Many all-risks insurance policies exclude damage caused by a contractor's faulty workmanship. The breadth of these "faulty workmanship" exclusions vary considerably. On one hand, a clause may narrowly exclude only the "cost of making good" the contractor's defective work. On the other hand, a clause may exclude not only the cost of correcting the fault, but any damage caused as a result of the work performed. Such damage is commonly known as "resulting damage". The Ontario Court of Appeal recently held that an insurer cannot exclude resulting damage by implication. Where a "faulty workmanship" clause is silent on resulting damage, such damage will remain covered.
In Monk v. Farmers' Mutual Insurance Co., the insured hired Pleasantview Log Restoration Systems ("Pleasantview") to perform restoration work to the exterior of her log home. The restoration involved the use of water and required that windows and other seams be sealed. Upon completion of the restoration in 2008, the insured discovered water damage to her carpeting, bedroom wall, and light fixtures. She noticed additional damage in 2009 and 2010.
The home was insured under a standard "all risks" homeowner's policy issued by Farmers' Mutual ("Farmers") and arranged by Muskoka Insurance Brokers Ltd. ("Muskoka").
Summary Judgment Motion
Upon denial of the claim, Monk sued Farmers and Muskoka, who both moved for summary judgment on two grounds: (i) the claim was the repair of faulty workmanship, which was specifically excluded by the insurance policy and (ii) the action was barred by the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. 1
The motion judge made a preliminary finding that the damage to the insured's home was caused, either directly or indirectly, by Pleasantview's failure to take protective measures required by their contract. As a result, the motion judge was asked to consider whether the damage resulting from Pleasantview's failure to appropriately seal the home from water damage was covered. The "faulty workmanship" exclusion clause read as follows:
We do not insure ... the cost of making good faulty material or workmanship.
The motion judge found that this exclusion clause was "clear and unambiguous" and that it excluded "both damage to the 'work' which forms the subject matter of the contract, as well as damages resulting from the faulty workmanship related to the work". 2 To arrive at this conclusion, the motion judge outlined four considerations.
First, the motion judge reasoned that an "all-perils" insurance policy should not be viewed as a "de-facto performance bond for the work of a third party." In other words, a contractor might be encouraged to charge for work at a full price, perform the work carelessly, and rely on an insurer to correct the cost of correcting its mistakes.
Second, the motion judge was mindful of the fact that insurers have good incentive to exclude resulting damage entirely because the "[c]ourts have frequently struggled with the issue of what constitutes resulting damage." According to the motion judge, removal of any reference to resulting damage in the faulty workmanship clause provided "greater certainty".
Third, the motion judge considered that "most home insurance policies" explicitly state that resulting damage is covered in the faulty workmanship clause.
Fourth, the motion judge turned to the policy before him and noted that, unlike "most" policies, this contract was silent on the issue of resulting damage. He concluded that this absence was intentional by the insurer and meant to exclude coverage for resulting damage. The motion judge held he was strengthened in this view because another clause of the insured's policy (the "while being worked on" clause) included an explicit statement regarding resulting damage. That clause read as follows:
We do not insure loss or damage to ... property ... while being worked on, where the damage results from such process or work (but resulting damage to other insured property is covered).
In effect, the motion judge held that, absent language to the contrary, a faulty workmanship clause excludes both the work performed and any resulting damage. Due to this finding, the motion judge declined to consider the limitations issue and granted summary judgment in favour of Farmers and Muskoka.
The Court of Appeal rejected the entirety of the above analysis and found that the motion judge erred in several ways. 3
Writing for a unanimous Court, Huscroft J.A. recognized that while it is true that a contractor should be responsible for its faulty work, and while it is also true that an insurer might reasonably have an incentive to exclude resulting damage, the reviewing judge must take into account the wellestablished principles of insurance contract interpretation.
Huscroft J.A. pointed out that insurers draft their policies with full appreciation of the fact that the courts are required to interpret exclusion clauses narrowly and coverage clauses broadly. As a result, Huscroft J.A. held that "[i]f an insurer wants to exclude particular coverage, especially for something as well-known as resulting damage, it should do so specifically rather than by implication." 4
In keeping with this principle, Huscroft J.A. further disagreed with the motion judge's finding that resulting damage was excluded due to the absence of explicit language. Huscroft J.A. wrote:
The motion judge's suggestion that the absence of an exception for resulting damage from the "faulty workmanship" exclusion reflects Farmers' intention not to provide coverage for such damage is misplaced. An insurer's unilateral intention is not relevant to the interpretation of the insurance agreement. 5
Huscroft J.A. also rejected the motion judge's reference to "most" policies, as that consideration was "irrelevant to the proper interpretation of this insurance contract". 6
Finally, Huscroft J.A. disagreed with the motion judge's reference to the "while being worked on" clause. 7 Although the "while being worked on" clause did explicitly indicate that resulting damage was covered, Huscroft J.A. held that it was not appropriate to refer to a clause intended to broaden coverage in order to strengthen the breadth of an exclusion. 8
Ultimately, the Court granted the appeal and referred the matter back to the motion judge for determination on the limitations issue.
The decision in Monk v. Farmers' Mutual Insurance Co. was a necessary correction to an outlier in our jurisprudence. This decision reaffirms the well-established principles of insurance contract interpretation and serves as a reminder to insurers that they cannot benefit from "exclusion by implication". In light of this decision, policyholders are encouraged to review their insurance contract for "faulty workmanship" clauses and the specific wording dealing with resulting damage.
1. Monk v. Famers' Mutual Insurance Co., 2014 ONSC 3940.
2. Ibid at para. 43.
3. Monk v. Farmers' Mutual Insurance Co., 2015 ONCA 911.
4. Ibid at para. 34.
5. Ibid at para 40.
6. Ibid at para. 35 (emphasis original).
7. Ibid at para. 40.
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