You will recall the decision Axa Assurances c. Valko Électrique rendered by the Court of Appeal (see our communiqué dated January 10th 2009), which confirmed that Valco, a subcontractor, was covered by the insurance policy issued by Axa, a Builders Risk – extended type insurance.
The Court stated that this Builders Risk insurance policy, which by definition is a property insurance policy, was delivered to the general contractor and covered insured property and all risks that could affect directly all properties during building, installation, rebuilding or repair, as long as the construction works are intended to be included in the work. Consequently, the Court concluded that the subcontractor Valko, who performed all of the electrical works, was an unnamed insured in the Builders Risk insurance policy, and therefore, was covered by the said policy. Consequently, the insurer could not raise subrogation against the subcontractor.
Following this decision, two decisions were rendered regarding the same subject matter.
On January 30th, 2009, the Superior Court rendered a decision in Axa Assurance c. Plomberie Bourque.
In that case, the Court concluded that if the property of a third party was destined to be incorporated into the structure, it benefitted from the property insurance and, from then on, its owner became an unnamed insured under the Builders Risk insurance policy.
The Court explained that the question, often asked by insurers, regarding the need to insure the properties on the basis of business contracts existing between the parties, became academic, because the subcontractor was an unnamed insured to the policy, as long as it involves a Builders Risk policy. According to the Court, the intention of the parties to the construction contract was therefore not relevant.
Nonetheless, the Court took the time to analyze the intention of the parties to the construction contract. It concluded that the business contract binding the general contractor and the subcontractor was clear and unequivocal, and that it was to the effect that the general contractor undertook to insure the subcontractor’s unpaid properties on the job site. The judge thus concluded that since the construction contract included an obligation for the general contractor to insure the subcontractor’s property, the subcontractor benefitted from a property insurance, and therefore became an unnamed insured to the policy.
Recently, in March 2009, the Court of Appeal rendered another decision regarding Builders Risk policies, which reiterated the principles established in Valko.
In the case of Optimum société d’assurance c. Plomberie Raymond Lemelin, the insurance policy issued to the general contractor was a builder’s risk insurance policy, where the general contractor was the only specifically named insured.
In this case, the insurer argued that the policy only covered the contractor, since it had not charged premiums for a policy protecting subcontractors. Furthermore, the contractor added that he intended to subscribe to a policy which only covered his business and property he owned.
The Court of appeal confirmed that this Builder’s Risk policy was a property insurance policy covering damages caused directly to the work by the covered risks. In light of the previous case law, the Court concluded that it is possible to adopt principles established by common law provinces, and that one must take into account that the goal of this type of property insurance is to permit a fast reconstruction of the work and to preclude situations where parties involved on the same job site sue one another when a loss occurs. Finally, the Court carefully added that, when drafting Builder’s Risk policies, insurers are aware of the purpose of said insurance and the interpretation given by courts throughout the country.
Thus, when a loss occurs, property belonging to the named insured is protected, as well as the property of which the named insured is not the owner. In the latter case, the property must be destined to be incorporated into the work. In consequence, subcontractors who are owners of said property will benefit from the policy, and there is no need to name them explicitly in the policy.
As regards the intention of the parties, the Court of Appeal said that it is not a reliable guide for the interpretation of an insurance policy, of which terms and nature ensure the coverage of an unnamed insured. Therefore, the contractual agreement regarding insurance is not a vital condition. The intention to insure subcontractors arises from the needs of the construction industry, the terms used and the nature of the policy. If the insurer issues a Builder’s Risk policy, the said policy automatically covers the subcontractors.
In sum, the following elements arise out of the cases:
- A Builder’s Risk insurance policy - extended type is a property insurance covering insured properties and all risks that may affect directly all property during the building, installation, rebuilding or repair, as long as said properties are destined to be incorporated into the named work. While they are not specifically named in the policy itself, subcontractors could be considered unnamed insureds (Valko and Plomberie Raymond Lemelin decisions);
- The intention of the parties would not always be relevant for the interpretation of the insurance contract (Plomberie Raymond Lemelin decision;
- If the construction contract includes an insurance clause in favour of the subcontractors, the latter could therefore be protected from a possible subrogation lawsuit by the insurer (Plomberie Bourque decision);
- Finally, if the insurer does not intend to cover the subcontractors, it should exclude it explicitly in the policy, otherwise, the Builder’s Risk insurance policy could be interpreted as including subcontractors as unnamed insured.