An update on the definition of contractors in contractors all risks (CAR) policies

This article was co-authored by Trainee Solicitor Dominic Deery.

We briefly review a recent development in Canadian case law impacting coverage in the construction sector for contractors and subcontractors.

The British Columbia Court of Appeal upon hearing Honeywell International Inc v XL Insurance Company Ltd [12.11.24] (“Honeywell”) has ruled that unless otherwise specified in a construction policy, the definition of an insured “subcontractor” includes offsite manufacturers of components to be used in the project, even if that supplier does not attend or perform on-site services.

Background

The claimant in the underlying action alleged deficiencies in sealed glass units forming part of the glass exterior of the Shangri-La tower in Vancouver. The action was initially brought against the principal contractors, who in turn, brought third party proceedings against Honeywell.

It was alleged that Honeywell manufactured and supplied a defective substance intended to absorb moisture during the glass manufacturing process. Honeywell claimed XL Insurance should have paid for its defence costs as an insured subcontractor under the policy. XL denied that Honeywell was a “subcontractor” as defined in the policy. The issue for the court to determine was, whether under the definition in the policy, Honeywell should be considered an insured sub-contractor.

The policy wording

The policy states:

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

To succeed on its application for declaratory relief and indemnity for costs, it fell to Honeywell to prove that there was a possibility it came within the definition of the Insured in respect of the third party claim made against it. On the policy wording, Honeywell had to prove that it did perform “any part of the work”. XL Insurance conversely argued that Honeywell was excluded under the policy as it did not carry out any “installation, construction or supervisory work” on the project.

Outcome

At first instance, the lower Canadian court found that Honeywell did not complete work that warranted their inclusion under the definition of a sub-contractor. This decision was reversed in the Court of Appeal who considered the lower court to have taken an inappropriately narrow interpretation of what it means to “perform any part of the work under the insured project”.

In its judgment, the Court of Appeal considered the definition of insured “sub contractors” to include suppliers, even those who do not perform site services, provided they perform some function other than merely supplying materials to the project. The court viewed that when read on its plain wording, that definition includes off site manufacturers of components incorporated in the project. It was further concluded that there was no evidence before the judge demonstrating a specific intent or industry practice to exclude all off site suppliers from the definition of insured sub contractors.

In summary, the court concluded that any limitation in the definition of covered suppliers must be found in the wording of the policy, not in the “nature” of the policy.

Comment

Whether a third party qualifies as an insured contractor or sub-contractor within a CAR policy is a common issue that arises in construction disputes.

Honeywell represents a departure from the recognised position in English law for over 25 years as set out in Hopewell Project Management Ltd v Ewbank Preece Ltd [1998] (“Hopewell”). The decision in Hopewell set out that if a party is not a named insured in a policy, and it did not perform any construction work on site, it should not be categorised as a contractor or sub-contractor. This is based upon the general view in English and Welsh law that an insurance policy, like any other contract, “must be interpreted objectively by asking what a reasonable person with all the background knowledge available to the parties when they entered into the contract, would have understood the contract to mean” (Financial Conduct Authority v Arch Insurance (UK) LTD & Others [2021]). In contrast, Honeywell indicates the Canadian courts’ willingness to consider the broader intention of contracting parties at the time of drafting the insurance policy. Furthermore, in Honeywell the court indicated that they would allow expert evidence to demonstrate a specific intent or industry practice to determine the extent of cover for off site suppliers from the definition of insured sub contractors. This consideration could represent an opportunity to work around the judgment.

Whilst not binding in UK law, the decision in Honeywell could be argued as providing undue protection to professional manufacturers and suppliers who owe a duty of care and should rely on their own insurance. The decision should serve as a warning to limit the scope of insured contractor or sub-contractor cover definitions more clearly when drafting CAR policies so as to prevent the UK courts being persuaded to extend cover beyond that which was originally intended.