In Honeywell International Inc. v. XL Insurance Company Ltd., the B.C. Court of Appeal has reached a surprising conclusion with respect to the definition of “subcontractors” in construction wrap up policies.
Writing for a unanimous court, Justice Willcock rejected the trial judge’s interpretation, ruling that the definition of insured subcontractors includes suppliers, even if those suppliers performed no site services. He further wrote that performing some function other than merely supplying materials is sufficient grounds to meet the definition of “subcontractor”.
Background
The dispute began with two separate claims against the Applicant Honeywell (listed as a third party in both claims) with respect to defects in materials they had provided. These actions have since settled, but Honeywell believed the cost of their legal defence should have been covered by the insurer, XL Insurance Company.
XL’s builders wrap-up policy contains the following provision:
“Contractors[”] and “sub-contractors” include all persons or organizations who perform any part of the work under the insured project but do not include:
- Suppliers whose only function is to supply materials, machinery or other supplies to the project and who do not carry out any installation, construction, or supervisory work on the insured project…
XL argued that Honeywell did not meet the definition of sub-contractor and was instead a supplier and therefore not covered by the policy. The trial judge accepted this reasoning, ruling that there was no duty to defend, but the matter was then appealed to the Court of Appeal.
The Decision
The view of the Court of Appeal was that the plain wording of the policy includes offsite manufacturers of components incorporated in a construction project. Because Honeywell was involved in manufacturing (negligently) some of the supplies used it cannot be considered just a supplier, rather the act of manufacturing makes Honeywell a subcontractor under the definition within the wrap-up policy.
Of note to Justice Willcock was the insurer’s failure to provide evidence that would demonstrate a specific intent or industry practice to exclude all offsite suppliers from the definition of insured contractors. The Court applied the reasoning of Chief Justice Finch in Booth v. B.C. Life 7 Casualty Co. which states that when interpreting an insurance policy the court “must attempt to give meaning to all the words the parties have used to express their intention” and that “one leans towards treating words as adding something, rather than as mere surplusage”. Having determined that Honeywell did meet the definition of a subcontractor under the policy, the court ordered the matter to be remitted to the trial court.
Take Away
This decision vastly expands the scope of wrap-up policies such that a variety of vendors and suppliers may now fall under the definition of sub-contractors. In turn, this expands the exposure of insurers who may now be compelled to defend parties only loosely connected to construction projects.
Holders of commercial general liability policies should also take note of this decision. The court’s overtly broad interpretation of subcontractors under wrap-up policies may give rise to new claims which engage the duty to defend and indemnify.
Though this decision is not binding on Ontario courts, parties are free to rely on it and judges are free to apply its reasoning if it is found to be persuasive. It would therefore be prudent for insurers to review their wrap-up policies to ensure that the wording is sufficiently clear in identifying how sub-contractors are to be defined and how porous that definition is. With respect to existing policies a second look is warranted to re-evaluate potential risk and exposure.
Adam Imtiaz is the author of this blog and an articling student at the firm. If you have a question about this decision or a related policy, please contact Adam or Shanti Barclay
