In Duri Homes Ltd v Quest Coatings Ltd, 2023 ABCA 276, the Alberta Court of Appeal (ABCA) clarified the analysis for determining when a party claiming the benefit of an insurance policy is an insured and has an insurable interest in the subject matter of the insurance.
Background
The insurer for the appellant, Duri Homes Ltd. (Duri Homes) brought a subrogated action in Duri's name against Quest Coatings Ltd. (Quest) to recover amounts paid to repair damage from a fire to a home Duri Homes was constructing. Quest was hired by the property owner and not contracted by Duri Homes directly. The fire occurred after Quest and its subcontractor performed painting and staining work on the home. The chambers judge summarily dismissed the action against Quest, finding that Quest was an unnamed insured under Duri Homes' builder's risk insurance policy, and was thereby entitled to exercise the subrogation waiver contained within the policy. Duri Homes appealed.
The chambers judge, on appeal from an applications judge's decision, summarily dismissed Duri Homes' subrogated claim, finding that Quest was an unnamed insured with an insurable interest in the insured property, and the subrogation waiver applied. The chambers judge held that the construction agreement between Duri Homes and the owner was not relevant to the interpretation of Duri Homes' insurance policy, as the policy was in standard form and not negotiated between the parties. Following the principles of interpretation set out by the Supreme Court of Canada (SCC) in Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37, the chambers judge found that the policy did not suggest that the coverage was limited to named subcontractors of Duri Homes. Quest's painting and staining work was necessary to complete the construction of the home, and thus fell within the scope of work Duri Homes intended to complete. The chambers judge deemed the language of the policy sufficiently broad to recognize Quest's insurance interest.
Decision on Appeal
The ABCA dismissed the appeal. The unanimous court held that a party claiming under an insurance policy must prove two elements:
- The party is an insured under the policy.
- The party must have an insurable interest capable of supporting the insurance policy.
In its analysis, the ABCA recognized the policy considerations justifying the insurable interest requirement as expressed by the SCC in Kosmopoulos v Constitution Insurance Co, [1987] 1 SCR 2. These considerations include:
- The principle against wagering, or obtaining insurance to gain enrichment from an occurrence unrelated to the insured's interests;
- The principle limiting indemnity, or that an insured by restricted to recovering full indemnity for their own losses; and
- The principle preventing temptation to destroy insured property, or the concern that if an insured has no true interest in the subject matter of the policy, they are more likely to destroy it to gain the insurance money.
In its review of the lower court decision, the ABCA drew a distinction between determining whether a party is an unnamed insured under the policy and whether that party has an insurable interest. The ABCA held that these two elements are not to be determined jointly and involve two separate analyses. The language of the insurance policy is not determinative of the claimant's insurance interest. Rather, the factual expectancy test and the overall factual matrix at play between the parties determine the presence of an insurable interest.
The ABCA held that the chambers judge correctly employed the analysis for determining that Quest was an unnamed insured. The ABCA agreed with the finding that the construction agreement between Duri West and the property owner was not relevant for interpreting the insurance policy because it was a standard form, and therefore was not relevant to the determination of whether Quest had an insurable interest. Since Quest supplied the paint and associated work, the ABCA agreed that these actions formed part of the completed project sufficient to find that Quest was an unnamed insured.
In determining whether Quest could demonstrate some relation or concern to the subject matter of the insurance policy such that any damage to the project would prejudice it, the ABCA followed the SCC's reasoning in Commonwealth Construction Co Ltd v Imperial Oil Ltd et al, [1978] 1 SCR 317. The Court concluded that there was no requirement for a contractual relationship between Duri Homes and Quest, and "the contractual arrangements opening the doors of the job site to the tradesmen" could include the owner's engagement of Quest.
The Court concluded that the factual expectancy test may be met in the construction context upon recognition of a "special relationship" between a subcontractor and the construction as a whole based on the potential for liability arising from the possibility of damage to the work of others in their joint efforts to complete the construction project. Quest had a special relationship with the subject matter of the insurance policy because Quest attended the jobsite with the intention of contributing to the construction in completing the painting and staining work, and was exposed to the risk that its work could damage the whole project. Therefore, Quest had an insurable interest under the policy. The Court concluded that the subrogation waiver in the insurance policy applied, and upheld the chambers judge's dismissal of the subrogation claim.
Takeaway
The ABCA's decision highlights the importance of considering both the language of an insurance policy and the factual matrix surrounding the context of that policy. The relationship between contractors, subcontractors, and other tradespeople in the greater context of the projects in which they work is essential for predictable insurance coverage in the construction context. Alberta courts will take a more holistic view of the interests and liabilities of subcontractors in a construction project when determining whether they have an insurance interest under the contractor's insurance policy.