Sky Clean Energy Ltd. (Sky Solar (Canada) Ltd.) v. Economical Mutual Insurance Company, 2020 ONCA 558
The appeal concerned a form of insurance commonly used in the construction industry whereby the policy permits a contractor to add the project owner as an additional insured under its liability insurance policy, to cover the owner’s liability “arising out of the operations” of the contractor. This form of relationship commonly arises in landlord and tenant/janitorial subcontractor context as well. The appeal focused on the requisite connection between the contractor’s operations and the owner’s liability to trigger coverage. The Court of Appeal also considered the insurance and indemnity provisions of a standard CCDC2 construction contract and the consequences of insufficient coverage obtained by the contractor.
Insufficient Coverage as Contemplated For in Contract
With respect to insufficient coverage, the Court of Appeal held at para 62 that the inclusion of the owner under the contractor’s commercial general liability policy is an efficient and cost-effective way of allocating risks that arise out of the contractor’s operations under the contract. Being named as an additional insured allows the owner to claim under the insurance policy irrespective of the contractor’s potential breach of the policy conditions. This is accomplished through a “separation of interests clause” or “severability of interest clause” providing that the insurance applies as if each named insured were the only named insured.
Furthermore, If a third party claim arises, the owner can obtain a defence and indemnity under the contractor’s policy, eliminating the need to claim under its own liability insurance. Both parties can be defended by the same insurer against third party claims arising out of the contractor’s operations. This avoids disputes and potential litigation between the owner and the contractor and allows them to proceed with the construction work without interruption or disruption of their commercial relationship.
Ultimately, the Court of Appeal held that that an owner who expects to be an additional insured should obtain a copy of the insurance policy and the endorsement to ensure that the appropriate coverage has been obtained. If coverage is not as broad as what the contract called for, the owner’s remedy may be against the contractor, either for indemnity under the contract or for breach of the contractual promise to obtain the specified coverage. The Court of Appeal expressly rejected the idea submission that the language of the contract between the parties should affect the interpretation of the insurance policy, other than to explain the commercial context. In this regard, the Court of Appeal held: the insurer is not privy to the construction contract. It typically does not know what the particular parties agreed to and does not underwrite different risks with each new contract entered into by its insured. While an insurer could, if asked to do so, create bespoke language to reflect the insured’s contractual undertaking in a particular case, there is no evidence it was requested here. That said, in the context of insurance coverage arising out of the operations of the a contractor, the contractors contractual obligations necessarily form part of the inquiry.
- Interpretation of “Arising Out of the Operations”
a. “Arising Out of”
Turning to the main issue, the Court of Appeal relied on and cited with approval, British Columbia’s approach in Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corp., 2012 BCCA 291.The Court of Appeal held that “arising from” and “arising out of” require more than a “but for” connection between the liability of the additional insured and the operations of the named insured. While a “but for” test is necessary, it is not sufficient. Specifically, there must be “an unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous”.
The Court of Appeal held that this approach provides certainty and predictability for all parties by requiring more than an incidental or fortuitous connection between the liability of the additional insured and the named insured’s operations. This limitation is consistent with both the reasonable expectations of the parties to the construction contract and that of their liability insurers.
b) “Operations”
Again, the Court of Appeal relied and cited with approval British Columbia’s approach to the interpretation of “operations”. In this regard the Court of Appeal held that it “is a word of sufficiently broad meaning as to include the creation of a situation, or circumstance, that is connected in some way to the alleged liability. It does not necessarily imply an active role by the named insured in creation of the liability event” . The Court of Appeal also explained that “operations” is broader than “activities”. Specifically, “[o]perations can include the occupation and use of premises or other ‘passive’ conduct that might not be included within the meaning of the word ‘activities’”:
- Conclusion
An owner who expects to be an additional insured should obtain a copy of the insurance policy and the endorsement to ensure that the appropriate coverage has been obtained. If coverage is not as broad as what the contract called for, the owner’s remedy may be against the contractor, either for indemnity under the contract or for breach of the contractual promise to obtain the specified coverage.
The phrase “arising out of the operations” requires more than a “but for” connection between the liability of the additional insured and the operations of the named insured. There must be “an unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous”. Furthermore, the word “operations” includes “the creation of a situation, or circumstance, that is connected in some way to the alleged liability. It does not necessarily imply an active role by the named insured in creation of the liability event”. The question that must be asked is: “why did the additional insured’s liability arise?” (at para 99).