The authors were recently successful in an Application for coverage under a builder's risk policy. On April 28, 2025, the Honourable Mr. Justice Schabas released his decision in Fluid Hose v. Allianz et al, 2025 ONSC 2517 finding that Fluid Hose, was an insured under a builder's risk policy of insurance, as a subcontractor. The decision analyzed and appropriately applied the principles set out in the leading Supreme Court of Canada decision of Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, and affirms that builder's risk policies are to be interpreted broadly in favour of coverage, erring on the side of inclusivity.
The underlying case stemmed from a water leak from the HVAC cabinet in a residential high-rise building under construction. The cause of the water leak was determined to be a ½ inch ball valve in the water supply line for the heat pump supplied to the project by Fluid Hose, which broke in half, resulting in a large amount of water escaping into the building. The construction of the building was insured under a builders' risk insurance policy issued by Allianz Global Risks US Insurance Company (Allianz) which provided comprehensive all risk coverage for any direct physical loss or damage at the construction site within the policy period. Following the water leak, a claim was made to Allianz by under the policy by the owner of the building for the costs to remediate the resulting water damage. Allianz subsequently commenced a subrogated action against Fluid Hose & Coupling Inc. (Fluid Hose), as supplier of the ball valve, for allegedly failing to ensure the valve was fit for its intended purpose and reasonably durable. In its defence, Fluid Hose alleged that the ball valve failed as a result of over-torqueing during the installation to the heat pump, which was not their responsibility.
Fluid Hose brought a coverage Application seeking a declaration that it was a subcontractor as defined under the policy, and therefore, a named insured against which the subrogated claim was barred. At the hearing of the Application, the key issue for determination was whether Fluid Hose met the definition of subcontractor set out in the Allianz policy, which is as follows:
"any person, firm or corporation entering into a contract derived through any such contract with a Contractor to provide, supply or lease work, services, materials or equipment, or any combination thereof, in connection with the project shown in the Declarations." [emphasis added] Fluid Hose argued that this definition is sufficiently broad to cover any party within the supply chain for the project, including Fluid Hose, which supplied custom designed ball valves that were necessary for the HVAC units manufactured to the specific requirements of each residential unit of the building. The key players of the HVAC supply chain were identified as follows:
- PCL Constructors Canada (PCL), which contracted with Malfar Mechanical Inc. (Malfar) to supply and install mechanical and plumbing equipment, including HVAC cabinets and heat pump;
- Malfar which contracted with HTS for the supply of HVAC cabinets and heat pumps for the building; HTS Engineering Ltd. (HTS) which contracted with Omega Heat Pumps Inc. (Omega) for the supply of HVAC cabinets and heat pumps for the building;
- Omega which contracted with its sister company, Sigma Convector Enclosure Corp. (Sigma), to fabricate the HVAC cabinets and heat pumps for the project; and
- Sigma which contracted with Fluid Hose for the supply of ball valves, manufactured to Sigma's specifications, to be installed in the heat pumps fabricated by Sigma for the project.
Notably, Allianz had previously acknowledged that Malfar, HTS and Omega (and likely Sigma1) were subcontractors as defined under the policy and therefore "insureds". Fluid Hose argued that it would not make commercial sense for the policy to cover these entities within the HVAC supply chain but not cover Fluid Hose, as supplier of the ball valve, and that this distinction was not supported by the language of the policy.
The Court accepted that the word "derived", as set out in the definition above, was indeed broad and extended to suppliers such as Fluid Hose. In particular, the Court found that Fluid Hose's ball valves were necessary to fulfill the contract between Omega and HTS, which in turn, was necessary to fulfill the contract between Malfar and HTS. Since Malfar had contracted with PCL, a named insured under the policy, Malfar met the definition of 'contractor' under the policy, such that the subsequent contracts in the supply chain were 'derived' through the contract between Malfar and PCL for the supply of HVAC cabinets and heat pumps.
Although Sigma had purchased other ball valves from Fluid Hose in the past and more recently had ordered 5,000 ball valves, despite only requiring 728 for the project, the Court appropriately observed that there was no requirement in the policy for the contract to be exclusively for the project, and moreover that there was no requirement that the contracts within the supply chain be executed chronologically.
The court rejected Allianz's position that Fluid Hose was advancing an interpretation of the policy that would cover all suppliers of material that found their way to the construction site, no matter how remote or tenuous. While broad, the policy was not unlimited in scope. The court concluded by highlighting that one of the purposes of builder's risk policies, as recognized in Ledcor, is to ensure "construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst the various contractors involved". If the subrogated action was allowed to continue, it would involve various contractors and subcontractors fighting over liability – precisely what builder's risk policies are designed to avoid.
The key takeaways from this decision are:
- builder's risk policies of insurance are to be interpreted broadly;
- subcontractors, including suppliers of material to the construction project, may be insureds under such policies, subject to the definitions of "insured", "contractor" and "subcontractor" therein; and
- each policy must be read carefully to give effect to the ordinary meaning of the language in the policy.
Footnote
1 As noted in the decision, Sigma brought a similar coverage Application against Allianz which was settled shortly before the hearing by way of a Pierringer Agreement.
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