Nothing but the kitchen sink: tort immunity and covenants to insure


In its recent decision in William Osler Health Centre v. Compass Construction et al., 2015 ONSC 3959, the Ontario Superior Court of Justice considered the scope of tort immunity arising from a covenant to insure in a CCDC 2 Contract (the “Contract”). Generally, tort immunity acts to prevent a party who covenants to insure another party from suing the other party for the losses which are insured. In this case, the Court considered whether the covenant to insure and related tort immunity extended only to the portion of the subject property that was under renovation or whether it extended to other parts of the subject property that were damaged in the course of construction.

The Facts

The Contract was entered into between the Plaintiff health center and the Defendant Compass Construction Resources Ltd. (“Compass”). Compass was to act as general contractor on a kitchen renovation on the Plaintiff’s property (the “Project”). The Contract contained a covenant to insure, which required Compass to obtain all risks property insurance that insured “property in the course of construction” at the Project site. The Contract identified the “property in the course of construction” as the kitchen and related mechanical HVAC and electrical distribution systems. In accordance with the Contract, Compass obtained the requisite all risk property insurance for the Project.

Compass retained Black Creek Mechanical Inc. (“Black Creek”) as a subcontractor and in the course of Black Creek’s work a water line separated and the resultant flood damaged the kitchen, as well as other areas of the Plaintiff’s property. The Plaintiff, by its subrogating insurer, commenced an action against Compass, Black Creek and others seeking compensation for the damage to its property. Compass cross-claimed against Black Creek for contribution and indemnity.

The Issue

The parties brought a motion seeking a determination as to whether the cross-claim brought by Compass against Black Creek was barred as a result of tort immunity arising from the covenant to insure in the Contract. In considering the question, the Court also assessed whether the tort immunity extended to losses to the entire health center or merely losses to the kitchen under renovation.

The Parties’ Positions

Black Creek argued that Compass was barred from maintaining its cross-claim against Black Creek in accordance with the principle of tort immunity. The rationale being that Black Creek, a subcontractor engaged by Compass, was an intended beneficiary of the insurance obtained by Compass for the Project and, as such, could not be sued by Compass for the insured losses.

Compass accepted that the tort immunity arising from the covenant to insure precluded a cross-claim against Black Creek for damages to the kitchen, i.e. the property under construction, but argued that the immunity did not extend to damages to other areas of the Plaintiff’s property.

Black Creek relied on the case of Medicine Hat College v. Starks Plumbing & Heating Ltd., 2007 ABQB 691, where it was held that the “property in the course of construction” under an all-risks insurance policy included the addition under construction and extended to cover losses to the existing facilities adjacent to the addition arising out of negligence or errors in construction.

Compass relied on a series of cases that held that tort immunity is limited to “property in the course of construction” and not the entire property. Compass pointed to several factors to support its argument that the all risk insurance only covered the kitchen being renovated and not the entire property, including:

  1. The all risk insurance policy contained clear wording that limited coverage to “property in the course of construction, installation, reconstruction or repair”;
  2. It would be commercially unreasonable for Compass to obtain insurance for the Plaintiff’s entire property, given the substantial costs of such insurance relative to the size of the Project;
  3. The Plaintiff’s entire property was already insured, and it would not make commercial sense for duplicate coverage to be obtained by Compass;
  4. The Canadian Construction Documents Committee, the author of the Contract, produced guidelines which stated that coverage for adjacent property is not covered under the builders’ risk policy;
  5. The covenant to insure would have expressly covered adjacent property if that was the intention, given that the Contract expressly distinguishes between “work” and the “property adjacent to the place of work”; and
  6. The Contract expressly preserved Compass’ right of subrogation against Black Creek, which indicates an intention that Black Creek was to be responsible for losses outside the scope of the insurance required under the covenant to insure.

The Decision

The Court agreed with the arguments raised by Compass and held that the covenant to insure, and by extension Black Creek’s tort immunity, covered losses relating only to the property under construction, i.e. the kitchen, and not the entire property. Compass was permitted to maintain its cross-claim against Black Creek for damages to the Plaintiff’s property outside of the kitchen.

The Implications

The decision serves as a reminder:

  1. to consider the insurance implications when defining the scope and place of work in construction contracts;
  2. to ensure additional insurance coverage is in place for adjoining property that could be damaged during work on “property in the course of construction”;
  3. to insurers to ensure they know the contents of contracts signed by their insureds, including the scope of any covenant to insure; and
  4. that subcontractors should maintain independent insurance rather than relying entirely on insurance obtained by a head contractor to cover their potential negligence.

Tort immunity arising from covenants to insure is a highly technical area of insurance law. A more detailed analysis is provided in the paper titled “Tort Immunity: Covenants to Insure and Waivers of Subrogation”, found on our website.