Construction Litigation Insights: To Indemnify or Not to Indemnify

When numerous actors are involved in complex construction projects, it is critical for all parties to review their respective subcontractor, contractor or project agreements. This will help parties determine whether they are contractually obligated to indemnify and defend other project actors, even with the existence of a primary ‘wrap up’ liability insurance policy naming all subcontracting parties as insureds.

In the matter of Crosslinx Transit Solutions Constructors v. Capital Sewer Serving Inc., 2021 ONSC 1091, a contractor sought a declaration that its subcontractor had a contractual obligation to indemnify and hold it harmless. The responding subcontractor brought a cross-application for a declaration that it had no such obligation given the existence of a wrap up commercial general liability insurance policy required under the main project agreement.

The Parties’ Dispute

The dispute arose after the subcontractor, Capital Sewer Servicing Inc. (“Capital Sewer”), by its proper name, was servicing sewer lines on the Eglinton Crosstown LRT project in Toronto, Ontario. Subsequent sewage backup during Capital Sewer’s work led to property damage to two properties within the vicinity.

The property owners brought claims against a number of the project parties, including Capital Sewer and Crosslinx Transit Solutions Constructors (“Crosslinx”), the contractor, which subsequently brought its application for declaratory relief.

Project Background and Construction Contracts Requiring Wrap Up Liability Insurance

To complete the Eglinton Crosstown LRT project, Metrolinx and Infrastructure Ontario entered into a Project Agreement with Crosslinx Transit Solutions General Partnership (“Project Co.”), the parent of Crosslinx.

Under the Project Agreement, Project Co. was required to obtain a wrap up commercial general liability insurance policy, which included all subcontractors as named insureds. The Project Agreement also required the wrap up insurance policy to be the “primary without right of contribution of any other insurance carried by any Named Insured.”

Project Co. then entered into a construction contract with Crosslinx which incorporated the wrap up insurance provisions found in the Project Agreement by reference.

Crosslinx subsequently retained and entered into a subcontractor agreement with Capital Sewer to perform sewer lining work for the Eglinton Crosstown LRT project.

The Court’s Analysis

Capital Sewer relied heavily on the wrap up insurance provisions in the Project Agreement and construction contract. It argued that a party’s contractual covenant to secure insurance operates to the effect of that party’s assumption of the risk of loss or damage caused by the peril it has insured against.

The Court was thus left with resolving the potential conflict posed by the contractual indemnity given by Capital Sewer and the contractual covenant by Project Co. and Crosslinx to obtain the wrap up insurance covering subcontractors.

The Court turned to the indemnity provisions in Capital Sewer’s subcontractor agreement and found that Capital Sewer had a contractual obligation to indemnify Crosslinx on several grounds, including that:

  1. the specific indemnity provisions of the subcontractor agreement took precedence over the more general provisions relating to the wrap up policy in Crosslinx and Project Co.’s construction contract;
  2. the indemnity provisions were abundantly clear that Capital Sewer would be liable for its own negligence and was liable to indemnify Crosslinx for certain claims even though Crosslinx was covered under the wrap up policy for those claims;
  3. the Project Agreement required all subcontractors to obtain insurance in the limits established by Project Co., which indicates that subcontractors were required to obtain their own insurance policies and could not simply rely on the wrap up policy;
  4. since Capital Sewer had agreed to secure insurance against its own negligence, Capital Sewer had, by its own argument, assumed the risk of loss or damage caused by its own negligence; and,
  5. adopting Capital Sewer’s interpretation would render its obligation to obtain its own liability insurance ineffective.

In finding that Capital Sewer was contractually liable to indemnify and hold Crosslinx harmless, the Court also found that the indemnity triggered Capital Sewer’s duty to defend, since the claim by the two property owners were brought in relation to Capital Sewer’s performance of the subcontract.

Although this application is based on contractual indemnity, it remains to be seen whether the matter will evolve into a claim where Capital Sewer’s insurer may seek to determine the priority of the respective insurance policies.

Key Takeaway

While wrap up insurance may provide centralized coverage for potential liability risks on construction projects, the customary approach is for all parties to procure and maintain their own separate coverage.

As is typical with complex construction projects, risk is typically allocated downstream, from owners to general contractors, then from general contractors to subcontractors, through contractually imposed minimum insurance requirements, contractual indemnity provisions and additional insurance clauses.

Construction project parties should be sure to carefully review their construction contracts, or seek the advice of a legal professional, to properly understand the risks and obligations set out in their respective contracts.

For more information about the article, please contact LN associate Wendy Ngai.