Subcontractor owes duty to indemnify and defend despite contractor’s obligation to obtain wrap up liability insurance for subcontractors

Insurance law – Liability insurance – Property damage – Wrap up policies – Interpretation of policy – Duty to defend – Construction development

Crosslinx Transit Solutions Constructors v. Capital Sewer Serving Inc., [2021] O.J. No. 471, 2021 ONSC 1091, Ontario Superior Court of Justice, February 2, 2021, M. Koehnen J.

The applicant contractor sought an order requiring the respondent subcontractor to indemnify and hold the applicant harmless pursuant to a subcontract in relation to a claim arising from sewer backup damage. The property owners brought a claim against multiple parties including the applicant and the respondent. The respondent brought a cross application seeking a declaration that it has no obligation to indemnify or defend the application.

The applicant entered into a project agreement and construction contract to carry out construction work for a transit project. The applicant retained a number of subcontractors, including the respondent who was retained to carry out sewer lining work. The project agreement and construction contract required that the subcontractors be covered under a wrap up insurance policy as named insureds for work done on the transit project. The applicant obtained a wrap-up policy for the transit project. The subcontract between the applicant and the respondent required the respondent to indemnify and hold harmless the applicant for all claims arising out of the performance of the subcontract.

The respondent relied on the principle that a contractual covenant by one party to secure insurance operates as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. On this basis, the respondent argued it had no obligation to indemnify or defend the applicant.

The Court was required to analyze a potential conflict between the contractual indemnity the respondent gave to the applicant and a covenant by the applicant to parties higher up in the contractual pyramid that it would obtain a wrap-up commercial general liability policy that covered all of its subcontractors as named insureds.

The Court found that the subcontract incorporated by reference the terms of the construction contract but it did so “with the changes necessary to give full effect to the intent of the parties as set out in this Subcontract, and subject to the express terms of conditions hereof.” On this basis, the provisions of the subcontract took precedence over the construction contract. Therefore, the specific provisions of the indemnity in the subcontract took precedence over the more general provisions relating to the wrap up policy in the construction contract. Courts must interpret contracts in a way that gives meaning to all of its terms and avoid interpretations that render one or more terms ineffective. The Court held that to adopt the respondent’s interpretation would render ineffective its obligation to obtain liability insurance.

The Court held that the respondent owed a duty to defend the applicant under the subcontract as the true nature of the claim disclosed in the statement of claim relates to property damage alleged to have been caused by the negligent conduct of the respondent.

The Court held in favour of the applicant and dismissed the respondent’s cross application.

This case was digested by Dominic Wan, 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 contact Dominic Wan at [email protected].

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