Legal Blog

Property Insurance #2

Only two months ago, in our September 2005 newsletter, we had reported on Active Fire Protection 2000 Ltd. v. BWK Construction, a 2004 decision of the Ontario Superior Court of Justice. The general appealed this decision to the Ontario Court of Appeal. 

Facts 

The general had a contract with the sprinkler sub in which the general was to take out builder’s all-risk property insurance. For whatever reason, the general did not do so. The sub negligently installed its sprinklers, resulting in a flood that the general spent $75,000 to clean up. Had the general taken out the insurance, the insurer would have covered the loss. Since there was no insurance, the general sued the sub for the damages incurred.

The trial judge held that the general had a duty to take out the insurance for the benefit of all of its subs and its failure to do so meant that it had no right to look to the sprinkler sub for damages.

The Court of Appeal agreed. It referred to its decision in Madison Developments Ltd. v. Plan Electric Co. (see May 1998 newsletter) as dispositive of the appeal. It stated that there would be no benefit to the sub from the contractual insurance covenants unless they applied to insured perils that the sub’s negligence caused. It concurred that it would make no business sense for each sub to have to obtain its own property insurance.

In a subcontract, there is often a provision requiring the sub to obtain insurance. The Court interpreted the insurance provision in the subcontract, which it did not set out in the reasons for decision, to apply to occurrences in excess of the general’s limits of insurance and, in any case, to cover third party claims, not claims from the general.

Proposition

This case and its predecessor cases stand for an entirely sensible proposition. If a general has to obtain property insurance, as it usually has to do pursuant to its contract with the owner, then its subs are covered by that insurance and if the general does not want to suffer from occurrences that are caused by a sub’s negligence, it had better take out the insurance that it contracted to take out.