DATE: 20050711

DOCKET: C42865

COURT OF APPEAL FOR ONTARIO

DOHERTY, MACPHERSON and CRONK JJ.A.

B E T W E E N :

ACTIVE FIRE PROTECTION 2000 LTD.

Ronald B. Moldaver, Q.C., for the appellant

Plaintiff/Defendant by Counterclaim (Respondent)

• and -

B.W.K. CONSTRUCTION COMPANY LIMITED

Chris Reain, for the respondent

Defendant/Plaintiff by Counterclaim (Appellant)

Heard: July 5, 2005

On appeal from the judgment of Justice H. D. Logan of the Superior Court of Justice dated December 8, 2004.

CRONK J.A.:

1. Background

[1] This appeal concerns the interpretation of contractual obligations to determine who, as between a contractor (the appellant) and a subcontractor (the respondent), agreed to assume the risk of damage to a construction project should damage to the project be caused by the subcontractor.

[2] The appellant, a general contractor, entered into a $2.381 million construction contract with the Town of Whitby for renovations and an addition to the Town’s centennial building (the “Main Contract”).

[3] Under the “contract documents” of the general conditions of the Main Contract, the appellant was obliged to obtain at its expense a policy of “all-risks” property insur-ance in the joint names of the appellant, the Town and the consultant (the architect) to the construction project. The coverage under this policy was to be maintained continuously until after the date of the final payment to the appellant under the Main Contract. The parties also agreed that the policy would provide, in the case of a loss or damage, for payment to be made to the Town and the appellant as their respective interests might appear.

[4] The appellant was further obliged under the general conditions of the Main Contract to protect the rights of the parties thereunder concerning work to be performed under subcontract by, among other matters, incorporating the terms and conditions of the “contract documents” into all contracts and written agreements with subcontractors and suppliers.

[5] After execution of the Main Contract, the appellant entered into a subcontract with the respondent for the provision of a fire protection system for the centennial building (the “Subcontract”). The general conditions of the Main Contract, including the appellant’s property insurance obligation, were incorporated by reference into the Subcontract. In addition, the Subcontract obliged the appellant to maintain fire insurance upon all work incorporated into the project and all materials on the premises. The Subcontract also stipulated that the appellant “shall not be liable for loss or damage to the work in this contract until after final acceptance of the work”.

[6] Article XII of the Subcontract, which concerned “liability for damage and personal injury” and “compensation insurance”, is key to the issues on this appeal. It read:

Article XII. The subcontractor hereby assumes entire liability for any and all damage or injury or any kind or nature whatever to all persons, whether employees or otherwise, and to all property resulting from the performance of the work provided in this Agreement, and agrees to indemnify [the appellant] from and against any and all loss, expense including attorney’s fees in connection with the performance of the work herein provided for, or resulting from the use by the Subcontractor, his employees, of any materials, tools, implements, scaffolding, ways, hoists, elevators, works or machinery or other property of [the appellant] whether same arise under common law or Worker’s Compensation Law (in effect) locally or otherwise. If such claim for demand is made against [the appellant], any payment due or thereafter to become due the subcontractor shall be withheld to cover such loss and expense, including attorney’s fees.

Until the completion and final acceptance of the work the subcontractor shall maintain, at his own expense, the following: “WORKER’S COMPENSATION INSURANCE” in accordance with the laws of the Province in which the Work is situated: “PUBLIC LIABILITY INSURANCE” and “PROPERTY DAMAGE” of sufficient coverages to protect and indemnify owners, [the appellant] and others from all claims that may arise.

[7] Contrary to its obligation under the Main Contract, the appellant did not obtain the requisite “all-risks” property insurance, nor did it acquire the fire insurance stipulated under the Subcontract.

[8] The respondent, however, purchased a “protective services package” insurance policy under which it was the named insured. This policy did not provide cover for “multi-peril, all risks property insurance” but did provide cover for “bodily injury, personal injury, property damage and failure to perform insurance”, subject to a deductible. Under the insuring agreement for this cover, the insurer agreed to pay on behalf of the insured “all sums which the Insured shall become obligated to pay by reason of the liability imposed by law upon the Insured or assumed by the Insured under contract” because of property damage. Certain exclusions to this cover applied under the policy, including the following:

The Insurance afforded hereunder shall be excess insurance over any valid and collectible property insurance (including any deductible portion thereof) available to the Insured, such as but not limited to Fire and Extended Coverage, Builder’s Risk Coverage or Installation Risk Coverage…

[9] Prior to completion of the construction project, a flood occurred in the basement of the centennial building when the main intake connection on the sprinkler system installed by the respondent failed. The respondent admitted that it was negligent in installing the connection and that its negligence caused the flooding. However, it did not admit that it was responsible for the payment of any damages resulting from the flooding.

[10] The appellant paid the Town the amount demanded by it as damages for its losses occasioned by the flood. The appellant then sought to recover this sum, in the net amount of $51,000, from the respondent as compensatory damages. The appellant also withheld further payments to the respondent under the Subcontract, in the amount of $14,790.66, subject to back charges and change orders.

[11] Although the respondent denied liability to the appellant and did not admit the quantum of the appellant’s claimed damages, it acknowledged that its liability insurer would indemnify it in respect of any judgment that might be obtained by the appellant against it.

[12] The parties did not wish their dispute to proceed to trial. Instead, they agreed that liability for the payment of the appellant’s claimed damages would be determined on a summary judgment motion and that, thereafter, the quantum of the appellant’s damages and the balance due to the respondent under the Subcontract would be determined at the trial of an issue.

[13] The summary judgment motion on liability proceeded before Logan J. of the Superior Court of Justice. On December 8, 2004, he held that the respondent was not liable to the appellant for damages arising from the losses occasioned by the flood. He concluded:

An agreement made by a contractor with the owner to obtain “all-risks” property insurance protects the sub-contractor or the owner from claims for its own negligence. This rule follows from the principle of law that a party cannot benefit from its own wrong. If the subcontractor was held liable, it would be deprived of the insurance that was supposed to have been taken out in its favour. It would make no business sense for each subcontractor to have to obtain its own insurance.

2. Issues

[14] I would frame the three issues on this appeal in this fashion:

(1) Did the trial judge err by finding that the appellant’s obligations to obtain all-risks property and fire insurance operated as an assumption by the appellant of those risks?

(2) If the answer to (1) is in the negative, is the appellant’s damages claim against the respondent precluded?

(3) Is it open to this court to grant judgment in favour of the appellant by dismissing the respondent’s claim for payment on the Subcontract and allowing the appellant’s claim for damages, subject to a reference as to the quantum of those damages?

3. Analysis

[16] There is no dispute that the appellant was required by the general conditions of the Main Contract to acquire an all-risks property insurance policy on the entire construction project prior to the flood and that this policy, if in place in accordance with the appellant’s contractual obligation, would have responded to the losses arising from the flood. It is also common ground that if the appellant had met its obligation under the Subcontract to acquire and maintain fire insurance, the fire insurance policy would also have responded to the losses occasioned by the flood.

[17] Accordingly, the question is upon whom the assumption of risk falls in this case and whether, in the absence of the policies of insurance that the appellant contracted to provide, the appellant is entitled to claim against the respondent for the losses caused by the flood, given the respondent’s insurance and indemnification obligations under the Subcontract and its admitted negligence.

[18] In my view, the decision of this court in Madison Developments Ltd. v. Plan Electric Co. (1997), 152 D.L.R. (4th) 653, leave to appeal to S.C.C. refused [1997] S.C.C.A. No. 659, is dispositive of this appeal. In that case, this court held:

[9] Let me begin with an analogous circumstance. The law is now clear that in a landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to the premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence. A contractual undertaking by the one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. This is so notwithstanding a covenant by the tenant to repair which, without the landlord’s covenant to insure, would obligate the tenant to indemnify for such a loss. This is a matter of contractual law not insurance law, but, of course, the insurer can be in no better position than the landlord on a subrogated claim. The rationale for this conclusion is that the covenant to insure is a contractual benefit accorded to the tenant, which, on its face, covers fires with or without negligence by any person. There would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant’s negligence.

[11] In my view, this interpretive reasoning as to the terms of a lease applies equally to this contract between contractor and subcontractor. This is a sizable building construction project in which the contractor has agreed with the owner to obtain comprehensive fire insurance covering losses arising from any cause. The anticipation was that a group of subcontractors would contribute their efforts to the overall project and it was undoubtedly expected that if a fire occurred it would most likely be caused by the negligence of one of those subcontractors. Given the contractor’s obligation in favour of the owner to obtain comprehensive fire insurance it makes no business sense for each subcontractor to pay premiums to duplicate that coverage. There would be no purpose for Article VI in the subcontract if it was not to protect the subcontractor from claims for fire damage caused by its negligence; there could be no claim if the subcontractor was not negligent.

[12] The separate obligation of the subcontractor in Article V to obtain liability insurance is, in a way, akin to the separate obligation of the tenant to repair. The subcon-tractor’s obligation to obtain liability insurance, which would cover many risks beyond that of fire, can be written with an eye to the respective obligations of the subcontractor and the contractor. In other words, the liability insurer should know in setting the premium that the subcontractor is protected against fire-related losses to the owner or general contractor caused by its negligence [emphasis added and citations omitted].

[19] This reasoning is apposite here. In this case, both in the Main Contract and in the Subcontract, the appellant contractually undertook to obtain insurance for the entire construction project that it admits would have responded to the losses in issue. In breach of its contractual obligations, the appellant failed to obtain such insurance coverage. But, its commitments to obtain the requisite insurance (all-risks property insurance under the Main Contract and fire insurance under the Subcontract) operated as a voluntary assumption by the appellant of the risk of loss or damage caused by the perils to be insured against. As a matter of contract, it assumed the risks.

[20] When the appellant’s commitment to obtain all-risks property insurance was incorporated as a term of the Subcontract, it became a specific contractual covenant in favour of the respondent. In addition, the appellant gave a separate and distinct covenant under the Subcontract in favour of the respondent to obtain fire insurance. As this court indicated in Madison, there would be no benefit to the respondent from these contractual covenants by the appellant unless they applied to insured perils caused by the respondent’s own negligence. Thus, the appellant’s failure to obtain the specified insurance was a breach of both the Main Contract, entitling the Town of Whitby to relief against the appellant, and the Subcontract, in contravention of its obligations to the respondent.

[21] As in Madison, this was a large construction project. The parties to the Main Contract expressly envisaged that subcontractors would be involved in carrying out the work on the project. For this reason, the Town extracted a commitment by the appellant to protect the Town’s interests under the Main Contract by incorporating the general conditions of the Main Contract into any subcontract. The respondent’s obligations under Article XII of the Subcontract must be understood in this context.

[22] The respondent agreed to assume the liability described in Article XII in the face of the appellant’s obligations to obtain all-risks property and fire insurance. In assuming that liability, the respondent was entitled to expect performance by the appellant of those contractual obligations, to its benefit and to the benefit of the owner of the project, the Town of Whitby. Were it otherwise, the respondent’s assumption of such liability may well have been differently expressed or reduced.

[23] It is important to reiterate that the respondent’s role on the overall construction project was a narrow, albeit an important one. Its contribution to the work of the project was to provide a fire protection system. In this context, its obligation to obtain “public liability insurance” and “ ‘property damage’ of sufficient coverages [to] protect and indemnify [the Town, the appellant] and others” was undertaken, as suggested in Madison, “with an eye to the respective obligations of the subcontractor and the contractor”.

[24] The insurer under the respondent’s policy was the same insurer involved with the whole of the construction project. It may be assumed therefore, as also suggested in Madison, that in setting the premium for the respondent’s policy, the insurer would be aware of the appellant’s obligations to insure against all-risks property and fire-related damage. This is confirmed in this case by the fact that the respondent’s policy of insurance is excess, not primary, insurance in relation to property damage.

[25] In these circumstances, I agree with the trial judge that if the respondent was held liable to the appellant in the manner claimed, the respondent “would be deprived of the insurance that was supposed to have been taken out in its favour”. I also agree with the trial judge’s observation that, “It would make no business sense for each sub-contractor to have to obtain its own insurance” for the risks to be insured, as a matter of contract, by the appellant.

[26] The appellant argues that the trial judge’s ruling in this case negates the respondent’s insurance and indemnity obligations under Article XII of the Subcontract, essentially rendering them meaningless. I disagree.

[27] Under Article XII of the Subcontract, the insurance to be obtained by the respondent was intended to respond to those third party claims against the appellant that were in amounts in excess of the limits that were to be provided under the insurance polices that the appellant was required, and failed, to obtain. Moreover, Article XII of the Subcontract, properly read, is concerned with third party claims, not claims by the appellant against the respondent.

[28] The appellant also emphasizes the respondent’s acknowledgement that its insurer will indemnify it in respect of any judgment obtained by the appellant against it. But, as counsel for the respondent submits before this court, there are many reasons, as between the respondent and its insurer, for such an acknowledgement. For example, under the insuring agreement to the respondent’s policy, the respondent’s insurer is liable for the respondent’s liability “imposed by law”. If this court were to reverse the trial judge’s interpretative ruling, the respondent’s liability for the appellant’s damages claim would be “imposed by law”, thereby triggering the insurer’s indemnification obligations. In addition, by way of further example, the respondent’s insurance cover was excess to insurance policies that were never issued. In the face of the appellant’s failure to obtain the requisite insurance, the respondent’s policy may well operate to ‘drop down’ to the primary layer of insurance coverage. That fact, however, does not relieve the appellant of its contractual obligations or entitle it to claim relief that, but for its own breach of contract, it would not be entitled to otherwise pursue.

[29] Finally, the appellant argues that the Madison principle does not apply here because, unlike in Madison, this case is not concerned with an insurer’s subrogation rights. I disagree. Although the issues in Madison arose in the factual context of a dispute regarding subrogation rights, this court’s interpretation in Madison of the ambit of the protection afforded by the insurance covenants in issue was not restricted to situations involving contested subrogation rights. The critical issue here, as also engaged in Madison, is whether the respondent subcontractor is entitled under the contractual bargain made between the parties to derive the benefit of the insurance obligations undertaken by the appellant general contractor. In my view, the contractual arrangements between the parties establish this entitlement.

[30] Accordingly, I conclude that the appellant’s appeal cannot succeed. It follows that it is unnecessary to address the appellant’s additional submission concerning the jurisdiction of this court to grant judgment in its favour.

[31] I would dismiss the appeal. The respondent is entitled to its costs of the appeal on the partial indemnity scale, fixed in the agreed amount of $8,500, inclusive of disbursements and Goods and Services Tax.

RELEASED:

“JUL 11 2005” “E.A. Cronk J.A.”

“DD” “I agree Doherty J.A.”

“I agree J. C. MacPherson J.A.”