Spring 2021 – A construction contract usually contains a clause by which the owner and the general contractor both take out insurance covering their insurable interest in a construction project. Accordingly, several types of insurance policies are issued, all providing for varying scopes and coverages. This situation gives rise to the following question: “may the terms of a construction contract be used to interpret an insurance policy?”

In Community Electric Ltd.^[1],  the Court of Appeal of Saskatchewan ruled that the obligations in a construction contract, which specify the insurance to be taken out by the owner and his general contractor, may be used as a guide concerning the intention of the parties to manage the risks, and not to define the scope of the insurance coverage.

More specifically, the services of the contractor Community Electric Ltd. (“Community”) were retained by the owner Cargill Ltd. (“Cargill”) to perform electrical work. The construction contract contained a clause obliging Cargill to take out worksite insurance or to self-insure for any damages in connection with the project. Similarly, the construction contract stipulated that Community must take out primary insurance covering its general civil liability resulting from its work on the project. Cargill chose to self-insure, while Community took out the required liability insurance.

A fire occurred during the performance of Community’s work. Community’s liability for the damage caused was fully retained and was not contested. To be reimbursed for the damage caused, Cargill retained Community’s owing contract balance.

Community’s civil liability insurer denied its obligation to indemnify based on the two (2) following arguments:

1. The owner Cargill had the contract obligation to take out worksite insurance or to self-insure for the damage related to the construction project. Because Community had an insurable interest in the project, which Cargill was supposed to protect, it was up to Cargill to support the risk of loss. Community would therefore be exonerated from the consequences of its faults because the construction contract gave the worksite insurer or the self-insured Cargill, status as a primary insurer;
2. If the general civil liability insurance issued for Community was triggered, the “Other Insurance” clause limited the obligation of indemnification of Community’s insurer to the excess amount.

First, the Court of Appeal of Saskatchewan properly delimited the scope of the issue by ruling that this was not a question regarding the order of application of the insurance in force, but a claim for an insurance indemnity by an insured against its own insurer.

Argument 1: Who will assume the risks?

The analytical approach to determine the scope of insurance coverage is now well settled by the Supreme Court of Canada^[2]. A court must examine the interpretation method as follows:  

1. The insured first has the burden of establishing that the claim is covered;
2. It is then up to the insurer to establish the application of an exclusion;
3. Lastly, the insured must establish the application of an exception to this exclusion.

Accordingly, a court must interpret the terms and language contained in the clauses and definitions of the insurance policy.

The Court of Appeal of Saskatchewan specified that the purpose, nature and commercial usefulness of worksite insurance does not in itself give it a special status as primary insurance to protect the insured which caused the damage to the construction project (in this case, Community).

Dealing with general civil liability insurance, this Court affirmed that there is no general rule to the effect that it never covers the insured’s defective work without considering the interpretation of the contract clauses, which may seem to be contrary. The scope of civil liability insurance cannot be interpreted or limited by the existence of worksite insurance or by the contract obligation of the owner to obtain one or to self-insure.

Likewise, a construction contract may be used as a guide to understand the intention behind the taking out of various insurance policies for the project, but cannot be used as the main tool to interpret the content of such an insurance contract.

Community’s liability insurer believed Cargill’s contract obligation to take out worksite insurance or to self-insure represented a complete assumption of the risks of damage to the project. Right from the start, the insurer also considered that Community had no legal obligation to assume the amount of the damage caused to the project, therefore, no legal obligation to pay “compensatory damages.” The Court dismissed this submission.

Argument 2: The “Other Insurance” Clause

As a second submission to support its refusal to cover, Community’s liability insurer invoked the fact that the CGL type of insurance policy contained an “Other Insurance” clause by which its obligation to indemnify became excess because of Community’s possibility of being indemnified by another insurance or have the benefit of “another valid and collectible insurance.” The liability insurer submitted that by deciding to self-insure for the physical damage caused to the project, Cargill opened the door to Community to have the equivalent of another insurance.

First, the Court of Appeal of Saskatchewan underlined the fact that in principle, the “Other Insurance” clause is not an exclusion clause, but rather a mechanism governing the relationship between several insurers regarding the same insurable interest.

After having studied the construction contract, the Court reached the conclusion that Cargill did not objectively have a role equivalent to that of an insurer. In addition, the contract assumption of risks by Cargill, for the benefit of Community, is not the same as that of an insurance policy, as Cargill has a subrogation right against Community.

Application to Quebec: What Must Be Understood

Although coming from a common law jurisdiction, this decision is applicable in Quebec as a supplementary source to civil law^[3]. The interpretation methodology of an insurance policy, as illustrated, is already current practice in Quebec and is not questioned.

According to the Ledcor^[4]decision, the attention of practitioners when interpreting an insurance policy is directed to the commercial usefulness of certain standard insurance policies in the construction industry, such as worksite insurance. This is why interest in the Community Electric Ltd. judgment is double.

First, the Court clarified the interpretation exercise by limiting the influence that other insurance coverages may have when potentially triggered for the same risk and the construction contract in force. An insurance policy is first and foremost interpreted in itself.

The Court then identified the criteria to determine the status of a self-insurer from the clauses in the construction contract. This determination will have to be made to apply or not apply the “Other Insurance” clause contained in the commercial liability insurance coverage.

Conclusion

It is not excluded that an owner or a general contractor may act as an insurer under an obligation of self-insurance contained in a construction contract.

However, considering the contract obligations to insure, which are generally contained in call for tender contracts and in construction contracts, the liability insurer and the wrap-up insurer on a construction project may have obligations to defend and indemnify, even if there is worksite insurance or self-insurance.

^[1] Royal & Sun Alliance Insurance Company of Canada v. Community Electric Ltd., 2020 SKCA 17.

^[2] Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33.

^[3] Caisse populaire des deux Rives v. Société mutuelle d’assurance contre l’incendie de la Vallée du Richelieu, [1990] 2 SCC 995.

^[4] Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Company, 2016 SCC 37.