In Honeywell International Inc. v XL Insurance Company Ltd., 2024 BCCA 375, the BC Court of Appeal expanded the definition of who may be considered an insured under a wrap-up insurance policy. The Court rejected the argument that suppliers who manufacture components for a construction project away from the project site are not covered under a wrap-up policy due to the nature of such policies.
This decision arose out of extensive litigation concerning alleged deficiencies in insulated glass units (“IGUs”) that made up part of the curtain wall of a high-rise building in downtown Vancouver. Actions were brought against the main contractors involved in the construction of the building; these contractors commenced third-party proceedings against various other parties. One of the parties that was added to the actions as a third party was Honeywell International Inc. (“Honeywell”); the defendants alleged that Honeywell manufactured defective desiccant that caused or contributed to the alleged defects in the IGUs.
One of the main contractors involved in the construction project was insured under a wrap-up policy (the “Policy”) issued by XL Insurance Company Ltd. (“XL”). The Policy’s definition of “Insured” included the following:
Each “contractor” designated as an Insured under written contract with the Named Insured, its “sub-contractors” and their “sub-contractors”, with respect to loss or damage arising out of their operations, activities or existence of property at the Project Site for the performance of operations of activities in connection with the Project.
The Policy included the following relevant definition:
“Contractors[”] and “sub-contractors” include all persons or organizations who perform any part of the work under the Insured Project but do not include:
a. Suppliers whose only function is to supply materials, machinery or other supplies to the project and who do not carry out any installation, construction, or supervisory work on the Insured Project…
Honeywell claimed against XL seeking indemnification under the Policy for its defence costs in the underlying litigation. Honeywell took the position that it was covered under the Policy because it fell within the definition of “sub-contractors.” At a summary trial, the BC Supreme Court dismissed Honeywell’s claim, finding that Honeywell was not an insured under the Policy because it “was many steps removed in the supply chain and not involved in the project in any way” (Owners, Strata Plan BCS 3206 v KBK No. 11 Ventures Ltd., 2022 BCSC 766). Honeywell appealed the lower court’s decision.
The Court of Appeal disagreed with the summary trial judge’s narrow interpretation of the relevant part of the Policy and allowed Honeywell’s appeal. It stated that if Honeywell fell prima facie within the Policy’s definition of “sub-contractor,” then XL bore the onus of establishing that Honeywell was excluded from coverage as a supplier whose only function was to supply materials, machinery, or other supplies to the project.
XL said that Honeywell was not covered by the Policy because wrap-up liability policies do not cover parties that fabricate parts off-site. The Court stated that there is no such general rule. Off-site fabricators and manufacturers may be considered sub-contractors and are not automatically excluded from coverage under wrap-up policies. Any consideration of whether such parties are covered will depend on an analysis of the wording of the policy at issue.
According to the Court of Appeal, under the Policy, suppliers must be parties “who perform any part of the work under the Insured Project; if they were not, there would be no need for the Policy to specifically include suppliers who do not carry out certain types of work. The Court held that suppliers that carry out installation, construction, or supervisory work on the insured project and suppliers that perform some function other than supplying materials, machinery, or other supplies to the project are covered by the Policy. Such a function would presumably refer to a function other than doing work on the project site.
The Court concluded that the allegation advanced by the defendants in the underlying litigation to the effect that Honeywell had negligently manufactured desiccant that was used in the IGUs for the project was an allegation that Honeywell performed a function other than supplying materials for the project. Therefore, it held that Honeywell was an insured sub-contractor under the Policy.
This decision is noteworthy for its potential to broaden the scope of the parties that will be entitled to coverage under a wrap-up policy in construction litigation.