Executive Summary: Key Legal and Evidentiary Issues

• The court had to determine whether Fluid Hose was covered as an insured under a builders’ risk insurance policy.

• A key issue was whether Fluid Hose qualified as a “subcontractor” through a chain of contracts linked to the main construction contract.

• The wording “derived through any such contract” and “in connection with the project” was interpreted broadly to include Fluid Hose.

• Allianz’s argument that Fluid Hose was too remote or collateral to be covered was rejected due to the inclusive policy language.

• The court ruled that the subrogated action brought by Allianz against Fluid Hose was barred under the policy’s terms.

• Although Fluid Hose succeeded, its request for full indemnity costs was denied, and partial indemnity costs were awarded instead.

Background of the dispute
This case arose from a construction project involving a high-rise residential building at 35 Greenfield Avenue, Toronto. On June 8, 2020, a major water leak occurred due to the failure of a ½ inch ball valve in the HVAC unit of one of the building’s upper floors. The resulting water damage amounted to approximately $420,000. Allianz Global Risks US Insurance Company, the insurer under a builders’ risk policy covering the project, paid for the damage and subsequently brought a subrogated action to recover the amount from parties allegedly responsible for the valve failure.

The subrogated action named Fluid Hose & Coupling Inc. (“Fluid Hose”) as one of the defendants. Fluid Hose had supplied the ball valves to Sigma, a manufacturer of HVAC units used in the building. Fluid Hose then applied to the court for a declaration that it was covered under the same insurance policy as an “insured” and could not be sued in subrogation.

Relationship among project parties
RioCan, the property developer, hired PCL Constructors Canada Inc. as general contractor. PCL contracted with Malfar Mechanical Inc. to provide HVAC installations. Malfar subcontracted with HTS Engineering Ltd., which in turn contracted with Omega Heat Pumps. Omega collaborated with Sigma to manufacture the HVAC units. Sigma sourced the ball valves from Fluid Hose. While Fluid Hose was several steps removed from the general contractor, it was part of a chain of supply contracts leading to the installation of components in the building.

Insurance policy terms and legal analysis
The Allianz builders’ risk insurance policy covered “contractors, subcontractors… and other entities with an insurable interest.” It also prohibited subrogated actions against insureds. A key question was whether Fluid Hose fell under the definition of “subcontractor,” specifically under the clause that included parties who entered into contracts “derived through” any contract with a contractor, for supplying materials connected with the project.

Justice Schabas interpreted these terms broadly. He found that Fluid Hose, although a valve supplier two tiers removed from the main contractor, was sufficiently connected to the project. The valves were made to specification and used in units essential to the building’s systems. The court emphasized the intent of builders’ risk policies to provide comprehensive coverage and avoid intra-construction litigation over fault. As a result, the judge ruled that Fluid Hose was an insured under the policy and the subrogated action against it was barred.

Rejection of full indemnity costs
Although Fluid Hose succeeded in its application, the court declined to award full indemnity legal costs. The judge reasoned that Allianz had not acted in bad faith and had been entitled to seek legal advice before accepting or rejecting Fluid Hose’s insured status. As Fluid Hose had not suffered a direct loss nor submitted a claim, the insurer’s denial of coverage was not wrongful in the strict sense. Partial indemnity costs were awarded: $37,500 for the application and $12,337.80 for the defence of the subrogated action.

Conclusion of the case
The Ontario Superior Court granted Fluid Hose a declaration that it was insured under the builders’ risk policy and barred Allianz’s subrogated action against it. The decision reinforced the principle that builders’ risk policies are to be interpreted broadly, protecting even suppliers several steps removed in the contracting chain, as long as their work or materials are sufficiently connected to the project.