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September 2018

Subrogating Claims in the Construction Context

They Do Exist

Jessica Grant
Jessica Grant,
Partner

By Jessica Grant

Oftentimes, builder's risk policies contain waivers of subrogation, and contractors, more often than not, are listed as additional insureds. For this reason, subrogated claims are few and far between in the construction context. However, the recent case of Maio v. Mer Mechanical Inc., 2018 ONSC 4426 (“Maio”) suggests that subrogation may be possible.

In Maio, the plaintiffs newly constructed home was completed in September 2009 and they moved in November 2009. Within days, a faucet detached, causing a major flood and over $3 million in damages to their home.

The plaintiffs made a claim under their homeowner's policy and their insurer subsequently commenced a subrogated action on their behalf against, inter alia, Mer Mechanical Inc. (“Mer”), the plumbing contractor who had provided plumbing services and installed the faucet.

Mer bought a motion for summary judgment taking the position that it was entitled to coverage afforded to it by a builder's risk policy which was in place and that the plaintiffs' action was therefore statute-barred. The Court dismissed the motion finding that the action was not barred and that the type of incident which caused the damage was not covered by the definition of “occurrence” in the builder's risk policy.

The Applicable Policies

Both were “occurrence” based policies.

During construction, the plaintiffs had in place a Commercial Multi-Peril Policy comprised of both a Residential Builders policy – All Risks Insurance and a Residential Contractor's CGL policy. Both were “occurrence” based policies. However, the definition of “occurrence' differed between two. In the Residential Builders policy, which ran until September 1, 2009, and was the primary insurance for the project, “occurrence” was defined as

... any one loss, casualty or disaster or series of losses, casualties or disasters, arising out of one event. If the inception of the event causing the loss occurs prior to the estimated completion date of the project, then the Insurer shall be liable for any loss incurred after the estimated completion date of the project, as a result of the event.

In the CGL policy, “occurrence” was defined as

... an accident, including continuous or repeated exposure to substantially the same a harmful conditions.

The Residential Builders policy, which included a waiver of subrogation, insured, among other things, “property of every kind and description used or to be used in, or incidental to, construction, installation, erection, dismantling, demolition, reconstruction or repair, owned by the insured”.

The Faucet and Flood

Mer installed the faucet sometime between June and August of 2009. On November 9, 2009, and after the expiration of the Residential policy, an extension tube that connected the faucet to the water line separated, resulting in the leak and subsequent damage.

... this, ultimately, led to the failure of the faucet ...

Mer subsequently retained an engineer who concluded that the faucet began to be “stressed” soon after it was installed which affected the water seal's resistance to water pressure and that this, ultimately, led to the failure of the faucet in November 2009.

Mer argued that the “inception of the event” was the improper installation resulting in the “creep/stress relaxation” and this occurred during the time for which Mer had coverage.

The plaintiffs took the position that the “occurrence” was the separation of the faucet's connection which took place after the expiration of the Residential Builders policy.

Conclusion

The Court did not accept Mer's argument and noted that Mer had confused “inception” with “cause” and that the “inception of the event” was not the specific installation of the faucet and did not occur during the policy coverage period. The Court further noted that “the definition of an ‘occurrence' as being tied to a single event as opposed to an ‘accident' or ‘continuous and repeated exposure' to harmful conditions is consistent with the purpose of a builder's risk policy.”

As such, the Court dismissed the motion and concluded that Mer was not insured under the policy and nothing barred the plaintiffs from bringing a subrogated action against it.

Takeaway

What we can glean from Maio is that the Court will not only carefully parse the language of relevant policies, but will also look to the origin and timeline in situations which result in damages in the construction context and will look at the intention of the builder's risk policy. In this case, this was good news for a subrogating insurer.


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