Court File and Parties

COURT FILE NO.: CV-17-575938 DATE: 20190410 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Pre-Eng Contracting Ltd. Plaintiff

AND:

Intact Insurance Company and Northbridge General Insurance Corporation, Industrial Roof Consultants (IRC) Group Inc, also known as IRC Building Sciences Group or IRC McCavour Engineering Group Inc.; Etude Architects Inc.; and Archilegend Design International Inc., also known as NCK Engineering Ltd. Or NCD Inc. or NCD AI Design Inc. or NCK Engineering Defendants

BEFORE: Mr. Justice Peter Bawden

COUNSEL: Mr. Brian Lau, for the Defendant Intact Insurance Company Mr. William Chalmers for the Defendant Northbridge General Insurance Co. No One Appearing for the Plaintiff or the Remaining Defendants

HEARD: December 7th, 2018

Endorsement

Overview

[1] A builder was hired to do a number of renovations on a school. One of the renovations involved repairing the roof over the school gymnasium. As a result of negligent work by the builder, rain spilled through the roof onto the wooden floor of the gym causing approximately $164,000 in damages to the floor and another $100,000 in losses due to delay in the project. The builder had obtained All Risk Builder’s insurance from Northbridge to cover any property at the project site which was damaged in the course of construction, renovation or repair. Northbridge takes the position that it was the roof, not the floor, which was under construction and their insurance contract did not cover damages to the floor.

[2] The builder also had a Commercial General Liability policy with Intact Insurance. The Intact policy covered any damages which the builder might have to pay as compensation for property damage caused in the course of its work. The two contracts were intended to be complimentary: Northbridge would cover anything that fell within Builder’s Risk Insurance and Intact would cover everything else.

[3] Intact takes the position that the Northbridge policy should be held to cover any damage caused at the Project Site. Northbridge argues that its policy covers only the portion of the property which was actually under construction, renovation or repair. If the gym floor was not covered by the Builder’s Risk policy, Intact must cover the loss.

[4] Did the Builder's Risk insurance policy which was obtained for this project cover only the part of the structure that the builder was actually working on or did it cover the entire school?

A Conflict in the Jurisprudence Recently Clarified by the Court of Appeal of Newfoundland and Labrador

[5] On the date of this hearing, there was a conflict in the case law concerning the scope of Builder’s Risk insurance. In Medicine Hat College 2007 CarswellAlta 1649, a contractor conducting repairs on a large building had obtained a Builder's Risk insurance policy which was substantially identical to the Northbridge policy at issue here. The renovation included moving a gas line in order to construct a new entrance to a large building. Gas to the building was turned off while the repairs took place. Shortly after the gas was turned on, an explosion occurred in the penthouse of the building. The explosion had been caused by a faulty connection between the new gas hose and the existing lines. The contractor had not been hired to do any work on the penthouse of the building but that happened to be the site of the damage caused by his negligence. Justice McDonald of the Alberta Queen's Bench concluded that the penthouse mechanical room was included in the phrase “property in the course of construction” and was covered under the Builder's Risk policy.

[6] Justice Firestone of the Ontario Superior Court came to the opposite conclusion in Osler Health, 2015 ONSC 3959. In Osler, a builder had been hired to renovate a kitchen within a large hospital. The builder hired a plumber to move pipes under the kitchen. As a result of negligence on the part of the plumber, flooding occurred in many other areas of the hospital which gave rise to significant damages. The builder had obtained Builder’s Risk insurance with terms which were substantially the same as those which had appeared in the policy at issue in Medicine Hat College. Justice Firestone concluded that the Builder's Risk insurance held by the contractor only covered damages to the kitchen itself, not to the other areas of the hospital which had been flooded.

[7] In Team Mechanical Construction 2017 CarswellNfld 370, a renovator negligently installed a water treatment system in a large health sciences complex which lead to leakage and extensive damages to many areas of the complex. The renovator had obtained a Builder’s Risk insurance policy which was substantially the same as the policies used in Medicine Hat College and Osler Health. Justice Goodridge expressly disagreed with the ruling in Osler Health and instead followed the reasoning in Medicine Hat College.

[8] On March 6th, 2019, the Court of Appeal of Newfoundland and Labrador released its decision in Dominion of Canada General Insurance Company v. Viking Fire Protection Incorporated, 2019 NLCA 13. That court preferred and adopted the analysis of Justice Firestone in Osler Health, stating at paragraph 193:

[193] Having considered the conflicting authorities, and the respective analysis and conclusion in Medicine Hat and in William Osler, I am of the view that the interpretation in William Osler accords more directly with the functions of Builders’ Risk insurance. The Court in William Osler also adopts an interpretation of the policy language that is consistent with the parties’ reasonable expectations, and produces a realistic result that the parties would have contemplated in the commercial atmosphere in which the insurance was obtained.

What is Builder's Risk Insurance?

[9] In any large construction project, the work of one tradesman on a minor part of the project can potentially damage or destroy a large part of the entire project. Every construction contract includes a requirement that the builder obtain Builder's Risk insurance which covers both the builder and the owner of the property in the event of loss. The amount of the Builder’s Risk insurance which was required in Medicine Hat College, Osler Health, Team Mechanical and the case at bar was expressed in identical terms: “not less than the sum of the contract price plus the materials and products which would be required to complete the job.” It is no coincidence that the amount was stated in identical terms in all four cases.

[10] In Commonwealth Construction, , [1978] 1 S. C. R. 317, Justice De Grandpre explained the purpose of Builder's Risk insurance:

In England, it is usually called a ‘Contractors all risks insurance’ and in the United States, it is referred to as Builder’s risk policy. Whatever its label, its function is to provide to the owner the promise that the contractors will have the funds to rebuild in case of loss and to the contractors the protection against the crippling cost of starting a fresh in such event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset.

Pages 328-329

[11] This statement reflects an important distinction between Builder's Risk insurance and general commercial liability insurance. A contractor may be able to do a great deal of damage to a large structure through negligence but that does not require the builder to insure the entire structure before undertaking his small task. The object of Builder’s Risk insurance is to ensure that the builder has sufficient insurance to complete his work in the event of an unforeseen failure. That is what the contract between the builder and the building owner required in this case and in every other case which has been brought to my attention by counsel.

[12] As Justice Firestone observed in paragraphs 27 to 29 of Osler Health, it would not be commercially viable to impose an obligation on the contractor to obtain Builder’s Risk insurance to cover an entire building. If the builder was required to insure the entire structure while working on only one part, (even a part as potentially hazardous as gas lines), the cost of insurance for minor contractors would become prohibitively expensive.

What did the contract between Northbridge and the Builder Say?

[13] The Northbridge policy described the insured property as follows:

3. Insured Property This Form insures the following items for the amount of insurance specified on the Coverage Schedule of Part I and II; A. 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: (a) 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;

[14] The parties agree that the Project Site included the entire school.

[15] The Commercial General Liability policy which the builder held with Intact was intended to exclude coverage for what was covered under the Builder’s Risk policy. The exclusion clause reads 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.

Is there any ambiguity in the provisions of the Northbridge contract?

[16] Mr. Lau on behalf of Intact argues that there is an ambiguity in the terms of the Builder's Risk insurance contract which Northbridge was obliged to resolve. He points out, for instance, that the renovations contract with the school also included replacing doors. In replacing doors, the builder would invariably have to perform some work on the walls which supported the doors. If the walls were damaged, would they be “property under construction”? The contract also called for painting. Painting generally demands putting ladders and equipment on floors. If damage to the floors ensued, would they be “property under construction”?

[17] Mr. Lau submits that Northbridge was obliged to foresee such eventualities and its failure to address them leaves an ambiguity which must be resolved in favor of coverage. That position finds support in the comments of Justice Goodridge in Team Mechanical at paragraphs 13 to 16.

[18] Mr. Chalmers on behalf of Northbridge argues that the words “property under construction” do not leave any room for ambiguity. The insurance contract explicitly covered “property under construction” and the gym floors were not under construction. They were damaged as a result of construction but they were not under construction and were therefore not covered by the builder’s insurance policy. This position finds support in the following comments by Justice Firestone in Osler Health:

[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.

[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.

[19] With all due respect to Mr. Lau and the well-considered authorities which he has brought to my attention, I do not find any ambiguity in the Northbridge policy provisions. Bearing in mind Justice de Grandpre’s explanation of the purposes of Builder’s Risk insurance, I find that the words “property in course of construction, installation, renovation, reconstruction or repair” are sufficiently clear to exclude the gym floor from coverage under the Builder’s Risk policy. The gym floor was not being installed, renovated or reconstructed and there is no evidence to suggest that it was.

[20] The wording of Intact’s own policy which was intended to exclude coverage for Builder’s Risk damage employs similarly general language. The fact that language may, of necessity, be general does not make it ambiguous.

[21] If Intact’s argument were correct, it would lead to the conclusion that the Builder’s Risk insurance was intended to cover the entire Project Site. That interpretation cannot be reconciled with the Northbridge policy which specifically limits coverage to property in the course of construction which is located at the Project Site. If the intention of the parties was to extend coverage to the entire site, there would have been no need to include section 3 in the agreement which defines the “insured property” as property located at the Project Site.

No Basis to Distinguish Osler

[22] The law in Ontario regarding the scope of Builder’s Risk insurance was established in Osler Health. There is no factual basis to distinguish Osler Health from the case at bar. Mr. Lau argued that Osler Health did not involve the interpretation of the insurance policy and that the insurer was not a party to the proceedings. Those arguments are dispelled by paragraphs 37-44 of the judgment where Justice Firestone clearly states that in order to resolve the matters which were before the court, it was necessary to determine the scope of the Builder’s Risk coverage.

[23] Judicial comity alone dictates that this court should follow Justice Firestone’s reasoning unless it could be said that he was clearly wrong. Based on my review of the case law and the standard form language which seemingly appears in all Builder’s Risk insurance policies, I prefer the reasoning of Justice Firestone. I respectfully reject the conclusions in Medicine Hat College and Team Mechanical. I am fortified in this conclusion by the very recent decision of the Newfoundland and Labrador Court of Appeal in Dominion of Canada vs. Viking Fire Protection, 2019 NLCA 13.

Conclusion

[24] Intact has brought a Motion for summary judgment seeking declaratory relief and an Order dismissing the action against it. That Motion is dismissed.

[25] Northbridge has brought a Cross-Motion for both declaratory relief and an Order for summary judgment seeking an Order dismissing all claims against it. I am satisfied that there is no genuine issue requiring a trial in order to resolve this litigation and am prepared to grant the Order requested by Northbridge.

[26] This Court declares that the Builder’s Choice Policy issued by Northbridge to the builder does not provide insurance coverage for damages to the gym floor or damages which resulted from the delay in completing the project.

[27] The Court declares that the General Commercial Liability contract issued by Intact does provide coverage for the damage to the gym floor and damages arising from related delay to the completion of the construction project.

[28] Costs are awarded in favour of Northbridge on a partial indemnity basis in the total amount of $6,978.28 inclusive of HST and disbursements.

Justice Peter Bawden Released: 10 April 2019