Introduction:
In Honeywell International Inc. v XL Insurance Company Ltd.[1], the British Columbia Court of Appeal ( “BCCA”) overturned an application judge’s decision. The BCCA found in favour of an appellant manufacturer seeking a defence under a liability policy placed in relation to a construction project (commonly known as a “wrap up policy”). The BCCA found that the manufacturer qualified as an insured under the policy and directed a trial of several other coverage issues not yet decided.
Background:
Two lawsuits arose out of alleged deficiencies in sealed insulated glass units that form part of the exterior façade of the Shangri-La tower in Vancouver. The appellant, Honeywell International Inc. (“Honeywell”) is a third party in both actions. Both actions allege that the deficiencies were caused by Honeywell’s manufacturing of deficient desiccant[2], which was used in the manufacturing of the insulated glass units.
XL Insurance Company Ltd. (“XL”) issued a wrap-up liability policy to one of the principal contractors (the “Policy”). Under the Policy, XL agreed to provide a defence for “sub-contractors” subject to certain exclusions. Honeywell commenced applications against XL to recover their defence costs, arguing that they should be considered a sub-contractor under the Policy.
Lower Court Decision:
The application judge considered the language of the Policy, which defined sub-contractors as those who perform any part of the work under the insured project but excluded:
“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.”[3]
XL argued that Honeywell was not an insured sub-contractor because it did not carry out any installation, construction or supervisory work on the insured project. Honeywell pointed out that although it did not carry out such work, the exclusionary clause in the definition of “sub-contractor” only applied if in addition, Honeywell’s only function was to supply materials, machinery or other supplies to the project. It argued that by being a manufacturer, its function was broader than that.
The application judge found that his interpretation of policy had to be based on the commercial context of the policy. Finding in favour of XL, the application judge held that the context of the policy required that insureds be limited to those suppliers who involvement in the project went beyond the supplying of goods.[4]
Appeal Decision:
Honeywell appealed the application judge’s decision.
XL argued that wrap up liability policies generally do not provide coverage to suppliers who perform none of their work on-site. The BCCA rejected this argument, finding that what mattered was not alleged general principles but the specific language in the Policy. If XL wished to limit coverage in this way, it could have achieved that through alternative wording.[5]
The BCCA held that “a clause that has the effect of narrowing the grant of coverage should be given its plain meaning, and, when there is ambiguity, it should be read in favour of the insured.”[6] The BCCA held that this principle applied to the interpretation of definition clauses, and that the application judge applied a “narrow construction” of the contested definition (i.e., “sub-contractor”).[7]
The BCCA held that under the Policy, suppliers who do not carry out installation, construction, or supervisory work are excluded if, and only if, they do not perform any function other than supplying materials, machinery, or other supplies.[8] Honeywell’s off-site manufacturing of desiccant constituted a function other than supplying materials, machinery or other supplies.[9] Therefore, the allegation that Honeywell negligently manufactured the desiccant was an allegation that it performed a function other than supplying materials, machinery or other supplies, which brought Honeywell under the definition of an insured sub-contractor.[10] A trial was directed to decide other coverage issues, such as whether the Policy’s warranty and recall exclusions ought to apply.
Conclusion:
This decision underscores the importance our courts place on the specific language of the policy. The language used trumps any alleged general principles applying to a particular policy. Honeywell also indicates that even if a phrase restricting coverage is found outside an exclusion clause, courts will interpret any ambiguities in the restriction in favour of the insured. The BCCA confirmed that this principle can apply to the interpretation of a definition clause.
Footnotes
[1] 2024 BCCA 375, [“Honeywell”]
[2] According to the decision, desiccant is a substance intended to absorb moisture that was used in the manufacture of the insulated glass units.
[3] Honeywell at para 37.
[4] Ibid at para 16.
[5] Ibid at para 31-32.
[6] Ibid at para 23.
[7] Ibid at para 36.
[8] Ibid at para 39.
[9] Ibid at para 40.
[10] Ibid at para 48.
David Yun is an associate at Theall Group LLP and is developing a broad commercial litigation and insurance coverage practice. Prior to joining Theall Group LLP, David completed a summer term at a national Canadian charity in addition to completing a summer and articling term at a mid-sized full-service firm in downtown Toronto.
For more information, visit https://theallgroup.com/
Photo courtesy of Nurmsook on Wikimedia Commons
