Insurer Permitted to Subrogate Despite Builders’ Risk Policy

Builders’ risk policies have historically been given broad interpretation, extending coverage to all parties involved in a construction project. When property damage arises, the insurer paying the loss may be inclined to subrogate against the at-fault party, who is usually a party involved in the project.  Almost invariably, however, the insurer is prevented from doing so by the principle that it cannot subrogate against its own insured (the Anti-Subrogation Rule).

Whenever a builders’ risk policy is involved, defendants become justifiably excited at the opportunity to have a subrogated claim dismissed. However, the recent Superior Court decision of Maio v. Mer Mechanical places limits on this tactic, which is good news for insurers who subrogate. 

The Maios acted as their on general contractor when building their new home and obtained a builder’s risk policy in the process.  As part of the project, various plumbing work was done by a subcontractor, Mer Mechanical. Shortly after the plaintiffs moved into the property, a sink faucet line separated resulting in a leak and over $3M in damage.

The plaintiff’s made a claim under their homeowners’ policy and their insurer brought a subrogated action against Mer Mechanical.  Mer brought a summary judgment motion, arguing that the plaintiffs’ builders’ risk policy provided coverage for the loss and that they ought to have sought coverage under that policy since it was deemed “primary” for the project. If the policy responded to the loss, the builders’ risk insurer would not have been permitted to subrogate against Mer, who would have been considered an insured.

The plaintiffs resisted the motion, arguing that the loss was not covered by the builders’ risk policy. Much of the analysis focused on the term “occurrence” in the builders’ risk policy:

… 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.

Mer argued that the “inception of the event” was the initial installation of the faucet, which occurred during the construction project and within the coverage period. It was critical to Mer’s argument that the loss originated from the initial installation, which set in motion a process called “creep/stress relaxation”.

The court rejected the argument, finding that the “event” was the separation of the pipe which occurred after construction was complete. The court distinguished the applicable definition of “occurrence” from other cases which used more expansive wording (e.g. “continuous or repeated exposure to substantially the same harmful conditions”).

The court ultimately found that the loss was not captured by the builders’ risk policy.  As such, there was no discussion as to whether the policy was primary or whether the plaintiffs would have been required to seek coverage under it prior to their homeowner’s policy. Nonetheless, the decision is a positive development for subrogation insurers, who should keep in mind the overall purpose of builders’ risk policies: to provide coverage during the construction project in order to ensure that the project is not interrupted by disputes and litigation.

Maio v. Mer Mechanical Inc., 2018 ONSC 4426 (CanLII)

Tim Gillibrand

Better known around the water cooler as “Amazon Prime”, Tim has a knack for knowing just what his insurance clients need and delivering it overnight (at a premium). Whether he’s flexing his subrogation muscles, “nerding out” over a new coverage issue or investigating fraud, Tim enjoys thinking outside the box.

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