In a highly anticipated ruling, the Supreme Court of Canada has
held that a "faulty workmanship" exclusion in a
"Builder's Risk" insurance policy precludes from
coverage the cost of recleaning the windows of a building (held
excluded faulty work) but not the cost of replacing the damaged
windows (held covered resulting damage).
Importantly, the Supreme Court of Canada has rejected the Court
of Appeal's test of physical or systemic connectedness to
determine whether property damage is excluded as the cost of making
good faulty workmanship or covered as resulting damage.
The dispute in Ledcor Construction Limited et al. v.
Northbridge Indemnity Insurance Company et al. (2016 SCC
37) arose from the insurers' denial of coverage for damages
caused by the improper cleaning of windows of an office building
under construction. The subcontractor hired to clean the windows
scratched them by using inappropriate tools and cleaning methods.
The building's owner and the general contractor sought the cost
of replacing the windows under the project's
"Builder's Risk" or "All Risk" insurance
policy. It excluded from coverage the "cost of making
good faulty workmanship", with the exception of
"resulting damages" (an undefined term). The insurers
denied coverage on the basis that replacing the windows was
"making good faulty workmanship".
Lower courts' decision
The trial judge found that the exclusion was
ambiguous in that it wasn't clear whether it encompassed only
the cost of redoing the cleaning work or also the damage to the
windows, as they were the very thing on which the subcontractor had
performed the faulty workmanship.1 The trial judge
therefore applied the rule of contra proferentem against
the insurers and held that the exclusion withdrew coverage for the
cost of having the cleaning redone only. The damaged windows
constituted resulting damages that were not withdrawn from coverage
by the exclusion.
Applying a correctness standard of review to the interpretation
of the insurance policy, the Court of Appeal reversed the trial
decision and found that the degree of "physical or systemic
connectedness" is the key to determining the boundary between
"making good faulty workmanship" and "resulting
damages".2 The test considers the connection
between the damages and the part of the project being worked on,
the nature of the work being done, and the likelihood of the
Applying this test, the Court of Appeal held that not only the
cost of redoing the cleaning was excluded, but also the damage to
the windows being worked on at the time. In short, there was no
covered resulting damage.
The Supreme Court's decision
Writing for the majority, Justice Richard Wagner rejected the
physical or connectedness test set by the Court of Appeal (viewed
as unnecessary) and restored the trial decision. Applying the
general principles of contract interpretation, as the exclusion was
held ambiguous, Justice Wagner found that the exclusion serves to
exclude from coverage only the cost of redoing the faulty work. The
resulting damage exception covers costs or damages apart from the
cost of redoing the faulty work. Thus, only the cost of
recleaning the windows was withdrawn from coverage.
Justice Wagner noted that this interpretation aligns with the
parties' reasonable expectations, informed by the purpose
behind builders' risk polices (i.e. to offer broad coverage),
and the commercial reality of construction sites. It is also
consistent with prior jurisprudence.
The decision also confirmed that the appropriate standard of
review was correctness. Justice Wagner explained that where
an appeal involves the interpretation of a standard form contract,
the interpretation at issue is of precedential value and there is
no meaningful factual matrix that is specific to the particular
parties to assist the interpretation. Thus, the interpretation is
better characterized as a question of law. This is an
exception to the general rule that contractual interpretation is a
question of mixed fact and law, subject to deferential review on
appeal, as held by the Supreme Court of Canada's decision in
Sattva Capital Corp. v. Creston Moly Corp.,
2014 SCC 53.
Consequences of Ledcor
The Ledcor ruling sheds light on the boundary between
"making good faulty workmanship" and "resulting
damage", especially when the alleged faulty work causes damage
to the very object of the work or part of the work on which it is
applied (the windows in that case).
The decision will also make it easier for insured and insurers
to appeal contractual interpretation decisions now that the
standard of review has been relaxed for standard forms.
1 Ledcor Construction Limited v. Northbridge
Indemnity Insurance Company, 2013 ABQB 585.
2 Ledcor Construction Limited v Northbridge Indemnity
Insurance Company, 2015 ABCA 121.
In the recent case Routh Chovaz Insurance Brokers Inc. v. Aviva Insurance Company of Canada, 2016 ONSC 2567, the court granted summary judgment to Aviva, dismissing an action brought by an insurance broker...
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).