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Posted on May 1, 1998 | Posted in Construction

A contract between an owner and a general typically imposes an obligation on the general to obtain liability and fire insurance during the course of construction. Similarly, a subcontract typically imposes an obligation on the general to obtain fire insurance covering the project and on the sub to obtain general liability insurance to cover all injuries to property, or person, arising out the operations of the sub. What happens when the employees of a sub cause a fire? Who gets the benefit of insurance?

The Case

These facts arose in Madison Developments Ltd. v. Plan Electric Co., a 1997 decision of the Ontario Court of Appeal. The facts were similar to those set out above. The employees of the sub negligently caused a fire. The fire insurer paid the claim for the general and then, on behalf of the general, sued the sub and its employees for its losses. This is known as a subrogated action.

The trial judge found that the negligent employees and the sub were liable to pay the insurer. He held that the requirement in the subcontract for the sub to obtain liability insurance meant that the insurance obtained by the general was not meant to cover the sub and its employees.

Commercial Reality 

The Court of Appeal analysed the case against the sub by looking at the commercial realities behind the contract. It stated:

“… the contractor has agreed with the owner to obtain comprehensive fire insurance covering losses arising from any cause. The anticipation was that a group of subcontractors would contribute their efforts to the overall project and it was undoubtedly expected that if a fire occurred it would most likely be caused by the negligence of one of those subcontractors. Given the contractor’s obligation in favour of the owner to obtain comprehensive fire insurance it makes no business sense for each subcontractor to pay premiums to duplicate that coverage.”

The court concluded that the liability insurance covers many more risks beyond that of fire (e.g. dropping a steel girder on someone passing by below). Therefore, the obligation of the sub to obtain liability insurance does not mean that the sub is no longer covered by the general’s fire insurance policy.

A subrogating insurer is in no better position than the insured under which it is subrogating (i.e. the general). Since, by contract, the general, who has an obligation to insure, cannot sue a sub for the negligence protected against by the insurance, the insurer could not sue the sub for that same negligence. The appeal was allowed and the action against the sub was dismissed.

The Employees 

The employees were not off the hook just because the action was dismissed against the sub. The doctrine of privity of contract means that third parties, who are not the actual parties to a contract, cannot claim the benefit of that contract. The employees of the sub were not the contracting parties to the subcontract.

However, a 1992 decision of the Supreme Court of Canada recognised that “the doctrine of privity of contract fails to appreciate the special considerations which arise from the relationships of employer-employee and employer-customer”.

The Court of Appeal applied that case and stated:

“The business reality which flows from the terms of the subcontract is that the contractor was to obtain comprehensive insurance covering the events which occurred and did so. Those events were unlikely to be caused by the corporate entity, the subcontractor, but rather were most likely to arise from the conduct of the employees in the course of their employment. That is what happened.”

The Court held that the contractor, and therefore its insurer, was barred by the contract with the sub from pursuing a claim against the employees of the sub.


The courts do recognise business reality.

If you are a subcontractor and the general, by contract, has obtained fire insurance for the project, ensure that your liability insurance and, more importantly, your premiums, do not include a fire insurance component.


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