In the recent case of Axa Assurances vs Valko Électrique, the Quebec Court of appeal had to examine the admissibility of a recovery action taken by a builder’s risk insurer against some of the sub-contractors who had worked on the insured construction site. In a unanimous judgment, the Court partly confirmed the decision rendered by Justice Claude Larouche of the Superior Court and dismissed the insurer’s action against one of the subcontractors, thus adhering to the majority of the Canadian case law on the issue.

In this case, a general contractor received the mandate to renovate a municipal library. It sub-contracted the electrical work to Valko Électrique and the supply and installation of an automatic regulation system to Régulvar.

According to the construction contract signed between the municipality and the general contractor, the latter had the obligation to carry an insurance policy covering “the interests of the owner, of the general contractor, of the sub-contractors or of any other person having an interest in the work” [our translation]. Consequently, the general contractor obtained a Builder’s Risk policy with Plaintiff Axa. However, only the general contractor’s name was given to Axa as being the “Insured’s name”.

During the course of the construction project, a fire occurred on site. The cause of the fire was either related to an electrical failure or a failure of the regulation system.

Axa indemnified the general contractor for all of the damages caused by the fire and then sued the sub-contractors Valko and Régulvar to recover the indemnities. Both sub-contractors presented a motion to dismiss Axa’s action based on the argument that even if they were not specifically named in the policy, they could benefit from the policy as unnamed insureds. Consequently, they were pleading that Axa could not sue its own insureds and that both actions were illfounded. The Superior Court granted both motions and Axa’s actions were dismissed.

Axa appealed from the decision. The Court of appeal confirmed the decision as regards Valko but ruled that Axa’s action against Régulvar should not have been dismissed. Here are the Court’s motives.

First, the Court confirmed that the Builder’s risk policy is a property policy. By referring to the definition of the insured’s property “all property in course of construction, installation or reconstruction or repairs, if they are integrated in the named project” [our translation], the Court concluded that the electrical work provided by Valko fell within the scope of that definition and that Valko should thus benefit from the protection of the Builder’s risk policy.

As regards Régulvar, the Court analysed the allegations contained in Axa’s action and concluded that Régulvar was not only sued as a sub-contractor, like Valko, but also as a manufacturer of the defective regulation system it provided and installed. Régulvar argued that its role as a sub-contractor was sufficient to make it benefit from the policy notwithstanding the fact that it acted also, in the same contract, as a manufacturer. The Court rejected this argument.

The Court finally decided that Régulvar could not hide behind its role as a sub-contractor to escape its primary liability as a manufacturer. The Court thus granted Axa’s appeal against Régulvar.

One should however be prudent with this decision, even if unanimous. In fact, the interpretation of Régulvar’s status by this Court is not in conformity with the common law case law on the subject. Some Canadian Courts have confirmed in the past that a manufacturer who acted also as a subcontractor can not be sued by the Builder’s Risk insurer.

We hope that the Québec Court of appeal will clarify this debate in the future. To this effect, we will await with great interest the case of Optimum vs Plomberie Raymond Lemelin in which the Court of appeal will soon have to rule on the same issue.