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Is Risk Insurance Enough? What Are the Limits of Insurance Coverage for Builders?

Insurance adjustor assessing property damage

Is Risk Insurance Enough? Ontario Superior Court Sheds Light on the Limits of Insurance Coverage for Builders

The Ontario Superior Court has clarified the limited scope of risk insurance that builders often carry for construction jobs.  The court confirmed that the scope of this insurance is strictly limited to property that is actually under construction and does not extend to other property damage.

This was the case in Pre-Eng v. Intact, a recent decision involving a builder who was hired to perform renovations on a roof over a school gymnasium.  Rain spilled through the roof and onto the floor during the renovation, due to the builder’s negligent work. This caused about $164,000 in damages to the floor and another $100,000 in losses due to delay in the project.

The main issue that Justice Bawden was tasked with was the scope of the builder’s insurance.  The builder had obtained builder’s risk insurance, which covers liability for damage to “property in the course of construction, renovation, or repair”. The builder also had a general insurance policy which was intended to cover anything that the risk insurance policy did not cover.

The question at issue was whether the risk insurance policy covered only the parts of the structure the builder was actually working on or whether it would also include other parts of the school.

In analyzing this issue, the court noted that prior to this decision there was a conflict in the case law concerning this specific question. In Medicine Hat College v. Starks Plumbing & Heating Ltd., the Alberta’s Queen’s Bench decided that a substantially similar builder’s risk insurance policy included property that was at the site of damage but not at the site of construction. This decision was followed by the Newfoundland and Labrador Supreme Court in Marcus Contracting Limited v. Team Mechanical Construction Limited.

However, the Ontario Superior Court came to the opposite conclusion in William Osler Health Centre v. Compass Construction et al.  In that decision, Justice Firestone noted that it would not be commercially viable to impose an obligation on contractors to obtain risk insurance to cover an entire building while only working on one part of the structure.  This would make insurance for minor contractors prohibitively expensive. This decision was also recently followed by the Court of Appeal of Newfoundland and Labrador in Dominion of Canada General Insurance Company v. Viking Fire Protection Incorporated.

In analyzing the conflicting case law, Justice Bawden opted for the reasoning from Osler Health, deciding that “property in the course of construction, renovation, or repair” was unambiguous and did not extend to cover damages to the gym floor. As such, the damages were not covered by the risk insurance policy but were instead covered by the general insurance policy.

In Ontario, courts have been consistent in finding that provided the wording of the policy is clear and unambiguous, it limits the scope of coverage. This decision should provide clarity for projects based in Ontario on the specific application of builder’s risk insurance as only covering property that is directly under construction, renovation, or repair.

Just heard about Pallett Valo being chosen as One of Ontario's Top Three Regional Firms. Congratulations – well deserved.
Peter Campbell, BDO Canada LLP