Insurance and Professional Liability

Efficiency and success in completing a construction project will often depend on the cooperative attitude prevailing among all the various participants performing work on the job site. According to a ruling by the Quebec Court of Appeal, the Quebec courts will now have to take that reality into account in interpreting “Builders’ Risk” policies, a type of insurance often purchased by general contractors or project owners. In Optimum, société d’assurances inc. c. Plomberie Raymond Lemelin inc.,1 a decision handed down on March 5, 2009, the province’s highest court has extended the scope of these insurance policies to include subcontractors who are not named in the policy. In the wake of Quebec case law that had been inconsistent on this question, this recent decision, in conjunction with another Court of Appeal ruling dated December 15, 2008,2 has now established some solid benchmarks, and in so doing, has brought Quebec insurance law in line with the majority position of the common law courts on the issue.

In Optimum, the appellant had insured a general contractor under a Builders’ Risk policy issued in connection with the construction of a residential building. The general contractor and his company were the only insureds named in the policy and the general contractor had not applied to obtain coverage for the other contractors, subcontractors or employees working on the site. The property covered under the policy was described as property belonging to the insured, property not belonging to the insured but destined to “enter into and form part of the designated project”, and expendable materials and supplies necessary to complete the construction. Lastly, the policy included a subrogation clause that precluded the insurer from exercising subrogation rights against the insured or third parties responsible for the loss that are “entitled to benefit” from the insurance. On the day before the purchaser was to take delivery of the building, major water damage attributable to a plumbing defect occurred, causing significant damage to the project. The appellant, the insurer Optimum, indemnified the general contractor and sought subrogated recovery from the respondent, Plomberie Raymond Lemelin inc., for $110,000 worth of damage caused to the building. The Quebec Superior Court dismissed the action, holding that the respondent was insured under the Builders’ Risk policy, and as such, could not be sued by the appellant.

Justice Dutil, writing for the majority of the Court of Appeal, characterized Builders’ Risk insurance as property insurance, noting that since such insurance covered property not belonging to the insured, it could, pursuant to article 2483 C.C.Q, be contracted for the benefit of any third party without that party having to be explicitly named in the policy. The insured’s intention to contract for the benefit of himself alone was not, in her view, a reliable guide in interpreting a policy of this kind and the Court had to refer to the nature of such insurance in order to determine the scope of its application to parties involved in performing work on the job site. She went on to write that the ultimate role of a Builders’ Risk insurance policy was to facilitate the expeditious rebuilding of the project in the event of a loss, and that only if the ability of the various participants to sue one another were removed would it be possible for that to be achieved. Justice Dutil also observed that the subrogation clause contained in the policy appeared to provide for the possibility of other insureds benefiting from the insurance since it prohibited the insurer from exercising any subrogation rights against the insured or third parties “entitled to benefit from this insurance.”

Dissenting on the main appeal,3 Justice Dalphond took issue with Justice Dutil’s reasoning as to the importance that should be imputed to the intention of both parties when negotiating a Builders’ Risk insurance policy, which intention was, in his view, crucial given the variety of insurance product offerings available to construction industry participants. He also expressed reservations as to whether the policy contained a provision clear enough to establish that a stipulation for a third person, in the sense of article 2483 C.C.Q., had been made in favour of the respondent.

IMPACT OF THE DECISION

This decision is in line with a recent trend in case law that advocates extending the scope of a ruling by the Supreme Court of Canada, in Commonwealth Construction Co. Ltd. v. Imperial Oil Ltd.,4 where a subcontractor that had worked on a construction site was recognized by the Court as an insured. However, in that case, the project owner had contracted with the insurer for the insurance to be written for the benefit of all the contractors and subcontractors working on the project. The courts in the common law provinces, and on occasion the Quebec courts, have applied the principles deriving from that ruling even to cases that involved insurance policies providing coverage for the contractor or project owner alone.5 Optimum and the decision in AXA, handed down last December, both apply this same reasoning and thus strike a major blow to the minority position in the Quebec case law which had interpreted the Supreme Court ruling narrowly and refused to allow other contractors, subcontractors or employees to benefit from Builders’ Risk insurance in the absence of a clause extending coverage to such parties.6 It should be noted, however, that the benefit of such insurance cannot apply to subcontractors held liable as product manufacturers, as was determined by the Court of Appeal in December 2008 in AXA.

The question remains whether the Optimum and AXA decisions will result in the parties’ intention carrying no weight at all in connection with the interpretation of Builders’ Risk insurance contracts, or what the Court of Appeal would have done if the policy concerned had included a clause that explicitly allowed the insurer to exercise subrogation rights against certain parties.