September 18, 2019


Beware contract insurance provisions 


Rob Kennaley In Jacobs v. Leboeuf Properties Inc., 2018 ONSC 4795, a homeowner retained the defendant builder to build a custom home for him in Toronto. He found aspects of the contractor’s work to be deficient. The contract required the owner to purchase insurance coverage and name the contractor as an additional insured. The language required the owner to purchase property and third party liability insurance, including builder’s risk insurance, for among other things, “damage resulting from defective design, workmanship or material.” 

Jacobs sued the contractor for faulty workmanship and the defendant builder brought a motion to dismiss the action on the basis that the owner had a contractual obligation to insure the project against his own faulty workmanship, such that the owner’s only recourse for deficiencies would be to claim against his own insurance. The motion’s judge agreed. 

The judge made her decision on a “Rule 21 Motion” which, in Ontario, is a motion based only on the pleadings, without any evidence from the parties about their intentions in agreeing to the clause or expert evidence on what a builder’s risk policy for damage resulting from defective design, workmanship or material would include in the insurance context. Our argument that the clause was not sufficiently clear that it could be interpreted in the absence of any such evidence was rejected. Rather, the motion judge found the clause to be clear.

Quoting from Geoff R. Hall’s Canadian Contractual Interpretation Law, the motion judge stated, “covenants to insure have been given a specific interpretation in the case law. They not only obligate one party to obtain insurance (the meaning apparent from the wording of the covenant) but also relieve the other party of liability for losses, subject to the covenant, even if such losses are caused by its own negligence….”. The motion judge also relied upon the decision in Madison Developments Ltd. v. Plan Electric Co. where a subcontractor was relieved from liability after negligently starting a fire that caused damage to the subject property. In Madison, the court found that the contractor’s failure to fulfil his obligation to acquire comprehensive fire insurance indemnified the subcontractor from any liability.

We had argued that, under a builder’s risk policy, a distinction must be drawn between damage resulting from faulty workmanship and the faulty workmanship itself. We argued that while the insurance obligation in this case was intended to cover damage resulting from defects, it was not intended to cover the cost of rectifying defects. To find otherwise, we argued, would be to say that a contractor could build a home out of tissue-paper-and-saliva and then walk away, taking the position that the owner’s only recourse would be to claim against his or her own insurance.  

We noted that each case upon by the builder involved a claim for damage, which had resulted from the faulty workmanship, such as from a fire or a flood, rather than a claim for the cost of rectifying the work itself. The motion judge was not swayed by the distinction, stating that “the plaintiff accepted the risks of the very type of losses or damages that he alleges were caused to the residence. Accordingly, the plaintiff cannot pursue the defendant for such damages in negligence or due to breach of contract.”

The distinction between deficient work and resulting damage is an important one. If a door is hung incorrectly, the cost of rehanging the door is the cost of correcting the deficient work. If the mis-hung door continually slams against the expensive antique door frame around it, the damage to the door frame would be considered “resulting damage” or “consequential loss.” The classic example used to describe the distinction is the retaining wall and the Volkswagen. If the wall falls over, the cost of correcting it is not resulting or consequential damage. If the falling wall takes out a Volkswagen, however, the cost of repairing or replacing the Volkswagen is considered resulting or consequential damage. We argued that, traditionally, comprehensive liability and builder’s risk policies will cover for the damaged Volkswagen but not to rebuild the wall.

The case had potentially significant impacts in the law of construction and insurance in Ontario. This is because, if left to stand, the case would allow any contractor or subcontractor to require the party above them in the construction ladder to include and rely on a clause such as the one at issue in this case, and refuse to correct deficient work. 

We appealed the decision to the Ontario Court of Appeal, which set aside the decision and allowed the homeowner’s action to proceed. In the end, the Court of Appeal simply held that “this was not a proper case for the application of Rule 21” and that the clause in question “could not be properly interpreted in isolation from the contract as a whole, or in a factual vacuum.”  The Court of Appeal declined to comment on the extent to which the covenant to provide a builder’s risk policy can or should be interpreted to include coverage for the builder’s own deficient work. It is worth noting, however, that the builder’s counsel was unable to point (when asked) to a single case where such an interpretation had been made by a court in Canada (other than in the underlying decision appealed in this case). 

In the end, parties to construction contracts must carefully read the insurance requirements set out in their contracts carefully. If there is confusion over what a clause means, they should contact their brokers for clarity. Further, if a clause expressly requires the hiring party to insure the person they hire against their own deficient or incomplete work, the court will most likely uphold that clause. Accordingly, parties should be on the lookout for such language.

Robert Kennaley practices construction law in Toronto and Simcoe, Ont. He speaks and writes on construction law issues and can be reached for comment at 416-700-4142 or at This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.