It is trite law that a subrogating insurer steps into the shoes of its insured. However, Justice McCarthy’s recent decision in Chippewas v. Sexton’s Mechanical Limited et al. is a sharp reminder that in doing so, the subrogating insurer also inherits its insured’s contractual obligations and the consequences of any contractual breaches.
In this lawsuit, the insurer for the owner of a commercial construction project brought a subrogated claim against an HVAC contractor as a result of damage to an outdoor cooling unit during commissioning and testing. As with most large-scale commercial construction projects, the contract documents required a builder’s risk policy to be in place. Unusually though, the owner (rather than the general contractor) agreed to take out the policy. Frustrated with delays and the ongoing cost of premiums, the owner cancelled the policy prior to obtaining an occupancy permit and, critically, prior to the date of loss. The owner made a claim to its property insurer for indemnity following the loss, and the insurer then sought to subrogate against the HVAC contractor.
Following a summary judgment motion, the court held that the owner was in breach of its contractual duty to maintain the builder’s risk policy until occupancy. As a result of the premature cancellation of the policy, neither the owner nor its insurer were entitled to bring the claim. The action was dismissed.
For insurers, the case serves as a reminder that advancing a subrogated claim in a construction context requires a fulsome review of the contract documents to ensure that subrogated rights exist and are not otherwise defeated by the insured’s conduct. For defendants (contractors, subcontractors and their insurers), the case affirms the value of reviewing the entire contractual context for any potential bars to subrogation.
