Breach Of Covenant To Obtain Fire Insurance Coverage For Another Party Means No Claim May Be Made Against That Party: Ontario Court Of Appeal

Those involved in building projects should always be alert to court decisions dealing with insurance, or insurance clauses in contracts, even if those contracts are not building contracts. Those decisions will inevitably impact the interpretation of insurance clauses in building contracts.

So the decision of the Ontario Court of Appeal in Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc., (2016), 130 O.R. (3d) 2016 ONCA 246 should be noted by those involved in the building industry and construction law. In a landlord-tenant setting, the court held that when a tenant covenanted in the lease to obtain fire insurance covering the tenant’s property in which the owner would be named as an additional insured, and failed to obtain insurance in which the landlord was so named, the tenant and its insurer could not recover against the landlord even though the fire was caused by a contractor hired by the landlord.

Changing landlord, tenant and contractor to owner, contractor and subcontractor, the same result would likely apply in the building contract setting.


The lease required the tenant to obtain insurance against all risks of loss or damage to the tenant’s property. If fire insurance was not provided by that insurance, the tenant was required to carry insurance against the risk of damage to its property caused by fire. The lease also required the tenant to include the landlord as an additional insured on the liability and property damage policies. In the lease, the landlord indemnified the tenant for damage arising from the act, default or negligence of the landlord, its agents, contractors and others, and the tenant indemnified the landlord in similar language. The property damage insurance obtained by the tenant did not name the landlord as an additional insured.

A welding contractor engaged by the landlord caused a fire while working at the premises, causing damage to the tenant’s property and business. The limits of the tenant’s property damage insurance policy did not cover the tenant’s losses. The tenant sued the landlord to recover its property and business losses. It sought to recover both the subrogated losses and the uninsured losses.

The motion judge granted summary judgment against the landlord. The landlord’s appeal was allowed by the Court of Appeal.

Decision of the Ontario Court of Appeal

The Court of Appeal held that, by agreeing to obtain insurance against “All Risks of loss or damage to the Tenant’s property” and “against the risk of damage to the tenant’s property within the Premises caused by fire”, the tenant assumed the risk of loss or damage to its own property caused by fire. That covenant relieved the landlord from liability for that loss or damage, even if caused by the landlord’s negligence, unless the lease elsewhere provided to the contrary. The lease did not provide elsewhere to the contrary. The court concluded:

“Here, the parties specifically agreed that the tenant would insure against the risk of loss or damage to its property by fire. That is the very risk that materialized. No coverage exclusion applied under the Lumbermen’s policy and the tenant’s claim was paid to the extent of the policy limits. The fact that, as it happens, the tenant was underinsured for this risk does not mean that its failure to obtain full protective coverage can be laid at the landlord’s door.”

The Court of Appeal also held that the tenant’s failure to obtain insurance, which named the landlord as an additional insured barred its subrogated claim against the landlord, for two reasons.

First, as already found, the tenant had assumed the relevant risk so the tenant’s insurer could be in no better position.

Second, the tenant’s covenant to add the landlord as an additional insured, if honoured, would have barred a subrogated claim by the tenant’s insurer since an insurer cannot sue another insured under the same policy. The court said:

“The tenant’s insurer can be in no better position than that of the tenant itself….where, as here, the risk of loss or damage by a specific peril passes to one contracting party under the terms of its insurance covenant, there is no basis for the covenantor’s insurer to assert a subrogated claim against the beneficiary of the covenant. Simply put, because the covenantor (in this case, the tenant) has contractually assumed the risk of liability for loss or damage caused by a specific peril, neither it nor its insurer can seek to recover for loss or damage caused by that peril from the beneficiary of the insurance covenant (in this case, the landlord). Further, had the tenant complied with its s. 8(5) obligation to have the landlord named as an additional insured on its property damage insurance policy, no right of subrogation for the tenant’s property loss or damage due to fire would arise. An insurer cannot assert a subrogated claim against its own insured…”

Finally, the Court of Appeal held that the covenant whereby the landlord indemnified the tenant did not over-ride the insurance clause, but only applied in the event that the insurance to be obtained by the tenant did not cover the loss. Referring to the approach taken by a judge in a previous decision, the court said:

“Applied to the facts of this case, this interpretive approach gives meaning to all the challenged provisions of the lease. It holds the tenant to its contractual bargain under the tenant’s insurance covenants to assume responsibility for the risk of loss or damage to its own property caused by fire and requires the landlord to indemnify the tenant under the landlord’s indemnity covenant for those types of risks against which the tenant is not required to insure. It also ensures that, under the immunity provision, the landlord is not exposed to negligence claims where the tenant has agreed to insure against an underlying risk, such as fire… “


In this decision, the Ontario Court of Appeal has followed and applied previous decisions of that court and the Supreme Court of Canada holding that an insurance clause in a contract, requiring one party to take out insurance, necessarily places the risk of loss specified in that insurance clause on the party required to take out that insurance. Neither that party nor its insurer may then sue the other party for that loss. That result flows from contract law.

And if the insurance clause requires that party to name the other party as an insured in the policy, that is icing on the cake. Due to the principles of subrogation, the insurer cannot sue the other party. That result flows from insurance law.

Perhaps the most interesting aspect of this decision is its resolution of the conflict or tension between the insurance clause and the indemnity clause in the lease. On their face, these clauses seem totally at odds with each other. But then the principles of contract interpretation swing into play. A way must be found to reconcile these seemingly opposing paragraphs. And the court has said that the way to do so is to allow the insurance clause to operate within the coverage that the insurance clause says the party obtaining it is to secure, and to allow the indemnity clause to operate outside that coverage.

Insurance clauses and the impact of a failure to obtain insurance conforming to that clause in the context of construction projects, were discussed by me in previous articles dated February 20, 2012 and June 24, 2012.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., Chapter 14, parts 7and 8.

Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc, (2016), 130 O.R. (3d) 2016 ONCA 246

Insurance – insurance clauses – subrogation – indemnity clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 29, 2017

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.


Claims By Equipment Supplier And Consultants Fall Within All Risk Insurance Umbrella

Claims By Equipment Supplier And Consultants Fall Within All Risk Insurance Umbrella

The owner and general contractor on a building project typically provide an “insurance umbrella” for the project. That umbrella will usually be referred to in the insurance clause in their building contract. That clause will provide that the owner or contractor will take out an All Risk Insurance policy which will apply to the project. That insurance clause, and the insurance policy taken out by one of them as a result of that clause, are of vital concern to all the subcontractors and other participants in the project, as they may be sued as a result of damage occurring during the project and they will want to have protection under the insurance.

There are a number of contract law and insurance law principles that apply to this situation. Often, those principles do not all arise or are not applicable in one situation. However, recently in DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., the Ontario Superior Court applied all of those principles to arrive at the conclusion that a subcontractor, equipment supplier and consultants could not maintain third party claims because all the claims fell within the insurance umbrella.


DCMS was the owner and developer of a retirement residence. It hired a concrete forming contractor, Outspan Concrete Structure, to do the concrete forming work on the project. Outspan hired Caribbean Tower Cranes (CTC) to provide a crane and crane operator. CTC in turn hired Magna Tech to inspect the crane before and after erection at the project site. Magna Tech was owned by a Mr. Perri. Magna Tech in turn hired a professional engineer, Lee, to review and supervise the inspection reports.

During the project, the crane fell onto and significantly damaged the partially completed residence.

The contract between DCMS and Outspan stated the following regarding the “All Risk Property Insurance” which DCMS was to take out and maintain during the project:

“All Risks Property Insurance, subject to the exclusions of the policy, against all risks of physical loss or damage occurring, including but not restricted to: earthquake, flood and will cover all materials, property, structures and equipment purchased for, entering into, or forming part of the work while at the site of the work and during construction, erection and installation. ..

The insurance shall cover the Owner on its behalf, the construction manager acting as agent or representative of the owner, all consultants and engineers (except for their professional liability), trade contractors, subcontractors and others having an insurable interest in the work, engaged in or connected with the construction, site preparation and related operations all as related to the project. …” (emphasis added)

The All Risk insurance policy which DCMS took out with Aviva stated that: “The Insurer hereby waives the transfer of such [subrogation] rights…of any Insured included in this policy against any other Insured…..” That policy named DCMS as the Insured, did not define or extend the meaning of Insured, and in particular, did not provide an expanded definition of Insured to include subcontractors or anyone else.

The insurer, Aviva, paid the loss arising out of this incident and then commenced an action in DCMS’s name against all the other participants in the project, including Outspan, CTC, Magna Tech, Perri and Lee. That action was discontinued by DCMS against Outspan and CTC, but those companies had in the meantime been third partied by Magna Tech, Perri and Lee. Outspan and CTC brought a summary judgment motion to dismiss the third party claims against them and to be removed entirely from the action.


The motion judge granted the summary judgment motion. So far as Outspan was concerned, it was a party to the building contract which contained the insurance clause and was entitled to enforce that clause. Under that clause, DCMS had agreed to take out all risk insurance and had thereby assumed the risk of loss falling within the policy.

CTC was also entitled to the benefit of the insurance clause in the contract between DCMS and Outspan, for three reasons:

  1. The Third Party Beneficiary Rule: CTC was performing part of the work referred to in the DCMS-Outspan contract. Therefore, it was entitled to the protections contained in that contract to the same extent as Outspan, under the third party beneficiary principles stated by the Supreme Court of Canada in such cases as in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd.:(1) the parties to the DCMS agreement intended to extend its benefit to CTC given that it is a “subcontractor” within the meaning of the insurance covenant; and, (2) the activities performed by CTC were within the scope of the DCMS agreement as it supplied the crane for the project which Outspan was required to provide under the DCMS agreement.”
  1. The No Liability Rule. Outspan and CTC could not be third partied by the other defendants since those other defendants were not liable to DCMS as they were themselves protected under the Third Party Beneficiary Rule: “…there can be no claim for contribution against Outspan and CTC by the other defendants as they are protected from liability by reason of the agreement between DCMS and Outspan.” This principle (that a defendant cannot assert a claim for contribution and indemnity if that person is not liable to the plaintiff) was stated by the Supreme Court of Canada in Dominion Chain Co. v. Eastern Construction Co.
  1. The No Subrogation against An Insured/Uninsured Interest Rule: Outspan and CTC were unnamed insureds under the Aviva policy because they had “an insurable interest in the construction project.” Accordingly, under basic insurance principles, Aviva could not maintain a claim against other insureds under the policy, even though those insureds were unnamed. In arriving at this conclusion, the court applied the principles stated by the Supreme Court of Canada in Commonwealth Construction Co. v. Imperial Oil Ltd. and sometimes this rule is referred to as the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.. As the Supreme Court said in that case, the “ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole” creates an insurable interest of all participants in the project.


This case provides a neat cross-reference to three contract and insurance principles that operate in the context of building projects. It is always a question of interpreting the building contract and/or the insurance policy taken out in respect of the project. But if the language of the building contract and policy reflect that intention – and the insurance policy should be written to reflect the insurance deal in the building contract – then it is logical that all three of these principles should either support (or contradict) the same conclusion, namely that the subcontractors and other persons engaged on the project are (or are not): carrying out the work of the general contract; not liable (or are liable) because the general contractor is not (or is) liable to the owner; or (or are not) engaged in the same project as the general contractor.

The factual matrix of the third party claims in this action was important. The damage occurred when the crane was on the site. Would the same result have occurred if the damage occurred off the site or arose from the supply of defective materials by a supplier? Would the language of the contract between the owner and DCMS (which referred to “equipment purchased for, entering into, or forming part of the work while at the site of the work”), or the Aviva policy have precluded such a claim? In other cases, suppliers have been found not to be unnamed insurers and not to fall within the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.

One aspect of this decision seems somewhat ironic. In applying the No Liability Rule, the court held that the other defendants, Magna Tech, Perri and Lee. were not liable to DCMS. Based on that finding, DCMS’s claim against those parties – which apparently were the only claims left by DCMS -must be dismissed. That result would seem to bring the action to an end. Yet, DCMS was not represented on the motion.

DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., 2015 CarswellOnt 12593, 2015 ONSC 4125, 258 A.C.W.S. (3d) 312

Building contracts – insurance – subrogation – third party beneficiaries

Thomas G. Heintzman O.C., Q.C., FCIArb                                           January 10, 2016

An Insurance Clause Does Not Necessarily Bar A Claim By The Owner

When does an insurance clause in a construction contract bar a claim by the owner against the contractor?  Is it barred if the contract requires that the contractor obtain insurance and that the owner is to be named as an additional insured and that subrogation is waived against the owner?  That was the issue in the recent decision of the British Columbia Court of Appeal in Lafarge Canada Inc. v. JJM Construction Ltd.

The Background

The contract in question was for the charter of barges by the owner, JJM, to the charterer, Lafarge, but the principles in question appear to be no different than in a construction contract. The contract placed the sole responsibility on Lafarge for the barges’ good condition during the term of the contract.  The contract contained “insurance clauses” which required Lafarge to maintain insurance on the barges with loss payable to JJM and also required that the insurance name JJM as an additional insured and expressly waive subrogation against JJM as the owner.

When the barges were returned to JJM at the end of the contract they were damaged.  JJM repaired the barges, made a claim under the insurance and then claimed against Lafarge for the additional costs that it incurred over the insurance recovery. The parties agreed to arbitrate the claim.

In the arbitration, Lafarge argued that the “insurance clauses” barred any claim against it.  It relied upon a series of decisions of the Supreme court of Canada (Agnew Surpass v. Cummer-Yonge, Ross Southward v. Pyrotech Products, T. Eaton v. Smith and Commonwealth Construction v. Imperial Oil) and various lower court decisions which applied the principles in those decisions.

In some of those cases, claims by owners against tenants and contractors were dismissed based upon insurance clauses in which the owner had agreed to obtain insurance covering the building or project.  In other cases, the owners’ claims were dismissed based upon clauses requiring the tenant or contractor to contribute to the insurance premiums incurred by the landlord.  In both cases, the courts held that these clauses effectively passed the risk of loss to the owner, even in the presence of a general duty placed on the tenant or contractor to repair and maintain the building or project.

The arbitrator agreed with JJM that the insurance clause in question did not protect Lafarge.  The arbitrator’s decision was upheld by the British Columbia Supreme Court and Court of Appeal.

The Court of Appeal held that the prior decisions relied upon by Lafarge did not apply to the present circumstances.  Those cases involved two situations.

The first situation is a claim by the party which undertook the obligation to insure the other party.  That was the situation in each of the Supreme Court of Canada cases in which the owner, expressly or impliedly, undertook to obtain insurance on the building or project, and then sued the tenant or contractor when there was damage to the building.  The obligation to insure was express if the lease or construction contract stated that the owner would insure the building or project.  The obligation to insure was implied if the lease stated that the tenant would contribute to the insurance maintained by the landlord.  In either situation, the courts held that the owner had assumed the risk of damage to the building and could not sue the tenant or contractor.

The second situation is a subrogated claim by an insurer of the owner.  The claim may be against a tenant or contractor which was a named or unnamed insured under the insurance policy taken out by the owner.  Or the claim may be against a tenant or contractor which the owner agreed to name as an insured party in the insurance policy to be taken out by the owner, but the owner failed to take out that insurance. In both cases, the courts have held that the insurer could not maintain such a claim.

Neither situation existed here.  In this case, the claim was by the owner but the owner had not contracted to take out insurance.  Rather, it was the charterer, Lafarge, which had contracted to take out the insurance, and insurance naming the owner as an insured party.  Here, the claim was not by the insurer but by JJM for its uninsured loss after giving full credit to Lafarge for all insurance proceeds it had received.

Lafarge argued that a wider principle applied.  Effectively Lafarge was seeking to broaden the first category, namely, the implied obligation to insure arising from a contribution made by a tenant or contractor to the owner’s insurance premiums.  Lafarge argued that this implied obligation is based upon the principle that any time a party pays for insurance under a contract relating to a project or building, all claims arising from that project or building must be made under the insurance policy, and that all other claims against that party are barred.

The Court of Appeal rejected that argument.  It pointed out that Lafarge had cited no cases that supported its argument.  It also noted that, in the first category of cases on which Lafarge relied, the party suing (usually the owner) was the party which had an express or implied obligation to obtain insurance for the benefit of the other party (usually the tenant or contractor) .  In the present case, the party suing (the owner, JJM) had not undertaken to obtain insurance.  To the contrary, the party suing was the beneficiary of the insurance to be obtained by the other party.  Effectively, Lafarge was arguing that JJM should be deprived of a remedy by the very insurance that Lafarge had agreed to obtain for JJM’s benefit.

The Court of Appeal concluded that the other cases cited by Lafarge were all based upon claims made by insurers and were based upon two principles of subrogation.

First, the insurer could not sue the other party (usually the tenant or contractor) because the other party was a named or unnamed beneficiary of the policy under which the insurer had paid.  Under well known principles of insurance law, an insurer cannot bring a subrogated claim against another party insured under the same policy.

Second, another well know principle of insurance law is that the insurer has no greater subrogation rights than its insured (usually the owner).  If the owner had contracted to obtain insurance for the building or project and to name the other party (usually the tenant or contractor) as an insured and had failed to do so, then the owner had accepted the risk of damage and the insurer could be in no better position than the owner when maintaining a subrogated claim.

The present case did not fall within those principles.  JJM had not contracted to obtain insurance and the claim was not a subrogated claim.

This decision by the British Columbia Court of Appeal is a good reminder that “insurance clauses” do not necessarily create a water-tight regime which precludes claims by one party  against the other under insurance contracts.  The water-tight regime may apply to, and exclude, claims by the party (or its insurer) which agrees, either expressly or by implication, to obtain insurance on the project for the benefit of the other party.  But, without more, it may not apply to and exclude claims against the party which agreed to put that insurance in place.

The business logic of this decision is also sound.  As the Court of Appeal pointed out, it was Lafarge which arranged for the insurance, together with the terms and the deductible that resulted in JJM’s insurance claim not being paid in full.  In this circumstance, it seems only fair that Lafarge bear the risk of any uninsured shortfall.

This conclusion may have several unsettling implications for a party taking out insurance for a construction project.

First, the party agreeing to take out insurance (Lafarge in this case) undoubtedly conferred a benefit on the owner (JJM).  Wasn’t the amount of rent paid by Lafarge for the barges likely reduced, in some measure, by the cost of that insurance and the benefit conferred on JJM?  If so, isn’t that benefit akin to the contribution made by a contractor or tenant to the owner’s insurance premiums?  And if that is so, should that fact not give rise to an implied duty on JJM to accept that insurance as its sole remedy?

Second, to the extent possible owners and contractors usually want to create a water-tight insurance regime in the construction contract.  Each of them wants to ensure that the insurance regime provides the only remedies available to the other party.  How can they accomplish that result?

Clearly, this case tells us that the insurance clause and the insurance itself is not sufficient, at least so far as claims against the party which agrees to take out the insurance.  What is sufficient?  Must the contract provide that the insurance is the sole remedy of either party?  Is there any other way to create that “water-tight” regime so far as claims against the party taking out the insurance?  This case will have owners and contractors scratching their heads to come up with an answer.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 5, Part 3

Arbitration  –  Construction Contract   –   Insurance  –   Subrogation

Lafarge Canada Inc. v. JJM Construction Ltd., 2011 BCCA 453

Thomas G. Heintzman O.C., Q.C.                                                                                                     February 20, 2012