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Insurance Revisited

Posted on January 1, 2003 | Posted in Construction

We have already discussed insurance and who is covered by what (see newsletter of May 1998). That newsletter dealt with the case of Madison Developments Ltd. v. Plan Electric Co., a 1997 decision of the Ontario Court of Appeal. In Pollard Enterprises v. Arizon Disposal Services, a 2001 decision of the Ontario Superior Court of Justice, the situation was similar to Madison but unfolded differently.

Similar Facts

In Madison, the employees of a sub negligently caused a fire. The insurer paid the general’s claim and then, on behalf of the general, sued the sub and its employees for its losses.

In Pollard, the employee of a subsub negligently damaged the general’s school project. The general had taken out an all-risk insurance policy. That policy, unlike the policy in Madison, insured not only the general but also the subs. For whatever reason, the general did not make a clam against the insurance policy; instead, it claimed setoff as against the sub to the extent of the damage that the employee of the subsub caused.

Everybody sued each other. The sub commenced an action against the general claiming a lien. The general counterclaimed against the sub for the cost of repairing the damage. The sub commenced a separate action against the subsub and its employee for contribution and indemnity if the general’s counterclaim was valid. To cover all bases, the general also commenced a separate action claiming damages against the subsub and its employee.

Reasoning 

In Madison, the Court of Appeal held that the sub and its employees were to be treated as additional unnamed insureds. Although an insurer has a right to claim against the person who caused the damage, the insurer does not have a right to claim against its own insured; that is why there is insurance in the first place. Since the sub and its employees were held to be insureds, the insurer could not claim against them.

In Pollard, the subsub did not even have to argue that it was an unnamed insured. The policy was explicit; it included all subcontractors as named insureds. The judge reviewed the definition of a subcontractor in the Construction Lien Act. It stated that a subcontractor was anyone, in essence, who was not a general contractor. Accordingly, it encompassed a subsub. Using the same reasoning as in Madison, the judge held that the insurance policy covered the subsub. She held, quite correctly, that the policy also covered all employees of the subsub as implicit third party beneficiaries under the insurance contract.

Result 

The trial judge dismissed the counterclaim of the general in the lien action; dismissed the action of the sub against the subsub for contribution and indemnity because there was nothing to indemnify; and dismissed the general’s action against the subsub and its employee. The original lien action of the sub was left intact; presumably, the general had another defence to this action.

Commentary 

Given the Madison decision, we would have thought that the Pollard decision was a foregone conclusion. We would also have thought that the general would have claimed against the insurance policy. No doubt, it had its reasons not to claim but those reasons were not relevant to the sub and the subsub.

Had the general claimed against the insurance policy, we believe that it would have been able to successfully claim as against the sub and the subsub for the cost of its deductible. That concept was not discussed in the Madison case.

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