CITATION: William Osler Health Centre v. Compass Construction et al, 2015 ONSC 3959
COURT FILE NO.: CV-09-391051
DATE: 20150625
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
WILLIAM OSLER HEALTH CENTRE
Plaintiff
– and –
COMPASS CONSTRUCTION RESOURCES LTD., BLACK CREEK MECHANICAL INC., FRASER BRACE ENGINEERING COMPANY LIMITED and PIGOTT CONSTRUCTION LIMITED
Defendants
Christopher Reain, for the Plaintiff, William Osler Health Centre (Responding Party)
Thomas J. Donnelly, for the Defendant, Compass Construction Resources Ltd. (Responding Party)
William S. Chalmers, for the Defendant, Black Creek Mechanical (Moving Party)
HEARD: June 3, 2015
REASONS FOR DECISION
firestone j.
Introduction
[1] This is a motion in a subrogated action by the Plaintiff, William Osler Health Centre (“William Osler”), against the general contractor, Compass Construction Resources Ltd. (“Compass”) and the subcontractor, Black Creek Mechanical Inc. (“Black Creek”) regarding damage done by Black Creek during construction. Compass was hired to complete renovations to the kitchen (“the Project”) at Etobicoke General Hospital (“the Hospital”), owned by the Plaintiff. Black Creek is a mechanical and plumbing contractor hired by Compass on a subcontract to complete work on the Hospital renovation. On November 22, 2007, in the course of Black Creek’s work on the Project, a water line separated. This resulted in flooding that damaged not only the kitchen but other areas of the Hospital.
[2] This motion was originally brought under Rules 20 and 21 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (“the Rules”) for the following: (a) an order for summary judgment, pursuant to Rule 20 dismissing all claims in this action against Black Creek on the basis that there is no genuine issue requiring a trial and (b) in the alternative, in order pursuant to Rule 21 for determination of a question of law, specifically, whether the defendant Compass is to wholly indemnify William Osler.
[3] During the hearing, the parties agreed to withdraw the summary judgment motion and to seek, pursuant to Rule 21.01(1)(a), determination of a question of law: whether the responding party/defendant Compass can maintain its cross-claim against the moving party/defendant, Black Creek for contribution and indemnity under the Negligence Act, R.S.O. 1990, c.N.1, as amended. Compass accepts that, according to the tort immunity principle, it cannot cross-claim against Black Creek for damages to the kitchen. However, Compass argues that it is not barred from cross-claiming against Black Creek for damages to the rest of the Hospital.
[4] In subsequent correspondence to the court dated June 17, 2015, the parties confirmed and agreed to the parameters of the Rule 21.01(1)(a) motion before me. The full text of their letter reads:
Further to our attendance before you on June 3, 2015, we confirm that the parties have agreed to the following conditions to assist in your determination of the Motion brought pursuant to Rule 21 of the Rules of Civil Procedure:
That the issue to be determined is whether the cross-claim made by Compass against Black Creek is barred as a result of General Condition 11.1.1.4 of the CCDC2-1994 Stipulated Price Contract (the “covenant to insure”) between Compass and the Plaintiff.
The defendants Compass and Black Creek agree that the court can rule on the scope of the covenant to insure in order to determine whether the cross-claim against Black Creek is barred. However, the parties recognize that the Builder’s Risk insurer, Dominion of Canada, is not before the Court. The parties therefore confirm that the court is not being asked to rule on whether the cross-claim is covered under the Builder’s Risk policy issued by Dominion of Canada.
The defendants Compass and Black Creek agree that no evidence is required to decide the issue on the Motion beyond the evidence that has been filed for this Motion.
The parties agree that any determination of the scope and effect of the covenant to insure on the cross-claim will not affect or limit the liability of either Compass or Black Creek to the Plaintiff.
The parties agree that General Condition 9.1.1 of the CCDC2-1994 Stipulated Price Contract does not limit Compass’ liability to the Plaintiff, nor does it limit Compass’ responsibility to the Plaintiff for damages caused by Black Creek.
The parties recognize that Justice Myers issued an Order, dated March 6, 2015, regarding the scheduling of the motion and of the trial in this action.
[5] The parties enclosed and consented to the following amended-amended Notice of Motion as follows:
This Motion is for:
An Order, pursuant to Rule 21 of the Rules of Civil Procedure, for a determination of a question of law, specifically, whether the cross-claim made by the Defendant, Compass Construction, against the Defendant, Black Creek Mechanical Inc., is barred as a result of General Condition 11.1.1.4 of the CCDC2-1994 Stipulated Price Contract.
[6] The parties advised during argument that a determination of this issue may assist in settlement discussions between the parties.
Factual Background
[7] In October 2007, the Plaintiff and Compass entered into a Standard Construction Document CCDC2-1994 Stipulated Price Contract (“CCDC2-1994”) according to which Compass would act as the general contractor for the Project at the Hospital.
[8] The CCDC2-1994 contained a “covenant to insure” in General Condition 11.1.1.4, according to which the Contractor was required to provide, maintain and pay for specific insurance coverage. In particular, the CCDC2-1994 required the Contractor to obtain “all risks” property insurance:
4 Property and Boiler and Machinery Insurance:
(1) “All risks” property insurance shall be in the joint names of the Contractor, the Owner, and the Consultant, insuring not less than the sum of the amount of the Contract Price and the full value, as stated in the Supplementary Conditions, of Products that are specified to be provided by the Owner for incorporation into the Work, with a deductible not exceeding $2,500.00 The insurance coverage shall not be less than the insurance required by IBC Form 4042 or its equivalent replacement, provided that IBC Form 4042 shall contain the latest edition of the relevant CCDC endorsement form. … [emphasis added]
[9] The IBC Form 4042 (“IBC 4042”) is a standard-form builder’s risk policy that was drafted by the Insurance Bureau of Canada. The IBC 4042 uses the following wording to describe the “property insured” by the agreement:
This Form, except as provided in this Form, insures the following property at the “Project site” for the amount of insurance specified on the “Declarations Page” for the “Project Site”:
(a) property in the course of construction, installation, reconstruction or repair other than the property described in 2(b):
(i) owned by the Insured;
(ii) owned by others, provided the value of such property is included in the amount of insurance;
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]
[10] In this case, the “property in the course of construction” is identified by the contract between Compass and the Hospital which sets out of the scope of the work:
2.6.1 The scope of the work includes, but is not limited to, the following work:
2.6.1.1 provision of kitchen renovations work and related mechanical HVAC systems and electrical distribution systems work as shown and required;
2.6.1.2 provision of required general trades work including but not limited to demolition work, architectural work to existing room, structural work, new walls, and cutting/patching/painting/fire stopping/smoke sealing of penetration through fire rated walls/ceilings;
2.6.1.3 testing, commissioning and certification of work and systems as required.
[11] In fulfillment if its covenant to obtain to obtain “all risks” property insurance, Compass held a builders’ risk policy issued by Dominion of Canada General Insurance Co. (the “Dominion policy”). This policy complied with the insurance limits stipulated above, insuring Compass to an amount not less than the amount of the Contract Price and any products incorporated therein. In this case, the contract price was $389,440 and builder’s risk coverage in the Dominion policy was $3,500,000. In defining the type and scope of the property insured, the Dominion policy is identical to the wording in the IBC 4042, recited above.
[12] The Dominion policy also included the following indemnity agreement, which is identical to the language in the IBC 4042:
- In the event that any of the property insured be lost or damaged by the perils insured against, the Insurer will indemnify the insured against the direct loss so caused to an amount not exceeding whichever is the least of:
(a) the “replacement cost” value of the property at the time of loss or damage but in no event to exceed the amount necessarily expended for replacement;
(b) the interest of the Insured in the property;
(c) the amount of insurance specified in the “Declarations” in respect of the property lost or damaged.
Provided, however, that where the insurance applies to the property of more than one person or interest, the Insurer’s total liability for loss sustained by all such persons and interests shall be limited in the aggregate to the amount or amounts of insurance specified in the “Declarations.”
[13] Compass retained Black Creek as a subcontractor to perform work on the Hospital pursuant to a November 1, 2007 Purchase Order. That Purchase Order stated: “all terms and conditions of a Standard CCDC 2 Contract to apply” and “Terms: As per CCDC 2.”
Positions of the Parties
Moving Party: Black Creek
[14] The moving party Black Creek argues that the principle of tort immunity bars Compass from cross-claiming against Black Creek for the damages done to the entirety of the Hospital. Black Creek disagrees with Compass’ position that the tort immunity principle only bars Compass from cross-claiming against Black Creek with respect to damage done to the kitchen.
[15] According to the tort immunity principle, when one party to a contract covenants to obtain insurance for another party, this signifies an assumption of the risk, and the party obtaining the insurance cannot sue the other party for the losses which are insured.
[16] The tort immunity principle arose in the context of landlord-tenant relationships but was expanded to apply to the construction context by the Ontario Court of Appeal in Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80. That case considered the subrogation rights of an insurer under a builders’ risk policy issued to the general contractor of a construction project. Justice Carthy for the court held that a contractor’s covenant to insure “protects the subcontractor from a subrogated claim for losses caused by fire resulting from the subcontractor’s negligence” (at para. 13). Discussing the rationale for this position, Carthy J.A. wrote at para. 11:
This is a sizeable 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.
[17] The reasoning in Madison was applied and expanded in Active Fire Protection 2000 Ltd. v. B.W.K. Construction Co., [2004] O.J. No. 5087 (S.C.), aff’d 2005 CanLII 24226 (ON CA), [2005] O.J. No. 2892 (C.A.). In the Superior Court decision, Logan J. held:
An agreement made by a contactor with the owner to obtain “all risks” property insurance protects the subcontractor or the owner from claims for its own negligence.
[18] Black Creek argues that the same principles applicable to subrogated claims operate with respect to cross-claims, such that the cross-claim brought by Compass is barred. For support, it points to the Court of Appeal’s decision Active Fire, in which Cronk J.A. stated at para. 29:
… 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.
[19] Compass does not dispute the principles outlined above, but argues that the covenant to insure, and the all-risks builder’s insurance obtained in fulfillment of that covenant, only insures the damage done to the Project and not to property adjacent to the project. As a result, Black Creek would not be immune from cross-claim for damages done to areas outside the kitchen.
[20] In response, Black Creek points to the case of Medicine Hat College v. Starks Plumbing & Heating Ltd., 2007 ABQB 691, where the Alberta Court of Queen’s Bench expanded the scope of coverage contemplated under all-risks builders’ insurance, which therefore expands the tort immunity. In that case, the court considered whether all-risks builders’ insurance taken out with respect to the construction of an addition extended to cover losses to the existing facilities arising out of negligence or errors in construction. Justice McDonald held that under a builder’s risk policy, each party working on a portion of a large commercial construction project had an insurable interest in the entire project. He found that the existing structure could be considered property “in the course of construction, installation, reconstruction or repair” in part because it would not be difficult to envisage a situation where negligent work of a tradesperson employed to do “new work” could cause damage to all or part of an existing structure. Justice McDonald concluded at paras. 62-63:
I hold that all parties involved in the construction of this project had an insurable interest not only in the addition being undertaken to the existing structure but to the existing structure itself. To hold otherwise would be to defeat the reasonable expectations of the parties and would require clear language of exclusion, which is absent in this case.
In conclusion, therefore, I hold that the on the facts of this case, the loss in question is covered by the Builder’s Risk Policy.
[21] Black Creek argues that, following the logic of Medicine Hat, the entire Hospital property in this case ought to be considered property “in the course of construction, installation, reconstruction or repair.” By having covenanted to obtain all-risk builders’ insurance coverage, which by implication insures Black Creek, Compass has therefore deprived itself of the right to claim over against Black Creek with respect to any damage arising out of the construction on the Project.
Responding Party: Compass
[22] Compass argues that because the tort immunity principle originated in the context of leases between landlords and tenant, it is appropriate to examine Supreme Court jurisprudence regarding the extent of the immunity as between landlord and tenant in order to determine whether the tort immunity extends as far as Black Creek argues. An analysis of this jurisprudence shows that there is no tort immunity for losses that are outside of the scope of the covenant to insure.
[23] In Cummer-Yonge Investments Ltd. v. Agnew Surpass Shoe Stores Ltd., 1975 CanLII 26 (SCC), [1976] 2 S.C.R. 221, the Supreme Court held that the landlord’s covenant to insure the building under all-risks property insurance barred its claim against the tenant for damage the tenant caused to the building. However, this covenant to insure did not extend so far as to preclude a claim for lost rents against the tenant. The court wrote at paras. 57-58:
The release of liability is from “damage to the building” only, and the lessor’s covenant is to insure the shopping centre from the “risk of loss or damage caused by or resulting from fire or any additional peril from fire, lightning or tempest or any additional peril defined in a standard fire insurance additional perils supplemental contract. This wording does not extend to loss of rental income…
The tenant cannot claim the benefit of any insurance which the owner took beyond what the lease required and its relief from liability cannot protect it beyond the actual wording of the stipulation in the lease.
[24] In the case at bar, Compass only agreed to provide builders’ risk insurance equivalent to the Insurance Bureau of Canada’s standard policy (IBC 4042), which only covers property that is in the course of construction. It does not cover damage to adjoining or adjacent property.
[25] According to Compass, there are a number of factors supporting the conclusion that the scope of the IBC 4042 and the scope of the covenant to insure do not encompass the entire Hospital.
[26] First, this interpretation follows from the clear wording of the policy (“property in the course of construction, installation, reconstruction or repair”).
[27] Second, it would be commercially unreasonable for Compass to obtain insurance for the entire Hospital. 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.
[28] Third, the Hospital is already insured and to require a small contractor to obtain duplicate coverage would not make commercial sense.
[29] Fourth, the author of the CCDC2-1994 form, the Canadian Construction Documents Committee, has explained the insurance requirements to make it clear that the required insurance does not encompass property adjacent to the work. In its Guide to Construction Insurance, it expressly states that coverage for adjacent property is not covered under the builders’ risk policy, writing:
Projects involving renovations or additions to existing buildings… and construction or installations within existing structures present additional exposures. In many cases, the risks and financial exposure can be considerably out of proportion to the contract value. The following are examples of additional risks; the insurance representatives should be consulted to ensure that these are addressed with appropriate additional insurance coverage:
The means by which damage to existing property will be insured. [...]
[30] Fifth, the CCDC2-1994 expressly distinguishes between the “work” and the “property adjacent to the place of the work”:
9.1.2 Should the Contractor in the performance of the Contract damage the Work, the Owner’s property, or property adjacent to the Place of the Work, the Contractor shall be responsible for making good such damage at the Contractor’s expense.
[31] Had the covenant to insure been intended to cover adjacent property, it would have expressly included it.
[32] Sixth, the CCDC2-1994 only required Compass to obtain insurance for the greater of the amount of the contract or the replacement cost of the work.
[33] Seventh, the CCDC2-1994 contract between the Hospital and Compass expressly preserves Compass’ right of subrogation against Black Creek, in s. 9.2.1 (recited above). The covenant to insure is found in this same document. According to the principles of contractual interpretation, the meaning and scope of a contractual clause must be interpreted in the context of the entire agreement. The express preservation of a subrogation right indicates an intention for Black Creek to be responsible for losses outside the scope of the insurance required under the covenant to insure. If it were the case that the covenant to insure was intended to act as a complete bar for all damages caused by Black Creek, the subrogation clause would be rendered meaningless. A contractual clause cannot be interpreted in a way that makes it meaningless.
[34] With regard to Medicine Hat, Compass submits that this case was wrongly decided and, in any event, is not binding on an Ontario court. The determination that the policy covered the entire building was based on the court’s decision that the contractor and subcontractors had an “insurable interest” in the existing structure. However, possessing an insurable interest does not determine the scope of coverage – it merely indicates whether a person is permitted to obtain insurance on the property.
Analysis
[35] The extent of Black Creek’s tort immunity is directly related the extent of its covenant to insure. If this covenant extends to cover damage done to the entire Hospital, then Compass is barred from cross-claiming against Black Creek for those damages. If, however, this covenant only insures the Project, then there is no basis in the law of tort immunity to prevent Compass from cross-claiming against Black Creek.
[36] The parties have agreed that the scope of coverage provided by the Dominion policy itself will not be the subject of analysis by this court:
… The parties therefore confirm that the court is not being asked to rule on whether the cross-claim is covered under the Builder’s Risk policy issued by Dominion of Canada.
[37] Despite this statement, the parties have also agreed that the covenant to insure contained in GC 11.1.1.4 is at issue. This provision includes reference to the terms and conditions of the IBC 4042, which operate as a minimum standard for what the all-risks builder’s insurance must cover. Thus, it is appropriate to examine the language of the IBC 4042 when determining the scope of the covenant to insure. As has been mentioned, however, the Dominion policy taken out by Compass employs the exact language of the IBC 4042. It is therefore impossible for this court to make a determination on the scope of the covenant to insure without at the same time determining whether the cross-claim is covered under the Dominion policy, at least insofar as the identical provisions in the IBC 4042 and the Dominion policy are concerned.
[38] For all of the reasons argued by Compass, it would strain the interpretation of both the IBC 4042 and the contract between Compass and the Hospital if this court were to find that “property in the course of construction” included the entire Hospital. The covenant to insure covers the Project, but not the rest of the Hospital.
[39] On a basic level, if Compass’ insurance coverage were intended to insure the entire Hospital as a “property in the course of construction,” the premiums and coverage limits stipulated in the covenant to insure would be much higher – they would more closely resemble the Hospital’s own insurance coverage. It thus stands to reason that the covenant to insure was not intended by either party to cover damage done to the entire Hospital.
[40] This interpretation is supported by the language used in the IBC 4042, which differentiates between the “property insured” and the “Project site”:
This Form, except as provided in this Form, insures the following property at the “Project site” for the amount of insurance specified on the “Declarations Page” for the “Project Site”:
(a) property in the course of construction, installation, reconstruction or repair other than the property described in 2(b) […]
[41] Per the IBC 4042’s definitions section, “project site” means “the site of a project described on the “Declarations Page.” This definition clearly differentiates between a project and the location at which it takes place, i.e. between the kitchen renovation project and the rest of the Hospital.
[42] The IBC 4042 also refers to the “property insured” in its indemnification provision:
- In the event that any of the property insured be lost or damaged by the perils insured against, the Insurer will indemnify the insured against the direct loss so caused to an amount not exceeding whichever is the least of:
(a) the “replacement cost” value of the property at the time of loss or damage but in no event to exceed the amount necessarily expended for replacement;
(b) the interest of the Insured in the property; […]
[43] This language makes it clear that the policy is intended to cover the “interest of the Insured” in the “property insured” at the Project Site only. The Alberta Court of Queen’s Bench held in Medicine Hat that contractors have an insurable interest in an existing structure (or, using the terminology in this case, the “Project Site”). Whether or not this is true, it does not change the clear language of the policy by which it is stipulated that only the Insured’s interest in the “property insured” will be covered by the policy. Any insurable interest the insured has in the Project Site as a whole, or property adjacent to the Place of the Work, is not insured by the all-risks builders’ policy.
[44] Support for this position is found in the excerpts from the Canadian Construction Documents Committee’s Guide to Construction Insurance relied upon by Compass. In this Guide, the CCDC advises contracting parties to ensure the risks of damage to existing structures are addressed with additional insurance coverage. This supports the argument that the covenant to insure and the all-risks builders’ policy obtained in fulfillment of that covenant were not intended to cover damage to existing property. Neither party seems to have followed the advice to obtain additional insurance coverage. However, the solution to this oversight is not simply to read broader coverage into the policy that was obtained.
Disposition
[45] For the reasons above, I find Compass’ cross-claim against Black Creek for damages to the Hospital outside of the kitchen is not barred by the covenant to insure.
[46] If the parties cannot agree on costs, I may be contacted in order to set a timetable for delivery of cost submissions.
Firestone J.
Released: June 25, 2015
CITATION: William Osler Health Centre v. Compass Construction et al, 2015 ONSC 3959
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
WILLIAM OSLER HEALTH CENTRE
Plaintiff
– and –
COMPASS CONSTRUCTION RESOURCES LTD., BLACK CREEK MECHANICAL INC., FRASER BRACE ENGINEERING COMPANY LIMITED and PIGOTT CONSTRUCTION LIMITED
Defendants
REASONS FOR DECISION
Firestone J.
Released: June 25, 2015