Court of Appeal confirms no coverage for economic losses under a builders’ risk policy

In this article, we analyze the recent decision in Zurich Insurance Company Ltd. v. CRT Construction Inc., in which the Court of Appeal overturned the Superior Court’s judgment and upheld the validity of a coverage denial under a builders’ risk insurance policy. Clyde & Co represented the insurer, Zurich, in appeal only.

Read the decision (French only)

Context

In May 2017, the City of Montreal hired CRT Construction Inc. (“CRT”) for the construction of an underground pipe at one of its drinking water plants. CRT obtained a builders’ risk insurance policy from Zurich for the project. Since flood was an excluded risk under the policy, CRT purchased a specific endorsement to extend coverage to this risk (the “Flood Endorsement”).

On November 12, 2017, during the policy period, a breach caused by erosion led to flooding, resulting in the interruption of work on a portion of the construction site. Zurich indemnified CRT for over $5 million, including the costs of cleanup, repairs, and securing of the site.

CRT subsequently submitted an additional claim to Zurich for indirect costs resulting from the work interruption and delays caused by the flooding. These costs included additional wages paid to less efficient crews, extra expenses related to rock removal on the site and rescheduling of concrete work, additional charges attributable to the indexing of salaries and costs of materials, as well as administrative costs associated with these claims.

However, the Flood Endorsement stated the following:

Since CRT’s additional claim did not relate to physical damage caused directly to the insured project but rather to indirect economic losses, Zurich denied coverage to CRT for this additional claim.

The trial court judgement

Dissatisfied with Zurich’s position regarding its additional claim, CRT commenced an action in the Superior Court, initially seeking nearly $1.6 million for these extra expenses and costs — an amount ultimately reduced to just under $800,000.

The Superior Court allowed CRT’s claim[1]. Although the Flood Endorsement specified that coverage is limited to physical damage caused directly to the insured project, the trial judge concluded that the definition of the term “occurrence”, as set out in the Flood Endorsement, broadened the scope of coverage to also include indirect economic losses suffered by CRT, provided they stemmed from a flood.

The trial judge also placed significant emphasis on the testimony of CRT’s representative at trial to the effect that CRT sought the most comprehensive insurance coverage available for the risk of flooding on this project. Finally, the trial judge inferred an ambiguity in the scope of coverage based on two exclusion clauses set out elsewhere in the main builders’ risk policy wording, leading her to apply the contra proferentem rule.

As a result, the Superior Court dismissed the grounds for denial of coverage advanced by Zurich and ordered it to indemnify CRT for all the indirect costs claimed.

The Court of Appeal decision 

Zurich appealed the judgment. On February 26, 2026, in a unanimous decision, the Court of Appeal accepted the arguments of Zurich — represented by Clyde & Co in appeal — and overturned the trial judgment.

Specifically, the Court of Appeal confirmed that the interpretation of an insurance policy must always begin with an analysis of the scope of the insuring agreement. In this case, the coverage afforded under the Flood Endorsement was clear: it extended only to physical loss and damage caused directly to the insured project.

Accordingly, in the Court of Appeal’s view, there was no need to refer to the definition of the term “occurrence”, which was only relevant in determining the applicable deductible and policy limits, nor to the scope of the coverage or exclusion clauses set out in the main builders’ risk policy form.

For the Court of Appeal, the scope of coverage was clear, and [translation] “because the disputed claims did not relate to the insured property itself but to the efficiency and profitability of the construction project, they were not indemnifiable.”

Takeaways

The Court of Appeal’s decision will be of interest to insurers for two reasons.

First, the Court of Appeal provides an important reminder that, in interpreting an insurance policy, the analysis must always begin with the wording of the insuring agreement. When the language is clear, it must be applied by the court, without regard to other provisions of the policy or to the parties’ testimony as to their reasonable expectations at the time of underwriting. Nor is there any need to search for ambiguities where none exist at the outset.

Secondly, the Court of Appeal’s decision supports the interpretation recognized in both case law and legal commentary that a builders’ risk policy is generally intended to indemnify the insured only for the cost of repairing damage directly caused to the insured property. In the absence of contrary wording, this type of policy should not cover indirect economic losses arising from an insured peril.

[1] CRT Construction inc. v. Zurich, Compagnie d’assurances, 2024 QCCS 2246.

The authors would like to thank Marilou Galarneau-Taillon for her assistance in drafting this article.