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By: Faiza Tariq, Associate |
Introduction
In a recent decision[1] of the Ontario Superior Court of Justice (“ONSC”), the court was tasked with determining whether Fluid Hose Coupling Inc. (“Fluid Hose”) was an insured entity under a Builders’ Risk Insurance Policy (“Policy”) issued by Allianz Global Risks US Insurance Company (“Allianz”) for a construction project. Fluid Hose was not referred to by name in the Policy. However, the Policy insured unnamed “subcontractors” who entered into derivative contracts to supply materials in connection with the project. The court found that this broad wording meant that Fluid Hose was a subcontractor as defined in the Policy and thus an insured entity. As a result, the court also held that a subrogated action brought by Allianz against Fluid Hose for losses allegedly caused by Fluid Hose’s negligence was barred. Fluid Hose was entitled to partial indemnity of its costs of defending the subrogated claim.
Background
Allianz commenced a subrogated action against Fluid Hose and others seeking damages for a water leak (“Subrogated Action”) that occurred in an HVAC cabinet in a construction project involving a high-rise residential building (“Project”) that was covered by the Policy. The leak was caused by a ½ inch ball valve in the water supply line which broke in half, resulting in a massive leak which cost Allianz approximately $420,000 to repair. Fluid Hose supplied the valve. Sigma Convector Enclosure Corp. (“Sigma”) purchased the valves from Fluid Hose and was responsible for manufacturing the HVAC cabinet that ultimately leaked. Sigma was one of many in a long chain of sub-contractors involved in the manufacturing and installation of the HVAC system for the Project. Neither Fluid Hose nor Sigma were referred to by name under the Policy.
Court’s Finding and Reasoning
The court found that the term subcontractor was broadly defined to include Fluid Hose as a subcontractor. Under the Policy, the insureds were specified as the developer and owner of the Project, the general contractor, and “all contractors [and] sub-contractors”. Sub-contractor was separately defined in a broad manner to include “any person, firm or corporation entering into a contract derived through any [contract between a “contractor” and another subcontractor,] … to provide, supply or lease work, services, materials or equipment” in connection with the Project. In the absence of any Policy term or caselaw defining the term “derived”, the court applied the dictionary definition. Allianz argued that Fluid Hose’s contract with Sigma was not “derived through” a contract involving one of the named insureds, since the valves were not specified for the Project. The court found this to be irrelevant because Fluid Hose was a regular supplier of valves to Sigma. In addition, Fluid Hose and Sigma had an understanding based on their on-going business relationship that the valves would be used by Sigma in large-scale construction projects similar to the Project. The Court also found that there was an intent for Fluid Hose to be insured by the Policy, because the scope of property insurance coverage provided by the Policy was broad enough to insure the valves supplied by Fluid Hose.
Conclusion
Because Fluid Hose was insured under the Policy, the Court applied the well-known common law waiver of subrogation rule. This rule generally prohibits an insurer from suing its insured, via subrogated action or otherwise. Allianz’s claim against Fluid Hose was dismissed. Fluid Hose was entitled to costs incurred in the Subrogated Action, but only on a partial indemnity basis.
Fluid Hose tendered caselaw stating that an insured can recover full indemnity costs in proceedings brought to enforce coverage rights. The Court distinguished that caselaw, noting that the proceedings before it were not to enforce coverage rights, but to raise a defence to a subrogated action.
Overall, this was a well-reasoned decision that is consistent with cases interpreting builders’ risk policies. Courts have recognized that such policies are unique because they are designed to provide broad coverage to complex construction projects where there is a lot of overlapping work between the various contractors and subcontractors involved. While some policies limit coverage only to subcontractors engaged in the specific construction project and others expressly exclude suppliers of materials from the definition of “insured”, this was not the case here.
Footnotes
[1] Fluid Hose & Coupling Inc. v Allianz Global Risks US Insurance Company et al., 2025 ONSC 2517.
Faiza Tariq is an associate at Theall Group LLP and is developing a broad commercial litigation practice. Prior to joining Theall Group LLP, Faiza articled at a prominent litigation boutique in downtown Toronto. During her articles, Faiza worked on a class action, cross-border IP litigation, employment law disputes, real estate litigation and commercial disputes, including assisting with a complex trial on the Commercial List. She also wrote an article entitled ‘Municipalities Do Not Owe a Duty of Care to Developers to Protect Their Economic Interest During Rezoning Application Process’ which was published in the Ontario Bar Association’s Real Property Law section.
Photo courtesy of Daan Mooij at Unsplash