Ontario Superior Court confirms limited scope of builder’s risk insurance

In Pre-Eng v Intact,¹ the Ontario Superior Court confirmed the scope of builder’s risk insurance is limited to the portion of the property that was actually under construction, renovation or repair.

Background

A builder was hired to renovate the roof of a school gym. Because of his negligent work, water leaked through the roof and onto the wooden gym floor causing upwards of $250,000 in damages and losses due to project delay.

The builder had two types of insurance: builder’s risk insurance with Northbridge and commercial general liability insurance with Intact. The policies were complementary: the commercial general liability policy would cover everything that did not fall within the builder’s risk policy.

The issue

The issue was whether the builder’s risk policy covered damages to the gym floor caused by the builder’s negligence. Northbridge argued its builder’s risk policy covered only the portion of the property that was actually under construction, renovation or repair, in this case, the gym roof. In other words, the court had to decide whether the builder’s risk policy for this project covered only the part of the structure that the builder was actually working on or the entire school.

The Ontario Superior Court

The court agreed with Northbridge that its builder’s risk policy did not provide insurance coverage for damages to the gym floor and such coverage was provided by Intact’s general commercial liability policy.

Justice Bawden recognized the conflict in the case law concerning the scope of builder’s risk insurance. In Medicine Hat College,² a case concerning a substantially similar builder’s risk policy, the court had found that the phrase “property in the course of construction” covered damage occurring in a part of the project other than that where the builder had been contracted to complete his work. In Osler Health³, the Ontario Superior Court came to the opposite conclusion. Work in a hospital kitchen causing flooding in other areas of the hospital was found not to have been covered by a substantially similar policy.

Justice Bawden confirmed that Osler Health established the law in Ontario regarding the scope of builder’s risk insurance and rejected the interpretation adopted in Medicine Hat College.⁴ In doing so, the court relied on Dominion of Canada General Insurance Company v Viking Fire Protection Incorporated.⁵ In that decision, the Newfoundland Court of Appeal adopted the analysis in Osler Health, finding its interpretation of the policy “accords more directly with the functions of Builders’ Risk insurance” and “is consistent with the parties’ reasonable expectations.”⁶

Justice Bawden adopted this interpretation. In his view, the narrower scope of builder’s risk insurance reflects an important distinction between it and general commercial liability insurance. The object of builder’s risk insurance is to ensure the builder has sufficient insurance to complete his work in the event of an unforeseen failure.⁷ It would not be commercially viable to require a builder working on one part of the project to insure the entire building.⁸

Justice Bawden found there was no ambiguity in the builder’s risk insurance provisions and the words “property in course of construction, installation, renovation, reconstruction or repair” were sufficiently clear to exclude the gym floor from coverage under the builder’s risk policy.⁹ He rejected Intact’s argument as it would lead to the conclusion that the builder’s risk insurance was intended to cover the entire project, an interpretation that cannot be reconciled with the policy’s wording.

Conclusion

The Ontario Superior Court’s decision in Pre-Eng confirms the limited scope and purpose of builder’s risk coverage. This will allow insurers and their counsel to assess coverage under these policies and complementary commercial general liability policies with more certainty.