DCMS was not represented on the motion.
DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., 2015 CarswellOnt 12593, 2015 ONSC 4125, 258 A.C.W.S. (3d) 312
Building contracts – insurance – subrogation – third party beneficiaries
Thomas G. Heintzman O.C., Q.C., FCIArb January 10, 2016