Construction ‘subcontractors’ include offsite suppliers

Unless otherwise specified in a construction wrap-up policy, the definition of insured “subcontractors” includes offsite manufacturers of components incorporated in the project, even if that supplier does not perform site services, the B.C. Court of Appeal has ruled.

“The definition of insured ‘subcontractors’ includes suppliers, even those who do not perform site services, provided they perform some function other than merely supplying materials to the project,” B.C. Court of Appeal Justice Peter Willcock wrote for a unanimous 3-0 court, in a decision released Tuesday.

“On its plain wording, that definition includes offsite manufacturers of components incorporated in the project.

“There was no evidence before the [trial] judge to the effect that there is a specific intent or industry practice to exclude all offsite suppliers from the definition of insured subcontractors. Any such limitation in the definition of covered suppliers must be found in the wording of the policy, not in the ‘nature’ of a wrap‑up policy.”

B.C.’s Appeal Court thus overturned a lower court decision that initially ruled XL Insurance Company did not have a duty to defend Honeywell International, a manufacturer of desiccant, a substance intended to absorb moisture that is used in insulated glass units.

Honeywell was named as a third party in a construction claim against principal contractors who are unnamed in the Court of Appeal decision. In that main legal action, the principal contractors were sued for their role in building the exterior curtain wall of the Shangri‑La tower in downtown Vancouver.

In the main legal action, which has since settled, the principal contractors defended themselves by alleging the manufacturer’s dessicant was defective, causing issues with the building’s insulated glass units.

In Honeywell International Inc. v. XL Insurance Company Ltd., Honeywell claimed XL Insurance should have paid for their defence costs. But XL denied the claim, saying Honeywell was not actually a “subcontractor” as defined in the principal contractors’ policy.

XL’s builders wrap-up 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:

1. 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…

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XL argued before court that Honeywell was excluded, since they did not “carry out any installation, construction, or supervisory work on the site of the insured project.”

Honeywell disputed that interpretation, saying it performed “any part of the work” under the insured project; namely, the manufacture of the dessicant used in the glass.

A lower court found that since Honeywell did not do any installation, construction, or supervisory work at the project site, XL’s policy exclusion applied and the insurer did not have a duty to pay for Honeywell’s legal defence costs.

But the B.C. Court of Appeal reversed that decision.

“In my opinion, with respect, the [lower court] judge adopted an inappropriately narrow conception of what it meant to ‘perform any part of the work under the insured project,’” Willcock wrote. “His narrow construction of that phrase, that it applies only to organizations that do something ‘on the project itself,’ cannot be reconciled with the definition of an insured….

“Suppliers must be considered to perform part of the work under the insured project. If that were not the case, there would be no need to identify specific suppliers who are excluded from the [policy] definition.”

Feature image courtesy of iStock.com/Brasil2