2015 has been an interesting year in Canadian construction coverage litigation with the release of two notable appellate decisions interpreting key workmanship exclusions. Should leave to appeal be granted by the Supreme Court of Canada in respect of one or both decisions, 2016 may be a critical year in respect of Canadian interpretation of Builder’s Risk and Course of Construction Policies.
In April, the Alberta Court of Appeal overturned a lower court decision in Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 ABCA 121. At issue was the damage caused to windows in the 28 EPCOR Tower in Edmonton. The Tower was nearly when the window washers undertook their final cleaning. All of the windows were scratched and damaged during the course of that cleaning. The EPCOR project was insured under a Builder’s Risk policy, which provided coverage to all contractors and subcontractors involved in the EPCOR project (including the window washers). The Policy included an exclusion which is frequently used in the Canadian market. The Policy did not cover:
(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.
At trial, the Court found the term “making good” to be ambiguous, and interpreted contra proferentum against the Insurer. The Alberta Court of Appeal overturned that ruling, finding that the exclusion was not ambiguous, and should be applied in accordance with its plain meaning:
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 …. 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 insured has sought leave to appeal the decision to the Supreme Court of Canada.
London Market DE and LEG exclusions are increasingly being written into Canadian builder’s risk and course of construction policies. However they had, until recently, received little judicial review. Last month, the British Columbia Court of Appeal issued judgment in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company, 2015 BCCA 6. The Course of Construction policy at issue employed the LEG2/ 96 exclusion. In that regard, the Policy did not cover:
all costs rendered necessary by defects of material workmanship, design, plan, or specification, and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.
At issue were concrete slab floors constructed in a hospital extension, which had over-deflected and become uneven. Uneven floors were unacceptable in a hospital environment, with the result that the work had to be demolished and rebuilt. Insurers contended that once poured, the deflections in the slabs could not be replaced or rectified without taking the very steps that the insured undertook. That is to say, the whole cost of the repair was excluded.
The BC Court of Appeal disagreed. It drew a distinction between the deflection in the slabs, and defects in the supporting structures and workmanship undertaken in the construction of the slabs. Notwithstanding the fact that the slabs were uneven, and this was the complaint made by the hospital, the Court agreed with the trial ruling that the slabs did not contain a defect. Rather, it ruled, what was defective was the workmanship in the construction of the concrete slabs. Had steps been taken to provide additional support to the formwork immediately prior to the pouring of the concrete, the deflection in the concrete would not have occurred.
In keeping with that finding, the Court determined that the amount excluded by the LEG 2 exclusion was not the cost that would have been incurred to prevent the deflection in the slabs, immediately prior to their deflection. Rather, the focus on faulty workmanship rather than on the actual deflection resulted in the Court’s determination that the amount excluded was the amount that would have been incurred to provide the additional supports immediately prior to the faulty workmanship. That is to say, that the amount excluded is the modest cost that would have been incurred in preventing the faulty workmanship through provision of additional support at the time the slab was poured.
The result is controversial, and may be inconsistent with the application that has been given to the LEG 2 exclusion in international jurisdictions. It is believed that insurers are considering seeking leave to appeal from the Supreme Court of Canada.