Off-site supplier falls within definition of “insured” under wrap up liability insurance policy

The British Columbia Court of Appeal found the definition of an insured subcontractor in a wrap-up liability policy includes suppliers if the supplier does more than merely supply materials to a project.

Insurance law – Liability insurance – Wrap up policies – Third parties – Interpretation of policy – Construction development – Duties and liabilities of insured – Practice – Summary judgments – Appeal

Honeywell International Inc. v. XL Insurance Co., [2024] B.C.J. No. 2102, British Columbia Court of Appeal, November 12, 2024, P.M. Willcock, G.B. Butler and K. Horsman JJ.A

The appellant, Honeywell International Inc., successfully appealed a finding of the Supreme Court of British Columbia that it did not fall within the definition of an “insured” under a wrap-up liability insurance policy and the consequential dismissal of its claim to be indemnified for costs incurred to the defend claims against it.

The appellant was a third party in actions related to construction of the Shangri-La building in Vancouver. The plaintiffs in those actions alleged deficiencies in sealed insulated glass units (IGUs) forming part of the exterior curtain wall of the Shangri-La. The third-party claims against the appellant alleged the appellant manufactured desiccant, a substance intended to absorb moisture that was used in the manufacture of the IGUs, and the failure of the IGUs was a result of the defects.

During the course of the litigation, the appellant learned that a wrap-up liability insurance policy was in place for the Shangri-La project and sought coverage under the policy. The appellant claimed to fall within the definition of insured as a subcontractor.

The policy defined the “Insured” as follows:

[1.] The term “Insured” means:

The policy defined the “subcontractor” as follows:

[4.] “Contractors [“] and “sub-contractors” include all persons or organizations who perform any part of the work under the Insured Project but do not include:

a. 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;

XL Insurance Company Ltd. was the wrap-up insurer.  The insurer denied coverage to the appellant on several grounds, including that the appellant was not an insured under the policy.

The appellant filed third party notices against the insurer, claiming it fell within the definition of “insured” and seeking orders requiring the insurer to indemnify it for its expenses in defending the third-party claims. The insurer filed responses to the third-party notices admitting that it issued the policy but maintaining its denial of coverage to the appellant. 

In the British Columbia Supreme Court, the appellant brought summary trial applications to determine coverage.  The applications and the appellants’ third-party claims against the insurer were dismissed. The appellants appealed the dismissal and the Court’s finding that it was not an “insured” under the wrap up liability insurance policy and the consequential dismissal of its third-party claims for indemnification.

The British Columbia Court of Appeal found the appellants fell within the definition of an insured under the policy and the case was remitted to the Supreme Court. The Court noted there was no evidence before the Supreme Court judge to the effect that there was a specific intent or industry practice to exclude all off-site suppliers from the definition of insured subcontractors. Any such limitation in the definition of covered suppliers had to be found in the wording of the policy, not in the “nature” of a wrap up policy. That was consistent with the rule that the intent of the parties is generally ascertained within the four corners of the policy. The Supreme Court judge adopted an inappropriately narrow conception of what it meant to “perform any part of the work under the Insured Project”. The narrow construction of that phrase, that it applies only to organizations that do something “on the project itself”, could not be reconciled with the definition of an insured.

The Court found the definition of insured subcontractors includes suppliers, even those who do not perform site services, provided they perform some function other than merely supplying materials to the project. The allegation that the appellant negligently manufactured the desiccant used in the IGUs was an allegation that it performed some function other than supplying materials to the project which brought it within the definition of an “insured” subcontractor under the policy.

This case was digested by Natasha Cooke and edited by Steven W. Abramson of Harper Grey LLP and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please feel free to contact them directly at [email protected] or [email protected].