In its recent decision in Hollowcore v. Visocchi, the Ontario Superior Court of Justice analyzed a rarely considered exclusion typically found in the errors and omissions ("E&O") policies issued to engineers and architects. The exclusion removes cover for losses arising from the professional's failure to complete drawings, specifications or schedules in time, unless the delay is the result of error or inaccuracy in the document preparation. It appears the Hollowcare judgment is the first reported judicial comment on this exclusion in Canada.
The case involved a contractor's claim for damages for breach of contract and negligence against an engineering company and its principal arising from the construction of an addition to a parking garage. The contractor, Hollowcore Inc. and its parent company Prestressed Systems Inc. (together referred to as "Hollowcore"), retained Visco Engineering Inc. to provide accurate and timely engineering documents, including drawings and calculations, for the parking garage project. Over the course of the project, Visco failed to provide accurate drawings and calculations on schedule and ultimately informed Hollowcore that it would not be able to complete the drawings due to financial concerns unrelated to the project. Hollowcore sued Visco for costs and expenses resulting from the project delays caused by the late and incomplete drawings.
Visco held E&O insurance through a consortium of insurance companies (the "Insurers") that covered claims arising from the company's negligence. Visco's policy contained an exclusionary clause related to any damages arising from the failure to produce drawings, specifications or any other document on time. Specifically, the policy stated that:
The Insurers were brought into the action by Visco's third party claim. They took the position that the exclusion applied to any damages resulting from Visco's failure to produce the drawings.
Justice Nolan found that Visco had failed to produce accurate drawings within the agreed upon timeframe and that Hollowcore suffered damages as a result of Visco's failure. The issue relating to coverage was what, if any, portion of the damages resulted from delays caused by errors or inaccuracy in preparing the documents and therefore came within the exception to the exclusion. The courts findings on the cause of the delay would determine the extent of insurance coverage.
The Parties' Positions
The parties advanced different positions with respect to the cause of the delay.
Visco argued that it was unable to provide the drawings on a timely basis due to errors and inaccuracies in the way in which it prepared the drawings. In other words, the delay resulted from the significant time it took Visco to correct and re-correct errors in its drawings. On this basis, Visco and Hollowcore submitted that the exclusion did not apply and Visco was entitled to seek indemnity from the Insurers for any damages it was liable to pay.
In contrast, the Insurers argued that the delay in producing the drawings was the result of Visco's failure to do the work and to provide sufficient resources to produce the work in a timely fashion. The Insurers argued that there was a distinction between delay caused by an error and delay caused by unfinished work, whereby delay caused by an error would be covered and delay caused by unfinished work would be excluded. Specifically, the Insurers submitted that:
The Insurers also argued that only the reasonable amount of time necessary to correct an error or inaccuracy should fall within the exception and that any additional time was simply an uncovered delay, e.g. a delay of a couple of days to correct certain errors with the drawings may fall within the exception, but a delay of two-months to correct the same errors should not fall within the exception.
The Court stated that errors in drawings are expected in the construction industry, and drawings may often need to go through a cycle of correction and resubmission. The Court found that this cycle did not necessarily indicate that the drawings were unfinished and, therefore, any associated delay was excluded from coverage. Rather, the Court found that the submission of a drawing that omits certain calculations or measurements may constitute an error, and the repeated submission of the drawing with the same omission may constitute the same error. However in Visco's case, the Court found that the number of times that many of the drawings had to be resubmitted for approval, including the number of times that the necessary corrections were not made, demonstrated some delay on the part of Visco unrelated to the correction of errors.
The Court acknowledged that it was "almost impossible to determine with absolute accuracy" the damages that were related to delay caused by errors as opposed to other delay. However, the Court ultimately apportioned 45% of damages to delay unrelated to errors and thus excluded from cover, and 55% to delay arising from errors, thus falling within the exception to the exclusion and covered.
In the construction industry, delay can cause significant loss and give rise to liability claims. If the delays arise from a design professional's simple failure to complete drawings, plans, specifications, reports, or schedules on time, coverage is excluded under the typical E&O policy. However, where the delay can be attributed to an error or inaccuracy in the professional's preparation of a particular document, coverage may not be excluded.
The problem for insurers is that it is often difficult to determine the cause of delay, and in particular whether the delay was the result of a professional's error, or simply his or her failure to do the work. Our courts have yet to elucidate a set of standard factors to consider when determining the cause of delay; however, such a determination will likely be based on factual and expert evidence. The findings in Hollowcore suggest that our courts are willing to accept that errors and inaccuracies are routine in the provision of certain professional services, and professionals will require time to correct these errors and inaccuracies. Insurers should expect to have to cover any delays arising from this regular iterative process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.