On August 19, 2014, Mr. Justice Skolrood of the British Columbia Supreme Court issued reasons in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company, 2014 BCSC 1568 (Acciona), regarding coverage under a Course of Construction (COC or Builders Risk) Policy. The decision should be noted by all construction and insurance lawyers, owners, contractors, insurers and brokers, as the Court interprets for the first time the LEG2/96 clause, a design/workmanship exclusion developed by the London Engineering Group which is commonly used for large infrastructure projects. The Court also provided clarification on common insurance issues to establish coverage in a COC Policy, including a fortuitous loss and what constitutes "damage to insured property". A copy of the reasons can be found by clicking here.
In Acciona, the Plaintiffs were the Design/Build Contractor on a $250 million P3 hospital extension in Victoria, BC. The Project was an eight storey reinforced concrete structure. The structural design was complex with each floor separated into four wings consisting of thin suspended slabs with large spans. The concrete slabs were designed to be poured with an initial camber (upper curvature) of up to 30 mm to account for the expected long term downward deflection of the concrete such that the slabs would eventually be level. During construction the slabs "over deflected", which resulted in the slabs throughout the facility not being level as planned. The Court accepted the expert evidence of the Plaintiffs that the cause of the "over deflection" was the formwork and reshoring procedures which did not accommodate the complexity of the slab design during each successive pour. This overloaded the slabs while curing and stretched the slab's steel reinforcing (rebar) beyond its yield point, resulting in extensive cracking and permanent slab deflections well below level. Although the slabs were subsequently tested and determined to be completely safe, meeting the design strength requirements, they required extensive remediation (grinding the high points and levelling the low points with concrete topping) to meet the Project's serviceability requirements of level floors for a major hospital. The Plaintiffs claimed recovery of the costs under the COC Policy. The Insurers denied coverage.
The Perils Insured clause of the Policy contained a typical insuring agreement covering "ALL RISKS of direct physical loss of or damage to the property insured...". The Plaintiffs submitted that the yielding of the reinforcing steel due to the overloading along with the extensive cracking and permanent downward deflections of the slabs were "damage". The Insurers denied coverage asserting that the slabs were merely defective and not physically damaged. Further, the Insurers asserted that the loss was not fortuitous. Finally, the Insurers principally relied on a "defects in material workmanship or design" exclusion in the Policy, known as "LEG2/96".
The Court held that the slab over deflections, cracking and rebar yielding all constituted "damage" as referred to in the Policy. The Court held that the significant and varying degrees of over deflection throughout the facility rendered the slabs unfit for their intended purpose, which included the serviceability requirements of a hospital to accommodate wheeled traffic (wheelchairs and rolling equipment). The Court did not accept the Insurers' argument that the over deflections and cracking were merely defects and not damage. While some degree of deflection and cracking was expected in concrete slabs, the extent of what occurred in this case and its permanent nature confirmed that the slabs were left in an altered physical state, which some courts have held to be the touchstone for a finding of damage. Mr. Justice Skolrood further noted that "the issue of causation does not enter into the analysis in determining whether the state of the slabs falls within the Perils Insured clause" as that only relates to the exclusion clause.
On the issue of fortuity, the Court stated that in order for
coverage to be triggered under the Policy, the loss or damage must
be fortuitous. The Court reaffirmed that negligent or defective
construction can be fortuitous depending on the circumstances of
the case. The Court held that what was required is that the loss be
unexpected or unintended from the standpoint of the insured. In
Acciona the fortuity requirement was met as the extent of the over
deflections and cracking were both unexpected and unintended. The
slabs were not designed to deflect to such a degree as to render
them unfit for their intended purpose. Further, the extent of the
problem was not discovered until very late in the Project
and the actual cause was not determined until after construction was complete. As such, the Court held that the over deflections and cracking of the concrete slabs fell within the Perils Insured clause of the Policy.
The Court then turned to what it considered the central question on coverage, whether the loss was excluded under the "LEG2/96" defects exclusion (a clause developed by the London Engineering Group, a UK think tank for the insurance industry). This exclusion had not previously been interpreted by any court. As worded, the LEG2/96 clause excluded:
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.
The Court held that the LEG2/96 exclusion is not limited to defective design of the work or facility as a whole, but rather includes any "defects of material workmanship, design, plan, or specification" which would include defective design of component pieces of the work, including the formwork and shoring/ reshoring. The Court then held that the failure to address the complex slab design with respect to the formwork and shoring/reshoring procedures constituted a "defect in workmanship", not a defect in the slab design itself as asserted by the Insurers.
The Court noted that the two components of LEG2/96 do not operate in isolation but must be read together as a single exclusion to give meaning to the clause as a whole. Further, in interpreting the latter part of the LEG2/96 clause, the Court held that read in its entirety, the intent is to exclude those costs rendered necessary by one of the named defects, but limited to costs "which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage." In other words, the excluded costs are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred to the insured property.
In Acciona, the "damage" was the over deflections and cracking of the concrete slabs. The "defect in material workmanship" was the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs. As such, the LEG2/96 clause excluded only the costs that would have remedied or rectified the defect before the cracking and over deflections occurred. In this case, the Court held there was no evidence on which to quantify these costs except to say they would have been minimal (i.e. the additional cost to release and retighten the reshores after each successive slab pour or incorporating additional camber into the formwork). Overall, the Insurers failed to meet their onus of establishing that the exclusion applied.
This is an important decision for the construction and insurance industry, as it interprets the LEG2/96 clause for the first time. It also clarifies the requirement of fortuity and the definition of "damage" under a COC Policy, issues not frequently litigated by Canadian courts.
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.