Canada: B.C. Court Of Appeal Finds Costs To Remedy Damage Caused By Defective Workmanship Is Not Excluded By Workmanship/Design Exclusion

The British Columbia Court of Appeal recently confirmed in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.¹ that a Workmanship/Design Exclusion does not exclude the costs to remedy damage caused by defective workmanship. The lower court decision was previously reported on in Covered. Acciona is the first case in Canada to consider the LEG 2/96, "Defects Exclusion" clause used in Course of Construction ("COC") policies in Canada. While the outcome of this appeal decision is definitely pro-insured, the lasting impact of this decision will depend on whether the court's reasoning is restricted to the unique facts of this case or applied more broadly to resulting damage claims generally.

Background

The Respondent was the contractor for an eight-story reinforced concrete structure being built as a major addition to the Royal Jubilee Hospital in Victoria, B.C. The contractor claimed over $14 million in damages from insurers under a COC policy for the costs to repair concrete slab floors that had "over-deflected" and did not meet the level surface functionality requirements for wheeled hospital equipment.

The policy's insuring agreement provided coverage for "all risks of direct physical loss of or damage to the property insured" subject to exclusions in the policy. The insurer denied coverage on the basis of a workmanship/design exclusion clause which read as follows:

2. 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.
   
   For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan or specification.

Lower Court Decision

The trial judge accepted the expert evidence of the contractor that the over-deflection, cracking of the slabs and bending of the rebar was not caused by defective design. Rather it occurred as a result of improper formwork and shoring procedures, which did not account for the thin slab design. The damage was therefore covered by the insuring agreement. The trial judge interpreted the defects exclusion so as to only exclude those costs of repair that would have remedied the defect immediately prior to the occurrence of the damage, and based on the evidence the costs of implementing proper shoring/framework procedures were nil. The insurer appealed.

Court of Appeal Decision

The insurer argued on appeal that the over-deflection, bending and cracking was not "direct physical loss or damage to the property insured" but a manifestation of faulty workmanship. The Court of Appeal held that this argument was inconsistent with the trial judge's finding of fact, that the defect (e.g., the faulty or defective shoring) caused actual physical damage (e.g., the over-deflection). Therefore, the greater than anticipated deflection was a fortuitous event. The Court of Appeal also did not accept that the slabs did not suffer physical loss or damage because they were never initially in a satisfactory state.² Accepting such an argument would have deprived the contractor of coverage for unfinished work product during construction.³

The insurer also argued that the trial judge erred in excluding only the costs of implementing proper shoring/framework procedures (which were nil). It submitted that the interpretation of the defects exclusion required a different inquiry than was undertaken in the resulting damage case law considered by the trial judge. The resulting damage case law addresses the distinction between resulting damage from an insured's own work which is generally covered, and the cost of making good a defect in an insured's own work which generally is excluded.⁴

The insurer relied upon the Alberta Court of Appeal decision in Ledcor Construction Ltd v. Northbridge Indemnity Insurance Co. ("Ledcor"),⁵ which excluded from coverage the cost of replacing glass windows that suffered damage during the cleaning process caused by the faulty workmanship of a trade contractor on the basis that repairing the windows would be "making good faulty workmanship" since the damage was the direct result of the cleaning carried out by the trade contractor.⁶ Based on Ledcor , the insurer submitted that the correct interpretation of the workmanship/design exclusion clause would lead to the exclusion of the entire claim.⁷ The Court of Appeal disagreed, finding no error in the trial judge's reasoning. The defects in the framing and shoring workmanship resulted in the damage to slabs, and therefore, there was no defect in the slabs themselves that could have been rectified to prevent the over-deflection, bending and cracking.⁸ The Court of Appeal applied the Ontario Superior Court decision of PCL Constructors Canada Inc. v. Allianz Global Risks US Insurance Company ("PCL Contractors"),⁹ which involved a similar exclusion clause that was interpreted as a deeming provision providing special treatment of loss or damage caused by faulty workmanship.¹⁰ The effect of the clause in PCL Contractors was to classify the damage to be "resulting damage" and therefore covered under the policy. The fact that sufficient preventative measures would not have added to the costs in this case did not matter. The Court of Appeal was clear that if the parties had intended to exclude all damage caused by the actions under the control of the insured, that there was simple and direct language available to do so, in the form of exclusion clause LEG 1.¹¹

The Court of Appeal dismissed the insurer's appeal and affirmed the trial judge's order, which awarded over $8 million to the plaintiffs for their costs incurred to remedy the concrete slabs.

Court of Appeal Decision

The insurer argued on appeal that the over-deflection, bending and cracking was not "direct physical loss or damage to the property insured" but a manifestation of faulty workmanship. The Court of Appeal held that this argument was inconsistent with the trial judge's finding of fact, that the defect (e.g., the faulty or defective shoring) caused actual physical damage (e.g., the over-deflection). Therefore, the greater than anticipated deflection was a fortuitous event. The Court of Appeal also did not accept that the slabs did not suffer physical loss or damage because they were never initially in a satisfactory state.¹² Accepting such an argument would have deprived the contractor of coverage for unfinished work product during construction.¹³

The insurer also argued that the trial judge erred in excluding only the costs of implementing proper shoring/framework procedures (which were nil). It submitted that the interpretation of the defects exclusion required a different inquiry than was undertaken in the resulting damage case law considered by the trial judge. The resulting damage case law addresses the distinction between resulting damage from an insured's own work which is generally covered, and the cost of making good a defect in an insured's own work which generally is excluded.¹⁴

The insurer relied upon the Alberta Court of Appeal decision in Ledcor Construction Ltd v. Northbridge Indemnity Insurance Co. ("Ledcor"),¹⁵ which excluded from coverage the cost of replacing glass windows that suffered damage during the cleaning process caused by the faulty workmanship of a trade contractor on the basis that repairing the windows would be "making good faulty workmanship" since the damage was the direct result of the cleaning carried out by the trade contractor.¹⁶ Based on Ledcor, the insurer submitted that the correct interpretation of the workmanship/design exclusion clause would lead to the exclusion of the entire claim.¹⁷ The Court of Appeal disagreed, finding no error in the trial judge's reasoning. The defects in the framing and shoring workmanship resulted in the damage to slabs, and therefore, there was no defect in the slabs themselves that could have been rectified to prevent the over-deflection, bending and cracking.¹⁸ The Court of Appeal applied the Ontario Superior Court decision of PCL Constructors Canada Inc. v. Allianz Global Risks US Insurance Company ("PCL Contractors"),¹⁹ which involved a similar exclusion clause that was interpreted as a deeming provision providing special treatment of loss or damage caused by faulty workmanship.²⁰ The effect of the clause in PCL Contractors was to classify the damage to be "resulting damage" and therefore covered under the policy. The fact that sufficient preventative measures would not have added to the costs in this case did not matter. The Court of Appeal was clear that if the parties had intended to exclude all damage caused by the actions under the control of the insured, that there was simple and direct language available to do so, in the form of exclusion clause LEG 1.²¹

The Court of Appeal dismissed the insurer's appeal and affirmed the trial judge's order, which awarded over $8 million to the plaintiffs for their costs incurred to remedy the concrete slabs.

Footnotes

1. 2015 CarswellBC 2210, 2015 BCCA 347; affm'g 2014 BCSC 1568 (CanLII)[Acciona].

2. Acciona at para 54.

3. Acciona at para 55.

4. Acciona at para 58.

5. 2015 ABCA 121 (CanLII)[Ledcor ].

6. Ledcor at para 8.

7. Acciona at para 58.

8. Acciona at paras 61-62.

9. 2014 ONSC 7480 (CanLII)[PCL Contractors ].

10. Acciona at para 64 citing PCL Contractors at paras 23-25, 28.

11. Acciona at para 69.

12. Acciona at para 54.

13. Acciona at para 55.

14. Acciona at para 58.

15. 2015 ABCA 121 (CanLII)[Ledcor ].

16. Ledcor at para 8.

17. Acciona at para 58.

18. Acciona at paras 61-62.

19. 2014 ONSC 7480 (CanLII)[PCL Contractors ].

20. Acciona at para 64 citing PCL Contractors at paras 23-25, 28.

21. Acciona at para 69.

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