Canada: The Reasonable Expectation Of What's Covered

A recent Alberta Court of Appeal ruling serves as a valuable reminder for insurers that clearly defined policy language in a multi-peril or "all-risk" policy is necessary for the application of a faulty workmanship clause.

The decision in Condominium Corporation No. 9312374 v Aviva Insurance Company of Canada turned on the interpretation of a faulty workmanship clause in a multi-peril policy (the "Policy"). The coverage dispute arose after the condo corporation contracted two contractors to perform maintenance and repairs on a parkade area. During their rehabilitation work, the contractors cut too deep into a concrete slab, impacting the structural integrity of the parkade.

Lawsuits initiated against the two contractors were settled, but the insurer, Aviva, denied coverage to the condo corporation for the loss, based on the faulty workmanship exclusion in the Policy:

Coverage A of section I does not insure: ...

(b) the cost of making good:

(ii) faulty or improper workmanship; ...

This exclusion does not apply to loss or damage caused directly by a resultant peril not otherwise excluded in Coverage A of Section I;

Aviva argued that the negligent cutting and resulting damage to the slab was all attributable to faulty workmanship and was therefore caught by the exclusion. The condo corporation disagreed on the basis that the "resultant peril" exception applied. "Resultant peril" was not a defined term in the Policy.

Following a summary trial on the issue, the trial judge found the exception to the exclusion did not apply as a specific resultant peril had not been established. The condo corporation appealed the trial judge's decision.

On appeal, the condo corporation argued that the Supreme Court of Canada's analysis of a builder's all-risk policy in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. (Ledcor) provided the governing framework for the Court's analysis of the faulty workmanship exclusion. In Ledcor, the Supreme Court of Canada concluded that the wording of the exclusion clause for faulty workmanship was ambiguous and ought to be interpreted in accordance with the reasonable expectations of the parties and the existing commercial reality – namely that the resulting damage exception covered costs or damages apart from the cost of redoing the faulty work.

The Court of Appeal found that the exclusion clause and exception to the exclusion, taken as a whole, were ambiguous and it was therefore necessary to apply the principles of insurance contract interpretation adopted in Ledcor to determine the correct interpretation.

In looking at the reasonable expectations of the parties, the Court of Appeal found that "[a]s with builders' risk policies, the purpose behind multi-peril or all-risk policies, like the one in question, is to provide broad coverage for fortuitous loss or damage, affording the insured certainty, stability and peace of mind."

With this in mind, the Court of Appeal turned to the interpretation of the faulty workmanship exclusion and considered whether repairing the excessively deep cut that pierced the concrete slab causing the loss of structural integrity fell within the exclusion or was covered because of the "resultant damage" exception.

As "resulting damage" was not a defined term in the Policy, the Court of Appeal relied on the Black's Law Dictionary definitions for "resultant" (1) and "peril" (2) to interpret the term to mean a "consequence that causes a risk of loss to person or property." In the case at hand, this consequence pertained to the "loss of structural integrity to the parkade; in other words, the risk of structural collapse."

Accordingly, the Court of Appeal found that the parties "reasonably expected that the cost of making good the faulty or improper workmanship (determined by the scope of work contracted for) would be excluded, but that the consequences of that faulty workmanship would be covered." The Court of Appeal considered this interpretation to be consistent with other jurisprudence interpreting faulty workmanship clauses and the commercial reality.