In 2000, Foster Wheeler contracted with the Greater Toronto Airports Authority Association Inc. (“GTAA”) to supply and install four steam boilers in one of its facilities (the “Supply Contract”).  During installation, one of the steam boilers exploded damaging the boiler and other GTAA property.  GTAA was fully compensated for the damage by its insurer who proceeded to commence a subrogated claim against Foster Wheeler and its sub-contractors.

Foster Wheeler moved for summary judgment on the basis that even if it was negligent, the GTAA action could not succeed in light of its covenant to insure in the Supply Contract.  The Supply Contract obligated GTAA to maintain “All Risks” Course of Construction Insurance naming Foster Wheeler as an additional insured:

G.C. 42.1: Without restricting any other responsibility of the Supplier under the Contract, the GTAA shall provide, maintain and pay for insurance … Coverage under these policies extends only to the activities of the insureds in relation to the project. … [T]hese policies will … include as additional insured …[Foster Wheeler] …

The Supply Contract also obligated Foster Wheeler to place “All Risks” insurance on machinery owned or used by it or its sub-contractors, that contained a “waiver of subrogation” in favour of the GTAA.  GTAA’s covenant to insure Foster Wheeler under G.C. 42.1 did not contain such a waiver.

The other contractual provision that played a major role in the interpretation of the Supply Contract was as follows:

G.C. 42.14: [Foster Wheeler] shall protect the project [and] the GTAA’s property … from damage.  The Supplier is responsible for damage that occurs as the result of the Supplier’s operations under the Contract … If [Foster Wheeler] … damages the work [or] the GTAA’s property …. [Foster Wheeler] is responsible for making good that damage at its expense.  This does not apply to injury, loss or damage to the extent that GTAA receives proceeds of insurance … but [Foster Wheeler] is responsible for … any uninsured portion of GTAA’s loss. [emphasis added]

Justice Sproat prefaced her judgment with the following “telling “quote from Canadian Contractual Interpretation Law text:

Covenants to insure have been given a specific interpretation in the case law.  They not only obligate one party to obtain insurance … but also relieve the other party for losses subject to the covenant, even if such losses are caused by its own negligence. [emphasis in original].

Justice Sproat held that where (commercially sophisticated) parties intend depart from an accepted interpretation,  clearer language ought to be used.  In addition, the Supreme Court of Canada has previously recognized the utility of “Course of Construction” insurance barring rights of subrogation in construction projects, including the avoidance of duplicative insurance coverage and the cost and time associated with coverage litigation.  While Justice Sproat did not consider “Course of Construction” insurance to have a fixed definition, it is not expected that parties would use this phrase to mean a different type of coverage altogether.

The clearest evidence that Foster Wheeler was not liable for its own negligence was the exception in G.C. 42.14.  This provision, in effect, operated as a waiver of subrogation since it relieved Foster Wheeler of its obligation to compensate GTAA for a loss where GTAA received insurance proceeds. This exception was as good as the express waiver of subrogation found in Foster Wheeler’s covenant to insure GTAA.

The contractual terms on which the GTAA sought to rely were considered ambiguous, equivocal or explicable.  Considering the Supply Contract as a whole and in light of the accepted interpretation of covenants to insure and “course of construction” insurance, Justice Sproat held that the “proper and only reasonable interpretation is that the GTAA, by reason of its covenant to insure, agreed to relieve Foster Wheeler of liability for damages caused by its own negligence.

If the GTAA has no right to claim against Foster Wheeler, neither can its insurer.