Supreme Court of Canada
Commonwealth Construction Co. Ltd. v. Imperial Oil Ltd. et al., [1978] 1 S.C.R. 317
Date: 1976-10-19
Commonwealth Construction Company Limited (Defendant) Appellant;
and
Imperial Oil Limited and Wellman-Lord (Alberta) Ltd. (Plaintiffs) Respondents.
1976: May 25; 1976: October 19.
Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.
ON APPEAL FROM THE SUPREME COURT OF ALBERTA, APPELLATE DIVISION
Insurance—Property insurance—Multi-peril subscription policy—Named insured including owner, contractor and subcontractor—Subcontractor responsible for fire causing damage to its property and to rest of building project—Subcontractor’s insurable interest extending to entire project prior to loss—Insurers having no right of subrogation.
A general contractor, Wellman-Lord, entered into a contract with Imperial Oil Ltd. for the construction of a fertilizer plant, and a subcontractor, Commonwealth, was charged with the installation of process piping. In the course of that installation a fire took place, which was admittedly the responsibility of Commonwealth. The damage to the property of the latter was $305.05 and to the rest of the project $102,628.50. The total damage was covered under a multi-peril subscription policy stated to be property insurance. The named insured included “Imperial Oil Limited and its subsidiary companies and any subsidiaries thereof and any of their contractors and subcontractors”.
The damage in its entirety was claimed by, and paid to, Imperial which had Wellman‑Lord effect the repairs. An action against Commonwealth claimed the cost thereof, less the damage of $305.05 to the property of Commonwealth. Notwithstanding the fact that plaintiffs were apparently Imperial and Wellman-Lord, the action had in reality been brought by the insurers alleging subrogated rights obtained from the owner, Imperial, as well as the general contractor, Wellman-Lord. Commonwealth denied the possibility for the insurers to invoke any such rights and asserted in substance that in the event the insurers had obtained no subrogation. The trial judge agreed with Commonwealth’s submission but was reversed by the Alberta Appellate Division. Commonwealth appealed to this Court.
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Held: The appeal should be allowed and the trial judgment restored.
In the case of true joint insurance the interests of the joint insured are so inseparably connected that the several insureds are to be considered as one with the obvious result that subrogation is impossible. In the case of several insurance, if the different interests are pervasive and if each relates to the entire property, albeit from different angles, again there is no question that the several insureds must be regarded as one and that no subrogation is possible. In the context of the construction contracts in this case, the various trades had, prior to the loss, such a relationship with the entire works that their potential liability therefor constituted an insurable interest in the whole.
By recognizing in all tradesmen an insurable interest based on the very real possibility of damage by one tradesman to the property of another and to the construction as a whole, which itself has its source in the contractual arrangements opening the doors of the job site to the tradesmen, the courts would apply to the construction field the principle long ago expressed in the area of bailment. In that field full insurable interest has long been held to exist in others than the owner because of their special relationship with the property entailing possibility of liability.
Accordingly, Commonwealth was an insured whose insurable interest extended to the entire works prior to the loss so that, in accordance with the basic principles, the insurers had no right of subrogation.
Also, the principle that even if insurers have a subrogation right in a given case, they may renounce that right, was applicable here. Under the policy it was to the rights of the insured, i.e., the entire group including Imperial, Wellman-Lord and Commonwealth, that the insurers were subrogated, not to the rights of some members of this group against another member of the same group.
Waters v. Monarch Fire and Life Assurance Co., [1843-60] All E.R. Rep. 654; London and North Western Railway Co. v. Glyn (1859), 1 El. & El. 652; Smith v. Stevenson, [1942] O.R. 79, applied; Simpson and Co. v. Thompson, Burrell et al. (1877), 3 App. Cas. 279; Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd., [1976] 2 S.C.R. 221; Morris v. Ford Motor Co., [1973] 2 All E.R. 1084, referred to.
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APPEAL from a judgment of the Supreme Court of Alberta, Appellate Division, allowing an appeal from a judgment of O’Byrne J. Appeal allowed.
J.R. Smith, Q.C., for the defendant, appellant.
R.L. Fenerty, Q.C., for the plaintiffs, respondents.
The judgment of the Court was delivered by
DE GRANDPRE J.—In March 1967, Imperial Oil Limited (“Imperial”) decided to proceed with the construction of a fertilizer plant at Redwater, near Edmonton. It entrusted the work, of a value in excess of $20 millions, to Wellman-Lord (Alberta) Ltd. (“Wellman-Lord”). Subletting was, of course, part of the agreement and appellant (“Commonwealth”) was the subcontractor charged with the installation of process piping.
In October 1968, in the course of that installation, a fire took place which, for the purpose of this appeal, is admittedly the responsibility of Commonwealth. The damage to the property of the latter was $305.05 and to the rest of the project $102,628.50. The total damage was covered under a multi-peril subscription policy stated to be property insurance, which it clearly is. On the first page thereof, in the first few lines, is to be found the following:
| Name of THE INSURED |
IMPERIAL OIL LIMITED AND ITS SUBSIDIARY COMPANIES AND ANY SUBSIDIARIES THEREOF AND ANY OF THEIR CONTRACTORS AND SUBCONTRACTORS |
| Loss payable to |
Insured or Order. |
The words “Name of the Insured” and “Loss payable to” are printed whereas the balance of the text is typewritten. As a matter of fact, apart from the statutory conditions and the standard insuring agreement and exclusions, the policy is entirely typewritten. In the construction contract between Imperial and Wellman-Lord, it is described as a course of construction policy; it is also known in
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insurance parlance as a builders’ (also spelled “builder’s”) risk policy.
The damage in its entirety was claimed by, and paid to, Imperial which had Wellman-Lord effect the repairs. The action claims the cost thereof, less the damage of $305.05 to the property of Commonwealth. Notwithstanding the fact that plaintiffs are apparently Imperial and Wellman-Lord, the official respondents before this Court, the action has in reality been brought by the insurers alleging subrogated rights obtained from the owner, Imperial, as well as the general contractor, Wellman-Lord. Commonwealth denies the possibility for the insurers to invoke any such rights and asserts in substance that in the event the insurers have obtained no subrogation. The trial judge agreed with Commonwealth’s submission in a very short judgment but was reversed by the Appellate Division. This last judgment being now reported at 46 D.L.R. (3d) 399, I will refrain from quoting therefrom.
There are two issues in this appeal, which I will venture to express in my own terms:
1) did Commonwealth, in addition to its obvious interest in its own work, have an insurable interest in the entire project so that in principle the insurers were not entitled to subrogation against that firm for the reason that it was an assured with a pervasive interest in the whole of the works?
2) if Commonwealth was not such an insured, were the insurers entitled to take advantage of their basic right to subrogation considering
a) the wording of the subrogation clause and of the policy as a whole;
b) the contractual arrangements between Imperial, Wellman-Lord and Commonwealth?
The Court of Appeal dealt at length with only the first issue.
I
On that first issue, given the fact that the policy is property insurance and not liability coverage,
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the reasoning of the Court of Appeal may be summarized thus:
1) a policy issued to many persons will constitute joint insurance if there is in existence a true joint interest, e.g. joint ownership; in that case, no subrogation is possible;
2) a policy issued to many persons will amount to several insurance if the persons insured have different interests in the subject-matter of the insurance; that is the situation in the case at bar and the possibility of subrogation must be examined in the light of the covenant for indemnification given by the insurers to Commonwealth;
3) this covenant limits Commonwealth’s rights of indemnification to the property furnished by it to the project and to any other property for which Commonwealth was responsible before the loss occurred; the circumstances of the case showing that Commonwealth had no liability for that other property prior to the loss, the insurers had the right to obtain subrogation.
For the purpose of this appeal, Commonwealth does not quarrel with the first two of these propositions. It asserts, however, that the Court of Appeal erred in holding that the policy indemnified Commonwealth only to the extent of the portion of the work peformed by it under the subcontract.
The starting point of that submission is the basic principle that subrogation cannot be obtained against the insured himself. The classic example is, of course, to be found in Simpson and Co. et al. v. Thompson, Burrell et al. In the case of true joint insurance, there is, of course, no problem; the interests of the joint insured are so inseparably connected that the several insureds are to be considered as one with the obvious result that subrogation is impossible. In the case of several insurance, if the different interests are pervasive and if each relates to the entire property, albeit from different angles, again there is no question that the several insureds must be regarded as one and that
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no subrogation is possible. In Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd., Pigeon J. wrote at p. 251:
When a building in construction is insured for the joint benefit of the owner and contractor, certainly the latter is not expected to be held liable for loss caused by the negligence of his workmen.
Although this statement may be said to be an obiter, because made in a landlord-tenant case, it does, in my view, express correctly the principle. In Ross Southward Tire Ltd. et al. v. Pyrotech Products Ltd. et al., another landlord-tenant case, the point was not mentioned but the conclusion reached by the majority necessarily implies its acceptance.
Is the interest of appellant in the entire project pervasive? Commonwealth submits that it is one member of a group called “the insured” and that all the members of that group are on the same footing when it comes to receiving the benefit of the insurance should the property insured be lost or damaged by the happening of an insured risk.
That property is described in clause 1 of the policy:
This Policy covers all materials, machinery, equipment including labour charges, and all other property of any nature whatsoever owned by Insured or in which the Insured may have an interest or responsibility or for which the Insured may be liable or assume liability prior to loss or damage to be used or incidental to the fabrication, installation, completion, upkeep, expansion, modification, and all other changes or extensions (whether defined herein or not), all pertaining to the Fertilizer Plant situated at Redwater, Alberta.
The question is: in the context of the construction contracts, did the various trades have, prior to the loss, such a relationship with the entire works that their potential liability therefor constituted an insurable interest in the whole?
In certain fields of mercantile law, e.g. bailment in the widest sense, full insurable interest has for a
[Page 323]
long time been held to exist in others than the owner because of their special relationship with the property entailing possibility of liability.
It is sufficient to refer to the now classic decisions of Waters v. Monarch Fire and Life Assurance Co. and London and North Western Railway Co. v. Glyn, applied by the House of Lords as recently as 1966 in Hepburn v. A. Tomlinson (Hauliers), Ltd. These two classic decisions were also referred to with approval by the Supreme Court of the United States in Phoenix Insurance Co. v. Erie and Western Transportation Co., which was followed in Wager v. Providence Insurance Co. The decisions of the Canadian Courts applying this doctrine are numerous and I will only refer to Smith v. Stevenson, a judgment of the Ontario Court of Appeal. Although these judgments were pronounced on policies issued to the bailee and not to the owner and all other interested parties, as in the case at bar, I do not see that circumstance making any difference when it comes to determining the existence or non‑existence of an insurable interest in a person who is not the owner of the property.
In all these cases, there existed an underlying contract whereby the owner of the goods had given possession thereof to the party claiming full insurable interest in them based on a special relationship therewith. Although in the case at bar Commonwealth was not given the possession of the works as a whole, does the concept apply here? I believe so. On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in court. By recognizing in all tradesmen an insurable interest based on that very real possibility, which itself has
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its source in the contractual arrangements opening the doors of the job site to the tradesmen, the courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, e.g., the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.
This reading of the policy finds support in general condition 5 entitled “Trustee Clause”:
(a) It is hereby declared and agreed that the insurance provided by this Policy is obtained by the Owner on his own behalf and as trustee for the benefit of any and all Contractors who heretofore or hereafter enter into a contract with the Owner, or other insured contractor relating to the construction of the project described in Clause 1 of the wording.
(b) In consideration of the premium charged, the Insurers hereby waive any right they have or may have to contest the inclusion as an insured under this Policy of any person, firm or corporation qualifying as an insured by virtue of clause 5. (a) above,…
All contractors are put on the same footing which is also the statement made in general condition 1 entitled “Definitions”:
Contractor as referred to in this Policy shall mean any and all persons, firms or corporations who perform work under contract with the Owner or the project described in Clause 1 of the wording, including all sub-contractors but shall not in any event include a supplier of machinery, equipment or materials who does not perform work at the job site.
While these conditions may have been inserted to avoid the pitfalls that were the lot of the unnamed insured in Vandepitte v. Preferred Accident Insurance Corpn. of New York, a precaution that in my view was not needed, they without doubt cover additional ground.
I have already said that the policy is basically a typewritten one, which was issued after the signature of the main construction contract, according to which the general contractor never owns any
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part of the works but assumes full liability therefor. In the description of the property insured, the words “assume liability prior to loss” are sufficient to define the interest of the general contractor. The words “may be liable” add another dimension and are wide enough, in my eyes, to recognize in all contractors (which term, I underline again, includes subcontractors) an insurable interest having its source in the very real possibility (“may”) of liability, considering the close interrelationship of the labour performed by the various trades under their respective agreements. Of course, that very real possibility exists prior to the loss.
In reaching that conclusion, I do not have to rely on clause 7 of the subcontract whereby:
It is further agreed that Sub-Contractor binds himself to Contractor to comply fully with and to assume all undertakings, obligations and duties of Contractor as set forth in Plans, Specifications and General Conditions, insofar as applicable to the Work included in this Sub-Contract.
Sub-Contractor agrees to pay and indemnify Contractor from and against all losses, liabilities, suits or obligations of every kind paid or incurred by Contractor on account of failure of Sub-Contractor to perform agreements herein.
Whether or not these stipulations could be said to impose on the subcontractor a contractual liability for the entire works is a question that may well remain unanswered.
I do not know of any major Canadian decisions on the point which makes it of more than usual interest to see what is being done elsewhere. It appears to be the situation in the United States that an action such as the one put forth by the insurers here could not succeed. In General Insurance Company of America v. Stoddard Wendle Ford Motors, the Supreme Court of Washington, through the voice of Hill J., stated at p. 908:
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The courts have consistently held, in the builder’s risk cases, that the insurance company—having paid a loss to one insured—cannot, as subrogee, recover from another of the parties for whose benefit the insurance was written even though his negligence may have occasioned the loss, there being no design or fraud on his part.
And this has been the holding in the following cases all involving subcontractors: Louisiana Fire Ins. Co. v. Royal Indemnity Co. et al.; New Amsterdam Casualty Co. v. Romans-Kohler, Inc.; Transamerica Insurance Co. v. Gage Plumbing and Heating Co.; United States Fire Insurance Co. v. Beach. The only dissenting voice is to be found in Texas in McBroome‑Bennett Plumbing, Inc. v. Villa France, Inc., where the facts may well be distinguished.
In England, the question does not appear to have been litigated. It is interesting to note, however, that MacGillivray, Insurance Law, 6th ed., 1975, appears to accept the authority of the American cases, two of which: General Insurance Co. of America v. Stoddard Wendle Ford Motors and New Amsterdam Casualty Co. v. Homans-Kohler Inc., above, are mentioned in footnote 76 to s. 1916, at p. 804. MacGillivray writes in that section:
The fact that the policy is in joint names will almost invariably mean that both parties are intended to benefit and that there is no scope for subrogation.
For these reasons, I conclude that Commonwealth was an insured whose insurable interest extended to the entire works prior to the loss so that, in accordance with the basic principles, the insurers had no right of subrogation.
II
Although my conclusion on the first issue is a full answer to the action, I shall also express my
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thoughts on the second issue. It is trite law that even if insurers in principle have a subrogation right in a given case, they may renounce that right. In my view, such is the situation in the case at bar.
General condition 2 of the policy under the heading “Subrogation” reads:
In the event of any payment under this Policy, Insurers shall be subrogated to all the Insured’s rights of recovery therefore, and the Insured shall execute all papers required, and shall do everything that may be necessary to secure such rights, but Insurers shall have no right of subrogation against any subsidiary or Allied Company owned or controlled by the Insured nor against any person, firm or corporation in respect of which the Insured has assumed liability under any contract or agreement.
The words I have underlined refer to the entire group called “the insured”, which group includes Imperial, Wellman-Lord and Commonwealth. It is to the rights of this group that the insurers shall be subrogated, not to the rights of some members of this group against another member of the same group.
This is in accord with other clauses of the policy which spell out that the payments in case of loss are not to be made to one insured individually but to the group called “the insured”. Clause 16 spells this out and clause 10 adds that all payments shall be made “to the Insured within thirty (30) days after filing proof of loss”.
That the expression “the insured” refers to the group and only to the group is made clearer, if possible, by several other clauses of the policy. When referring to Imperial, general condition 5 quoted previously uses the word “owner” whereas endorsement No. 2 refers to the owner as “an assured”. The same general condition 5, para. 1, refers to “any and all Contractors who heretofore or hereafter enter into a contract with the Owner, or other insured contractor” and then states, in para. 2, that all persons thus qualifying “as insureds” become “an insured” on the respective dates of their contract.
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The last lines of general condition 2 quoted above bring me to the same conclusion: no right of subrogation will exist against any subsidiary of “the insured”. If the words receive their ordinary meaning, no subsidiary of Commonwealth could be made to defend a suit. Still, the insurers contend that Commonwealth itself can be asked to repay the damages. To go around the plain meaning of the text, the insurers have to say that in that context, the words “the insured” refer only to the owner and to the general contractor, a suggested reading that I cannot accept.
It follows that the clause upon which the insurers rely to claim subrogation in the case at bar, does not support their contention. By that clause, the policy makes it clear that it is only to the rights of the group against outside parties that the insurers are entitled to proceed by way of subrogation.
The conclusion I have expressed is based on an ordinary reading of the subrogation clause as well as on the general text of the policy. In my eyes, it also conforms to the intent of the drafters of this type of insurance, as well as to the intent of the parties to the construction contract in the case at bar.
As already noted, the multi-peril policy under consideration is called in the contract between Imperial and Wellman-Lord a course of construction insurance. In England, it is usually called a “Contractors’ all risks insurance” and in the United States, it is referred to as “Builders’ risk policy”. Whatever its label, its function is to provide to the owner the promise that the contractors will have the funds to rebuild in case of loss and to the contractors the protection against the crippling cost of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset. This purpose recognizes the importance of keeping to a minimum the difficulties that are bound to be created by the large number of participants in a major construction project, the complexity of which needs no demonstration. It also recognizes the realities of industrial life. In Morris v. Ford
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Motor Co. Ltd., the majority in the Court of Appeal refused to accept the existence of subrogated rights because in the words of Lord Denning, it was not just and equitable to compel the insured to lend their name to an action against their own servant and, in the words of James L.J., such a subrogation in an industrial setting was unacceptable and unrealistic. As I see it, the drafters of the type of policy with which we are here concerned were clear-sighted enough to achieve this result before any judicial pronouncement on the subject.
And this was the intent of all the parties to the construction contracts, namely Imperial, Wellman-Lord and Commonwealth. A finding on this point was made by the trial judge when he said:
No demand was made by the Plaintiffs on the Defendant for the resulting damage. It was thought by everyone at the time to be an insurance claim and was treated accordingly.
The insurers submit that no such intention existed. They establish a parallel between the liability insurance requirements in the main construction contract and that in the subcontract; they point out that in the former the policy is to stipulate that the owner will be deemed to be a member of the public but that no coverage will exist “for loss to the work under the contract” whereas in the latter, no such exclusion is mentioned. They also stress that a course of construction policy insuring the work to full value in the joint names of the contractor and the owner will be obtained, whereas the subcontract makes no reference to any property insurance. The short answer to that submission is
a) that Imperial, by its conduct when it obtained property insurance in favour of all concerned wherein the contractor and the subcontractors were put on the same footing, gave
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its true meaning to the arrangement relating to property insurance;
b) that in such a context, there was no need to repeat in the subcontract the statement found in the main contract that the policy of liability insurance would not provide indemnity “for loss to the work under the contract”,
in addition to which it would be astonishing to find that the owner, when turning its thought to liability insurance, would insist upon a protection of $1,000,000 excluding the work under construction in the case of the contractor but would be satisfied with a coverage of $300,000 including that work in the case of the subcontractor.
The insurers have submitted that this reading of the contractual agreements between owner, contractor and subcontractor is negated by para. 17 of the subcontract:
LIABILITY FOR DAMAGES:—In cases of damage by the Sub-Contractor to the work of others engaged on the project or of damage to the Sub-Contractor’s work by others, the parties involved shall agree promptly regarding the making of necessary repairs and the assumption of repair cost. Such repairs shall be made in a manner satisfactory to the Contractor and the Contractor may require, in order to assure proper workmanship, or to prevent delays, or in cases where responsibility is in dispute or cannot be determined, that repairs be made by the party whose work has been damaged and said party shall comply at his own expense and secure recompense, by such proper means as may be available, from only the party or parties at fault.
That submission goes beyond the words of the text. The main purpose of that paragraph is to ensure that in case of damage, the general contractor will be in a position to have the repairs done promptly. That paragraph does not negate the basic proposition that everyone involved in the construction of the project will be insured under a policy issued to all as a group. The reference to fault occurs because this policy stipulates a deductible of $10,000 and because it contains a number of exclusions, e.g. error in design and latent defect; that reference has no other purpose.
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For all these reasons, I would allow the appeal, set aside the judgment of the Appellate Division of the Supreme Court of Alberta and restore the judgment at trial, with costs throughout.
Appeal allowed with costs.
Solicitors for the defendant, appellant: Mac-Kimmie, Matthews, Calgary.
Solicitors for the plaintiffs, respondents: Fenerty, Robertson & Co., Calgary.
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