Faulty Workmanship Exclusion In A Builders’ Risk Policy Excludes Only The Cost Of Re-Doing The Faulty Work: Supreme Court Of Canada

In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, the Supreme Court of Canada has issued a definitive decision about the scope of the “faulty workmanship” exclusion in Builders’ Risk insurance policies. The Supreme Court has held that the clause only excludes coverage for the cost of re-doing the faulty work, and does not exclude the cost of repairing the damaged work.

In this landmark decision, the Supreme Court has set at rest the ongoing debate about the proper interpretation of this clause, a debate which has embroiled the construction and insurance industries for many years.

Background

During the construction of a building, the windows which had been installed were dirtied. Before the project was completed, the owner hired cleaners to clean the windows. Because the cleaners used improper tools and methods, they scratched the windows. The windows had to be replaced and the building’s owner and the general contractor made a claim for the replacement cost under the builders’ risk insurance policy covering the project. The insurers denied coverage, asserting that the claim fell within the policy’s exclusion for the “cost of making good faulty workmanship”.

Proceedings Below

The trial judge in Alberta held that the clause was ambiguous and applied the contra proferentem rule to find that the claim was not excluded.

The Alberta Court of Appeal reversed the trial judge’s decision. It applied a test of physical or systemic connectedness to decide if the physical damage was excluded as the “cost of making good faulty workmanship” or covered as included within the exception for “resulting damage.” The Court of Appeal concluded that the damage to the windows was excluded because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.

These decisions were reviewed by me in my articles dated December 27, 2013 and March 30, 2015.

The Supreme Court reversed the Court of Appeal’s decision and re-instated the trial judge’s decision.

The Exclusion and Exception

In the policy in question, the Exclusion for “faulty workmanship” and the Exception to that exclusion for “resulting damage” read as follows:

“This policy section does not insure:

…(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.”

The Supreme Court’s Reasoning

Justice Wagner delivered the judgment for all the judges of the Supreme Court of Canada on this issue. Justice Wagner arrived at his decision through the following reasoning:

  1. The Court of Appeal had held that the Exclusion must relate to physical damage since the policy covers physical damage. The Court of Appeal then went on to develop a new theory about how the Exclusion should be construed in light of that requirement.

The Supreme Court held that this conclusion by the Court of Appeal was wrong. The mere fact that the policy covered physical damage did not require that the exclusions also relate to physical damage. The Supreme Court pointed to several other exclusions in the policy that clearly did not relate to physical damage.

  1. There were two competing interpretations of the Exclusion. The Insureds said that only the cost of redoing the faulty work — in this case, cleaning the windows — is excluded from coverage. The Insurers said that the Exclusion covers not only the cost of redoing the faulty work, but also the cost of repairing that part of the insured property or project that is the subject of the faulty work.

On balance, and while the Supreme Court was of the view that the clause was ambiguous, the Supreme Court favoured the Insured’s interpretation, stating its reasons as follows:

“The word “damage” figures only in the exception to the Exclusion Clause; it is not included in the language setting out the exclusion itself, i.e., the “cost of making good faulty workmanship”. As such, “making good faulty workmanship” can, on its plain, ordinary and popular meaning, be construed as redoing the faulty work, and “resulting damage” can be seen as including damages resulting from such faulty work. “

  1.  Any ambiguity in the Exclusion should not, in the first instance, be resolved by reliance on the contra proferentem rule, as that is a rule of last resort. Rather, the ambiguity should be resolved by reference to the true purpose of the policy. The Supreme Court expressed its conclusion on this point as follows:

“…the purpose of these polices is to provide broad coverage for construction projects, which are singularly susceptible to accidents and errors. This broad coverage — in exchange for relatively high premiums — provides certainty, stability, and peace of mind. It ensures construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst the various contractors involved. In my view, the purpose of broad coverage in the construction context is furthered by an interpretation of the Exclusion Clause that excludes from coverage only the cost of redoing the faulty work itself — in this case, the cost of recleaning the windows.”

The Supreme Court was of the view that the Insurers’ interpretation of the Exclusion would re-introduce the very uncertainty that the insurance was intended to eliminate:

“Consequently, an interpretation of the Exclusion Clause that precludes from coverage any and all damage resulting from a contractor’s faulty workmanship merely because the damage results to that part of the project on which the contractor was working would, in my view, undermine the purpose behind builders’ risk policies. It would essentially deprive insureds of the coverage for which they contracted.

[71] In my opinion, therefore, the Insureds’ position on the meaning of the Exclusion Clause better reflects and promotes the purpose of builders’ risk policies. In the words of this Court in Commonwealth Construction, it keeps “to a minimum the difficulties . . . created by the large number of participants in a major construction project” and “recognizes the realities of industrial life” (p. 328). Their position finds additional support in some of this Court’s other comments in that case, at pp. 323-24, where it was emphasized that these policies exist to account for the fact that work of different contractors overlaps in a complex construction site and “there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole”. (underlining added)

  1. The contract between the owner and the window cleaning company was irrelevant to the proper interpretation of the insurance policy, and the Court of Appeal erred in referring to that contract in interpreting the policy. After all, the window-cleaning contract was between different parties than the policy, and was entered into years after the policy was placed.

Moreover, the fact that the cleaners’ contract provided that the cleaners accepted responsibility for its work and agreed to pay for damages arising from its work did not preclude coverage under the policy. As in the present case, insurance contracts often have deductibles or limits, and the contractor may be responsible within those features of the policy.

  1. The Court of Appeal’s new “physical and systemic connectedness test” did not solve the alleged disconnect between the policy’s coverage and the cleaners’ obligation for damages under its contract with the owner. The cleaners would be liable for collateral damage to areas where it was not working, yet there would still be coverage under the policy for this damage. In these circumstance, the Supreme Court said: “In effect, there would be dual responsibility for payment, under both the Policy and the service contract, even though, as discussed above, the Court of Appeal stated it would be artificial to draw the dividing line where such dual responsibility would result.”
  1. The Insureds’ interpretation of the policy was commercially sensible, best reflected the reasonable expectations of the parties and did not result in an unreasonable result:

“As already discussed above, the interpretation advanced by the Insureds in these appeals best fulfills the broad coverage objective underlying builders’ risk policies. These policies are commonplace on construction projects, where multiple contractors work side by side and where damage to their work or the project as a whole commonly arises from faults or defects in workmanship, materials or design. In this commercial reality, a broad scope of coverage creates certainty and economies for both insureds and insurers. In my opinion, it is commercially sensible in this context for only the cost of redoing a contractor’s faulty work to be excluded under the faulty workmanship exclusion. Such an interpretation strikes the right balance between the two undesirable extremes… “ (underlining added)

  1. The Insureds’ interpretation “did not transform the insurance policy into a construction warranty. It does not inappropriately spread risk, nor would it allow or encourage contractors to perform their work improperly or negligently.” The Supreme Court noted that the cleaners were “precluded from receiving initial payment for its faulty work and then receiving further additional payment to repair or replace its faulty work” and that the “cost of redoing faulty or improper work is excluded from coverage.”
  1. The Insurers argued that Insureds’ interpretation of the policy would create an incentive for the owner or contractor to divide up the work, in order to maximize the amount of damage that would be covered under the policy. To this suggestion, the Supreme Court said:

“With respect, I do not find this persuasive. It is premised on a theoretical concern that does not reflect the commercial reality of construction sites on the ground. In my view, it is unreasonable to expect that the owner of a property or the general contractor on a construction site will divide up work exclusively on the basis of potential coverage under their insurance policy. Many other considerations, such as costs, subcontractor expertise and the risk of delay, will likely be more relevant in deciding how to allocate work.”

  1. The Supreme Court undertook a lengthy review of the cases dealing with the Exclusion for faulty workmanship. It concluded that the case law was consistent with its present decision once the facts in each case were understood. In each case, it is necessary to determine exactly what work was undertaken by the contractor or sub-contractor whose work was allegedly faulty. The Exclusion only excludes that work. In the present case, the cleaners were responsible for cleaning the windows, not installing them. Accordingly, the Exclusion applied to the work of re-cleaning the windows, not installing replacement windows.
  1. The Supreme Court pointed out the necessity to distinguish between cases dealing with Exclusion clauses relating to “faulty workmanship” and those relating to “faulty design.” In the latter cases, a contractor’s obligation to provide the design (and therefore the scope of the Exclusion) may be much broader than would be the case for a contractor’s obligation to provide work, and the factual circumstances that have been found to fall within the Exclusion for “faulty design” are not necessarily a guide to the circumstances that fall within the Exclusion for “faulty workmanship”.
  1. Interpreting the Exclusion Clause as precluding coverage for only the cost of redoing the faulty work was consistent with the accepted approach to interpreting similar exclusions to comprehensive general liability insurance policies. These policies usually contain a “work product” or “business risk” exception, which excludes from coverage the cost of redoing the insured’s work.
  1. If the general rules of contractual interpretation had not clarified the meaning of the Exclusion clause, and the clause still remained ambiguous, then the court would have reached the same conclusion on the basis of the contra proferentem rule.

In its decision, the Supreme Court also dealt with the standard of review to be applied by an appellate court when reviewing (as in this case, by the Court of Appeal or the Supreme court of Canada) the decision of a lower court interpreting a standard form contract such as a construction contract. A majority of the Supreme Court held that the review should be conducted according to a standard of correctness, not reasonableness. This important part of the Ledcor decision will be reviewed by me in a future article.

Discussion

It will take some time to digest the full ramifications and impact of this seminal decision. This article has sought to identify the ingredients in the decision as a basis for further discussion.

Clearly, the decision results in a much narrower interpretation of the ”faulty workmanship” Exclusion than insurers have been arguing for, and one that does not depend upon the “resulting damage” Exception to achieve that interpretation.

This decision requires the parties to exactly determine the scope of the defaulting contractor’s work. The “faulty workmanship” Exclusion is limited to the cost of making good that work, and not the cost of correcting damage to the subject matter of that work.

How far this decision will impact the faulty “construction materials or design” elements of the Exclusion will have to await future cases. However, the logic of the Supreme Court’s decision would seem to apply to all three elements of the Exclusion: once the defaulting contractor’s work, materials or design is determined, the Exclusion applies no further.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 14, paras. 3(b), 4(b)

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37

Insurance – Exclusions and Exceptions- Builders’ and All Risk Insurance – Exclusion for faulty workmanship

Thomas G. Heintzman O.C., Q.C., FCIArb                                     September 18, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

 

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

What Damage Due To Faulty Workmanship Is Excluded From A Builders’ Risk Policy?

Last week I reviewed the decision of the Alberta court of Appeal in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance. In that decision, the Alberta Court of Appeal held that damage done by one contractor to the work of another was not recoverable under a Builders’ Risk policy because it fell within the exclusion for “faulty workmanship”.

This week, let’s review the decision in Acciona Infrastructure Canada Inc. v. Allianz Global Risks Insurance Co. In this decision, the British Columbia Supreme Court held that the “faulty workmanship” exclusion did not apply.

Background

Acciona was the design-build contractor for a hospital project. Campbell Construction Ltd. (“CCL”) was the principal sub-contractor for the construction of the concrete structure, including designing and building the concrete formwork, placing and finishing the concrete and undertaking the required shoring. During construction, there was cracking and over-deflection of the concrete slab.

The trial judge found that the over deflections and cracking were caused by the failure of the formwork/reshoring procedures to account for the unusually thin design of the slabs. The trial judge also found that the over deflection and cracking of the concrete slabs fell within the Policy and constituted damage that was fortuitous.

With respect to the exclusion for “faulty workmanship”, the trial judge found that the formwork and shoring/reshoring procedures constitute a defect in workmanship, which fell within the exclusion. The judge then considered what damages were so excluded: the entire claim, as submitted by the insurer, or only those costs that would have been incurred to remedy or avoid the resulting damage, those being the costs of implementing proper formwork and shoring/reshoring procedures, as submitted by the insured. The trial judge adopted the latter submission and set forth his reasons as follows:

 Read in its entirety, I find that the intent of clause 5(b) is to exclude those costs rendered necessary by one of the named defects, but is limited to costs “which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.” In other words, the excluded costs are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred, but the exclusion does not extend to exclude the cost of rectifying or replacing the damaged property itself; the excluded costs crystallize immediately prior to the damage occurring and are thus limited to those costs that would have prevented the damage from happening. … The approach is to exclude the cost that would have been incurred to rectify the defect if that effort had been put in hand immediately prior to the damage…..

The “damage” in issue here is the cracking and over deflection of the concrete slabs. The “defect in material workmanship” is the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs. Applying clause 5(b), the excluded costs are those that would have remedied or rectified the defect before the cracking and over deflections occurred i.e. the costs of implementing proper formwork and shoring/reshoring procedures or incorporating additional camber into the formwork. (underlining added)

Discussion

The contrast between this decision and that in Ledcor v. Northbridge could not be starker. In this decision, the court held that the insured was entitled to recover the full damages resulting for the mis-installation of the concrete slab. Certainly, the slab and the faulty work in installing it were connected, yet the B.C. court held that the purpose of the exclusion was only to eliminate the recovery of the cost of the faulty work, not the resultant damage. In Ledcor v. Northbridge, the Alberta court of Appeal disallowed the damages claimed in that case because they were connected, physically or systematically, to the faulty work.

It seems that the words in the Builders’ Risk policy providing for the exclusion for “faulty workmanship” and the exception for “resulting damages” are speaking like the Delphic oracle, and only the Supreme Court of Canada can solve the riddle.

Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.

(2014), 33 C.L.R. (4th) 210, 2014 CarswellBC 2471

Building contracts – Builders’ risk Insurance- Exclusion for faulty workmanship – Exception for resulting damages

Thomas G. Heintzman O.C., Q.C., FCIArb                                 April 1, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

When Is Faulty Workmanship Excluded From A Builders’ Risk Policy?

One of the most difficult issues in construction law is the proper interpretation of an exclusion for faulty workmanship in a Builders’ Risk policy. The amounts in issue can be huge and if the exclusion applies, the absence of insurance can be serious.

Take for example the recent Alberta decisions in Ledcor Construction Limited v Northbridge Indemnity Insurance Company. Window cleaners were hired to clean the windows of the newly constructed building in the final clean up of the site. The cleaners scratched the windows, which necessitated very expensive replacement of the windows. The trial judge held that the damage was covered by the Builders’ Risks insurance policy, and not excluded by the faulty workmanship exclusion. The Alberta Court of Appeal has just held that the damage was excluded by that exclusion. This decision raises serious questions about the viability of Builders’ Risk insurance with respect to damage to another contractor’s work. I wrote about the trial decision in this case on December 29, 2013.

Background

A company known as Station Lands retained Ledcor as the construction manager to coordinate the construction of the EPCOR Tower in Edmonton, Alberta. Station Land also contracted with various trades to construct the building. The owner obtained an All Risk Builders’ insurance policy from Northbridge. The policy covered all “direct physical loss or damage except as hereinafter provided”. The named insureds were the owner and Ledcor, and the additional insureds were the owners, contractors, sub-contractors, architects, engineers, consultants, and all individuals or firms providing services or materials to or for the named insureds. The policy was a “blanket” policy, designed to cover all actors and activities on the site.

The policy contained the “faulty workmanship” exclusion and “resultant damage” exception to that exclusion found in most Builders’ Risk policies. Those provisions read as follows:

“Exclusions…This policy section does not insure:. . .

(b)        The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage. (underlining added)

The windows were supplied and installed by one of the trade contractors. Station Lands retained another contractor, Bristol, to do the “construction clean” of the exterior of the building, including the windows.

Station Lands’ contract with Bristol was in a standard CAA format which provided that the owner would maintain “all risks” property insurance for the project naming the owner and construction manager as insureds and the consultants, contractors and subcontractors as additional insureds.

The Court of Appeal’s Decision

The Court of Appeal went through the following logic to arrive at its conclusion that the damage to the windows did not fall within the policy:

  1. Cleaning involves workmanship

The court rejected the respondents’ argument that cleaning is not workmanship because it does not create some physical product. In Bristol’s contract, work included “services” and the contract refers to Bristol’s “workmanship.” In the court’s view the “construction clean” was as much a part of the construction of the building “as the designing of the foundations, the hammering of the nails, and the pouring of the concrete.”

  1. Multiple contractors do not create “resultant damage”

The respondents argued “that the exclusion does not apply to damage caused by one contractor to the work of another…. All other damage it is argued, particularly damage to the work of other contractors, is “resulting damage”. The “cost of making good” only relates to the making good by any contractor of its own work product.”

The court noted that “this argument contains echoes of the argument that what Bristol Cleaning was doing was not “workmanship”, because the exterior cleaning involved did not create any physical product or structure.” The court rejected this argument for many reasons.

First, it held that:

“it is artificial (especially in the context of an all risks blanket insurance policy) to try to draw a dividing line between the product created by the work of other contractors, and the work to be done by Bristol Cleaning. GC 2.4 requires Bristol Cleaning to repair any damage it does to the work of other contractors. In effect Bristol Cleaning’s “Work” included replacing the damaged glass, even if it was installed by another trade contractor. To say that the exclusion in the policy only applies to a trade contractor “making good” its own work seeks to sever that replacement work. The “cleaning” work that Bristol Cleaning was required to do under the contract is said to be of a different character than the “repair of damage” work that is also required to be done by GC 2.4. Yet all this work had to be done before Bristol Cleaning could claim substantial completion.”

Second, the court noted that the respondents conceded that the exclusion is not limited to the cost of re-doing the cleaning and that there must be some “physical damage” caught by the exclusion. But, applying their theory, they could not point to any physical damage excluded in a case like the present one.

Third, this policy was a “blanket” wrap-around policy covering the entire project and all participants in the project. In this context, it was the court’s the view “it does not make sense to interpret the policy such that the damage would be covered by the insurance if the work was done by two trade contractors, but not if it was all done by one trade contractor.

Fourth, this policy was a multi-year policy. It does not make sense, in the opinion of the court, that activities occurring later in the project would be covered merely because they damaged work done earlier in the project. In its words: “Whether something is the “cost of making good faulty workmanship” for the purposes of a multi-year insurance policy, related to a single construction “Project”, does not depend on the exact sequence or timing of the various constituent tasks required to build such a complex building.”

Fifth, “the scheme of the insurance policy is that all activities on the site are to be covered by one policy. There is nothing in the policy wording to suggest that coverage varies depending on the contractual relationships of the parties; the coverage depends on the type of “damage”.

Sixth, there was “nothing in the wording of the policy to support the respondents’ argument that the key to the exclusion is the identity of the person who performed the work that is subsequently damaged.”

The court’s problem with the respondents’ position was summed up in the following paragraph:

“The respondents’ argument leads to the conclusion that coverage under the policy depends on how the work is divided up. Under the respondents’ theory, if a single contractor is retained to supply the glass, install the glass, and do the construction cleanup, the scratches on the windows would not be covered by the insurance. However, because some other contractor supplied the windows, the very same damage caused by Bristol Cleaning is covered. This approach might create an incentive to artificially divide up the work as finely as possible, as then the maximum amount of damage would be covered by insurance. On the other hand, it would be dangerous for the owner to hire a single contractor to do all the work, as then nothing would be covered. That cannot have been the expectation of the parties, and is not a commercially reasonable outcome. It is, as noted, inconsistent with the philosophy behind a “wrap-up” policy covering all contractors.

  1. The physical or systemic connectedness between the work and damage underlies the coverage and exclusion

The court accepted a variant of the insurer’s approach to defining the ambit of the coverage and the “faulty workmanship” exclusion. In doing so it relied upon the provision in Bristol’s contract requiring it to repair damage caused by it to the work of other contractors. It said:

“If the workmanship itself directly causes the damage, then both re-doing the work and fixing the damage from the first attempt easily fall into the expression “making good faulty workmanship”. This test identifies a class of physical damage that is excluded from coverage by the exclusion clause, while recognizing a significant class of physical damage that would be “resulting” and therefore covered. It is also consistent with GC 2.4, which requires Bristol Cleaning to repair any damage it does to the work of other contractors. While that covenant is expressly found in this construction agreement, it would likely be implied in any construction contract; it is natural that if a contractor causes damage while doing its work, it should be required to repair that damage as the consequence of its own poor workmanship. The appellants’ interpretation is consistent with commercial expectations.” (underlining added)

However, the court slightly altered the test proposed by the insurer as follows:

“The proper test can more properly be described as a test of the connectedness between the work, the damage and the physical object or system being worked on. The application of the test will depend on an examination of the factual context, but the primary considerations will be:

(a)        The extent or degree to which the damage was to a portion of the project actually being worked on at the time, or was collateral damage to other areas. The test will be relatively easy to apply when the damage is caused directly by the work to the very object being worked on. There may be cases where several parts of the project work together as one system. Work on one part of the system may cause damage to another part, but repairing that damage might still properly be characterized as the cost of making good faulty workmanship if there is sufficient systemic connectedness;

(b)        The nature of the work being done, how the damage related to the way that work is normally done, and the extent to which the damage is a natural or foreseeable consequence of the work itself. If the damage is a foreseeable consequence of an error in the ordinary incidents of the work, then it presumptively results from bad workmanship; and

(c)        Whether the damage was within the purview of normal risks of poor workmanship, or whether it was unexpected and fortuitous.” (underlining added)

The court concluded this analysis by saying that the “degree of physical or systemic connectedness is the key to determining the boundary between “making good faulty workmanship” and “resulting damage”. (underlining added)

Here, the court said:

“the scraping and wiping motions that caused the damage were the actual “Work”. The damage was not “accidental” or “fortuitous”. The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done. Fixing the resulting damage is “making good the faulty workmanship” that caused the damage.”

The Court of Appeal acknowledged that the test it was propounding might lead to “extreme results in extreme cases”. It posed the situation of the window cleaner using a flammable solvent and causing the building to burn down. It acknowledged that such a loss would normally fall within the policy but said that “[e]xtreme cases should be decided when they arise. Whether these extreme situations call for a separate test, or are merely an exception to the connectedness test, need not be explored in this decision.”

The Court of Appeal concluded its analysis with this over-all approach:

“The key is to find the dividing line between physical damage that is excluded as “making good faulty workmanship”, and physical damage that is “resulting damage” which is covered by the policy. As demonstrated in the previous discussion, the wording of the policy and the weight of the case law supports the test for physical or systemic connectedness. The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.

“The principle just stated reflects the proper interpretation of this wording of the insurance policy. The presumptive test is that damage which is physically or systemically connected to the very work being carried on is not covered. Whether coverage is nevertheless extended under that test in the factual context of any particular case will depend on the consideration of the factors listed above (supra, para. 50). Those factors all engage elements of “causation” and “foreseeability”, concepts which are well known in the common law, when applying the policy wording to particular factual situations. The presumptive test stated above reflects the proper interpretation of the policy, but these collateral factors will come into play in applying the policy wording to particular factual situations, especially in extreme cases.”

On this basis, the Court of Appeal held that the damage to the windows did not fall within the policy.

  1. Contra Proferentem did not help

The Court of Appeal held that there was no need to resort to this rule of interpretation. These provisions of the Builders’ Risk policy had been interpreted many times and their meaning did not become ambiguous just because the circumstances raised difficult questions of the application of the policy to the particular facts.

Discussion

This decision is a very important one and will take some time to digest. On a first reading, however, some of the remarks and the basis of the decision raise some apparent conflicts with prior decisions and raise fundamental issues about Builders’ Risk insurance.

  1. The Court of Appeal relies upon the provision of Bristol’s contract, requiring it to repair the work of others which Bristol damages, to supports the court’s “physical or systemic connectedness” test. Yet, that submission appears to be similar to the one which was rejected by the Supreme Court of Canada in the Commonwealth Insurance v. Imperial Oil There, the Supreme Court explained that the contractor’s obligation to repair work might well require it to perform work within the deductible but did not disentitle the contractor to protection under the policy. As the Supreme court said at paragraph 39 of that decision:

“That paragraph [in the building contract] does not negate the basic proposition that everyone involved in the construction of the project will be insured under a policy issued to all as a group. The reference to fault occurs because this policy stipulates a deductible of $10,000 and because it contains a number of exclusions, e.g., error in design and latent defect; that reference has no other purpose.”

  1. The Court of Appeal makes reference to the insurance contract not being a “construction warranty agreement.” That submission is one often relied upon by insurers, but was rejected in the Progressive Homes v. Lombard Insurance decision of the Supreme Court of Canada, where the court said that the proper approach is to interpret the policy, not arrive at a presumption as to what it means by saying that it will convert the policy into something else. At paragraph 45 of its decision, the Supreme court said:

“Lombard argues that interpreting accident to include defective workmanship would convert CGL policies into performance bonds. In my opinion, these general propositions advanced by Lombard do not hold upon closer examination.”

  1. The Court of Appeal equated Bristol’s work (“the scraping and wiping motions that caused the damage”) with intentional harm (“The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done.”) and then concluded that “fixing the resulting damage is “making good the faulty workmanship” that caused the damage.” This is a curious conclusion because it does not seem possible that Bristol intended to damage the windows. The damage occurred negligently, but fortuitously; otherwise the policy would not apply at all. As the Supreme Court said in Progressive Homes v. Lombard;

“Fortuity is built into the definition of “accident” itself as the insured is required to show that the damage was “neither expected nor intended from the standpoint of the Insured”. This definition is consistent with this Court’s core understanding of “accident”: “an unlooked-for mishap or an untoward event which is not expected or designed” ….When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.

  1. The basic proposition of the Court of Appeal appears to be that a Builders’ Risk policy does not cover damage caused by one contractor to the work of another contractor on the site. One must ask: where does the policy say that? Damage by one contractor to the work of another contractor seems such a foreseeable event. If the policy does not apply to that damage, should the policy clearly say so? And is this proposition consistent with the purpose of Builders’ Risk insurance as described by the Supreme Court in the Commonwealth v Imperial Oil decision:

“On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in court. By recognizing in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements opening the doors of the job site to the tradesmen, the courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, e.g. ,the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.” (underlining added)

Based upon this decision, contractors and subcontractors may want to obtain additional insurance to cover damage to each other’s work and property during the project. It appears that a Builders’ Risk policy may not cover that damage.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 14, paragraph 3(b)(ii)

Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 ABCA 121

Building contracts – Insurance – Exclusion for faulty workmanship – Exception for resultant damage

Thomas G. Heintzman O.C., Q.C., FCIArb                                  March 30, 2015

www.heintzmanadr.com

www.constructionlawcanada.com