The first line of defence? Course of construction insurance and tort immunity

On most construction projects involving multiple contractors and sub-contractors, it is common for the owner or general contractor to obtain course of construction insurance (also known as “builder’s risk” insurance) to provide repair or replacement coverage for damage to the project while it is being constructed, and in some cases, for a specified period afterwards.

Where a claim is made involving damage to property while under construction, the presence of course of construction insurance, or even an agreement to provide such insurance, can be a party’s first line of defence against a claim, even where the damage was caused by that party’s own negligence. A defendant can be relieved from liability by operation of the doctrine of tort immunity, which provides that a party may, in certain circumstances, be immunized from the consequences of its own negligence. The circumstances in which tort immunity may apply fall into two broad categories: contractual covenants to insure and waivers of subrogation.

Covenants to insure are frequently found in construction contracts and usually require the owner or general contractor to place course of construction insurance covering the project against loss or damage, and including the contractors, sub-contractors, or consultants (as the case may be) as insureds under that policy. Where a claimant agreed to place such insurance, the doctrine of tort immunity provides that the claimant has in effect waived the right to recover any loss or damage from the beneficiaries of the agreement to insure.

Tort immunity arises in these circumstances on the basis of the contractual agreements between the parties, not on the basis of the wording of the insurance policy. The fact that the insurance may not have been placed at all, or did not include the appropriate coverages, does not displace the operation of the doctrine. In one case in Ontario involving a construction contract,[1] the general contractor had failed to place the appropriate ‘all-risks’ property insurance as contemplated by the contract. A flood occurred at the project which was admitted to have been caused by the negligence of a sub-contractor. The sub-contractor successfully defended the claim on the basis that the general contractor had covenanted to insure against risks of flood, and therefore the sub-contractor was immune from liability for its own negligence, even though there was in fact no insurance to cover the loss.

The benefit of a covenant to insure will often be extended to employees of the contracting parties.  In one case involving a construction subcontract, the Ontario Court of Appeal ruled that a covenant to insure “implicitly intended the benefit of the fire insurance to extend to the employees” of the subcontractor, and therefore both the subcontractor and its employees were immunized from a subrogated claim.[2]

In all cases, the important question is what the contractual language indicates about the intention of the parties as to who was to bear the risk of any loss. The Courts have noted that while it is possible to rebut the presumption of tort immunity arising from a covenant to insure, this can only be done by “quite clear” language.[3]  It is therefore important to examine the overall language of the contract to determine the parties’ intentions.

Tort immunity can also arise through a waiver of subrogation. Unlike covenants to insure, waivers of subrogation tend to revolve around the language of the insurance policy at issue.  Where the party being pursued is an insured under the policy, the Courts will generally find that any subrogated action is barred on the basis of the well-established principle that an insurer cannot subrogate against its own insured.[4]

This situation frequently arises in the context of course of construction insurance. Such policies typically include contractors, sub-contractors and trades as named or additional insureds, however there may be other parties who are covered by the policy despite the fact that they are not specifically named as insureds. In cases involving course of construction policies, the Courts have generally included as insureds those parties without whose contributions to the project were necessary for its completion.

In some cases, the insurance provisions in the parties’ contract may stipulate that the policy to be obtained shall contain an express waiver of subrogation. In such cases, this is usually a clear indication that the parties intended that any subrogation rights would be waived, and therefore the doctrine of tort immunity will apply.

As with covenants to insure, the benefit of a waiver of subrogation may be extended to sub-contractors or employees of the named insureds.

Where claims arise for loss or damage to a project under construction, the first line of defence against such claims may be the doctrine of tort immunity. In such cases, it will be important to carefully examine both the contract and any policies of insurance to determine whether the claiming party has waived any right to pursue the allegedly negligent party for the damage. In many cases, this may provide a complete defence to the claim.