Subcontractors increasingly granted coverage in builder’s risk policies, lawyers say

If a builders’ risk insurance policy is worded broadly to include subcontractors throughout a contractor’s supply chain, then the insurer issuing the policy must be prepared to live with the consequences, the Ontario Court of Justice ruled in April.

“If an insurer is prepared to provide a very broad policy, as it has done here, and which it presumably priced accordingly, it must live with the consequences,” the Ontario Superior Court ruled in Fluid Hose & Coupling Inc. v. Allianz Global Risks US Insurance Company, released in April.

Barry Cox and Luciana Amaral of Boghosian + Allen, the successful lawyers in the case, referred to the dispute in in a blog post for Mondaq published Aug. 22. They say the decision is part of a trend for courts to grant coverage to subcontractors in builder’s risk policies.

“The key takeaways from this decision [include]: builder’s risk policies of insurance are to be interpreted broadly,” they write in the blog. “And subcontractors, including suppliers of material to the construction project, may be insureds under such policies, subject to the definitions of ‘insured,’ ‘contractor,’ and ‘subcontractor’ therein.”

The claim

In Fluid Hose, Allianz wanted to launch a subrogated lawsuit against Fluid Hose & Coupling for a part they supplied to a construction project that led to a $420,000 water damage repair.

The property damage in June 2020 was caused by an HVAC cabinet on the 32nd floor of the building, the court found.

“The cause of the water leak was determined to be a ½-inch ball valve in the water supply line for the heat pump in unit 3201, which broke in half, resulting in a large amount of water escaping and travelling all the way down to the ground floor,” the court found.

Fluid Hose supplied the ball valve to one of the project’s subcontractors, a named insured in the policy. Fluid Hose denied it was responsible for the damage, claiming the installation of the ball valve created the issue, not the ball valve itself.

The policy 

Allianz’s builder’s risk policy contained a provision prohibiting the insurer from making a subrogated claim against any “named or additional insureds, contractors or subcontractors, consultants and subconsultants for repayment of amounts paid out under the policy.”

The dispute was over whether Fluid Hose was considered a ‘subcontractor’ under the insurance policy.

The construction project was large, with many contractors and subcontractors.

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Riocan, the owners and developers of the project, contracted with PCL Constructors Canada (PCL) to provide general contractor and construction management services. Both were named insureds on the policy.

PCL contracted with Malfar Mechanical Inc. to supply and install mechanical, plumbing and fire protection for the building, including HVAC cabinets and heat pumps. Malfar was considered a subcontractor under the policy, and therefore insured.

Malfar then subcontracted with HTS Engineering Ltd. to purchase HVAC cabinets and heat pumps required for the building. HTS was also considered a subcontractor under the policy, and hence insured.

HTS contracted with Omega Heat Pumps Inc. for custom heat pumps, and was also considered a subcontractor under the policy.  

Omega fulfilled the HTS contract by working with its sister company, Sigma Convector Enclosure Corp., to manufacture and supply the HVAC cabinets and heat pumps. These custom cabinets and pumps were manufactured using ball valves supplied by Fluid Hose to Sigma.

Allianz, in bringing the subrogated action, refused to recognize Sigma and Fluid Hose as subcontractors under the policy.

The decision

The case turned on the policy’s definition of a ‘subcontractor’:

“Subcontractor shall mean (i) any person, firm, or corporation entering into a contract with any contractor, and (ii) any person, firm or corporation entering into a contract derived through any such contract with a contractor [emphasis added] to provide, supply or lease work, services, materials or equipment, or any combination thereof, in connection with the project shown in the declarations.”

Allianz argued this language, while broad, was not intended to cover all parties involved in the supply chain connected to the construction project. The court disagreed.

“I am aware of the concern expressed by counsel for Allianz that the policy, while broad, should not be unlimited in its scope,” Ontario Superior Court Justice Paul Schabas ruled. “Allianz submits that finding for Fluid Hose ‘leads to the result that the policy would cover all suppliers of material that ultimately found their way to the construction site, no matter how remote or tenuous.’ I disagree.

“The policy, as I have found, includes contracts ‘derived through’ a contract with the contractor, and includes a contract of supply, which is ‘in connection with the project.’ This is broad, but it is not indeterminate or unlimited.”

The definition means Fluid Hose is a subcontractor covered by the builder’s risk policy, the court concluded. As such, Allianz’s policy means the insurer can’t make a subrogated claim against Fluid Hose.