The Ontario Superior Court of Justice has granted summary judgment dismissing a subrogated insurance claim against a mechanical subcontractor after finding that the project owner prematurely cancelled the builder's risk policy that was supposed to protect all parties through construction completion. The decision in Chippewas v. Sexton's Mechanical Ltd. et al., 2026 ONSC 3226, released on June 2, 2026, offers a pointed reminder for any business involved in construction projects about the consequences of failing to maintain contractually required insurance coverage for the full duration specified in the contract documents.
The dispute arose from construction of a three-story office building on Rama Road in Ontario. W.S. Morgan Construction Limited served as general contractor and hired Sexton's Mechanical Limited to perform HVAC work. The project contract required the owner, Chippewas of Mnjikaning Rama First Nation, to obtain a builder's risk policy naming the owner, general contractor, and consulting engineer as insureds. The subcontract similarly required the general contractor to provide and maintain builder's risk coverage that included Sexton as an insured. Through a subsequent agreement, responsibility for obtaining and maintaining the builder's risk policy was transferred to the project owner, who added a builder's risk broad form endorsement to its own property policy with coverage running from April 1, 2021 to April 1, 2022.
The policy contained specific cessation language providing that coverage would cease 10 days after the commencement of use or occupancy of any part of the project, unless that use was for construction purposes, office or habitational purposes, or installing, testing, or storing equipment or machinery. On January 31, 2022, the project owner cancelled the builder's risk policy without providing written notice to either Sexton or W.S. Morgan. Between February 23 and 24, 2022, a Sexton employee was commissioning and testing a cooling unit when it was mistakenly filled with water, causing it to freeze and sustaining critical damage totalling approximately 356,981 dollars. Because the policy had been cancelled before the loss occurred, the owner's insurers covered the repair and replacement costs and then sought to recover those costs from Sexton through subrogation.
Justice J.R. McCarthy found that the summary judgment process was appropriate because the evidentiary record allowed for fair determination of the key issue: whether the project owner was entitled to cancel the builder's risk policy when it did. The court identified six critical admissions from the owner's representative that undermined the owner's position entirely. When the decision to cancel was made, the owner was aware of the consulting engineer's opinion that the building was still under construction and restricted until confirmation of interim or final occupancy. Between that date and the cancellation, no such confirmation had been received. The local Building Department had not yet inspected the premises for occupancy at the time of cancellation, and a subsequent inspection report from February 11, 2022 confirmed the premises were not suitable for occupancy. The first inspection report indicating that occupancy was acceptable came on March 11, 2022, well after both the cancellation date and the date of loss.
The applicable by-laws prohibited occupancy of any building without an occupancy permit, which could only be obtained following a successful mandatory inspection. Justice McCarthy concluded that on both the date of the policy cancellation and the date of loss, occupancy and use of the premises were legally impermissible because no occupancy permit had been issued. The court found that the owner breached its covenant to insure by cancelling the policy on January 31, 2022, when it was not contractually entitled to do so until at least March 11, 2022, when partial occupancy was first approved.
The court also noted that the intention of the parties to maintain builder's risk coverage throughout the project was evident from the contract documentation itself. The policy included special permission to occupy language that specifically contemplated maintaining coverage even during certain types of occupancy, including for the installation, testing, and commissioning of equipment forming part of the project. This language reinforced the importance of the coverage to the subcontractor and the project as a whole. With no genuine issue requiring trial on the undisputed documentary and testimonial evidence, the claim was dismissed in its entirety, and the owner was ordered to pay costs of 30,000 dollars to Sexton and 10,000 dollars to W.S. Morgan.
For SMB operators who engage subcontractors or who are themselves engaged as subcontractors on construction projects, this decision underscores the critical importance of understanding and complying with insurance maintenance obligations in project contracts. A covenant to insure is not merely administrative; it creates legal obligations that, if breached, can bar the insured party from pursuing subrogated claims. Operators who find themselves responsible for maintaining builder's risk coverage should ensure the policy remains in force until all contractually specified cessation triggers have actually occurred, such as obtaining occupancy approval from the relevant building authority. Cancelling coverage based on an assumption that a project is complete enough, without verifying that the contractual and regulatory milestones have been met, can leave the insurer without recourse and potentially expose the operator to liability for the breach itself. Careful review of both the insurance policy terms and the underlying construction contracts is essential before making any decision to terminate coverage mid-project.