Scratching below the surface: damage to glazed panels and contract works insurance policy response
Feb 2017 |
It is not uncommon on major building projects for scratching to glass panes or panels to be observed pre-practical completion (or during the defects liability period), and a question can thus arise as to whether contract works policies are likely to respond to indemnify the project participants with respect to damage of this nature.
This damage is often caused by one or more combinations of the following:
- Scratching during installation;
- Scratching post installation;
- Weld splatter; and/or
- Cleaning of the glass.
A case authority which considered specifically the operation of a defective workmanship exclusion in the context of damage to installed windows, is a New Zealand decision of Holmes Construction Wellington Limited v Vero Insurance New Zealand Limited.1 In that case, the judge thought it was significant that there was an obligation cast upon the subcontractor to protect/mask all finished surfaces.
It was argued against the insurer in that case that the expression ‘defective in workmanship’, meant that the part of the Contract Works that was being replaced, i.e. the windows, had to be inherently [emphasis added] defective, before the insurer could rely on the exclusion.
The judge rejected that submission, finding that it was ‘impractical and wrong’ to separate the subcontractor’s ‘plastering of the walls on the one hand from its over-spraying of the plaster onto the windows and its efforts to remove the plaster from the windows on the other’.
The judge reached his conclusion by reference to the wording of the subcontract and found reinforcement for it by consideration of several case authorities including Ted Corp Holdings Ltd v QBE Insurance (International) Ltd,2 Pentagon Construction (1969) Co. Ltd v United States Fidelity & Guarantee Co3 and the judgment of the Ontario Court of Appeal in Sayers & Associates v Insurance Corp of Ireland Ltd.4
In that last mentioned case, it was said:5
‘In the present case the fault that underlaid the "faulty workmanship" was the failure of the appellant to take protective measures; but by the terms of its contract its "work" was to install the electrical equipment and to keep it dry and clean until the contract was completed. It would be taking too narrow a view of the case to isolate one part of the work from the total contractual obligation. The damage to the equipment was the product of the failure to take protective measures, and so that fault rendered the appellant’s performance of its contractual obligations "faulty workmanship". The damage to the ducts and the switching gear was not, therefore, "damage resulting from such faulty…. workmanship….", so as to come within the exception of the exclusion.’
It will be observed that the judge in the New Zealand case considered above concluded that once damaged, the windows became ‘defective in workmanship’ in circumstances where the contract prescribed protection or repair in the event of such damage.
A subsequent Canadian case however, appeared to support the alternate notion that it is the defect or error in workmanship being carried out elsewhere in the project that caused the damage to the glass, rather than the windows themselves being ‘defective in workmanship’.
This case which concerned a concrete slab rather than glass panels and construed an LEG2 defect clause was the decision of the Court of Appeal of British Columbia in Accionna Infrastructure Canada Inc v Allianz Global Risks US Insurance Company.6 The Court of Appeal in that case said that the trial judge’s critical finding was that defects in the framing and shoring workmanship resulted in damage to the slabs (which was not challenged on appeal) and that in light of that finding the floor slabs could not be considered to be a ‘portion of the insured property containing any of the said defects’ within the meaning of the Defects Exclusion. The writer has been (respectfully) somewhat critical of that decision.7
Ledcor Construction Limited v Northbridge Indemnity Insurance Company (and Ors) [2015] ABCA 121 – Court of Appeal of Alberta
In the 2015 decision of the Court of Appeal of Alberta, the Court had cause to specifically consider whether damage that occurred to windows was excluded from coverage under the terms of the all risks policy therein under consideration.
The case related to the EPCOR Tower in Edmonton and insurers had appealed from the decision of the judge at first instance who had held that damage to the tower’s windows was covered under insurers’ policy. The central issue was whether the damage resulted from ‘poor workmanship’ or was ‘resulting damage’. The policy was a ‘blanket’ policy designed to cover all participants and activities on the site and it contained an exclusion in the following terms:
‘4 (A) Exclusions
This Policy section does not insure:
….
(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.’
The windows on the EPCOR Tower were supplied and installed by a trade contractor. At the time construction neared completion, concrete splatter, paint specs, and other construction dirt remained on the windows. Another trade contractor Bristol Cleaning was retained to undertake a ‘construction clean’ of the exterior, including the windows. Cleaning up after construction was part of the overall work for which Ledcor was responsible.
During the cleaning process Bristol Cleaning caused damage to the windows by using what were said to be inappropriate tools and methods, specifically by using dull or inappropriate blades to scrape off the dirt and by not properly cleaning the blades during the cleaning. It was also said to have also used a ‘non uni-directional’ cleaning method and failed to follow the manufacturer’s cleaning instructions. The glass had to be replaced at considerable expense and Bristol Cleaning was responsible under the terms of its trade contract for replacing the glass which had been previously installed by the glazing contractor.
On the Appeal it was observed [at 24] that both parties agreed that the policy was intended to cover some element of unforeseen loss and was not intended to be a construction warranty. Ledcor accepted the observation in Ploutos Enterprises Ltd v Stuart Olson Constructors Inc8 that on too narrow a reading of the exclusion:
‘The contractor or designer would theoretically be able to charge a full price for the work and save money by being careless, and then rely on the insurer to pay for the cost of correcting the mistakes.’
The Court of Appeal noted [at 27] that the policy was said to be ‘all risks’ and defined coverage broadly. It observed [at 28] that it was not disputed that the damage to the windows was included in the basic coverage for ‘direct physical loss or damage’. The Court of Appeal noted [at 29] that because the base coverage was for ‘physical loss’, the exclusion ‘cost of making good faulty workmanship’ must exclude some physical loss, or the exclusion would be redundant.
The Court of Appeal went on to note that the clause continued with a proviso that ‘resulting damage’, that is ‘physical damage not otherwise excluded’ was nevertheless covered, and that the key was to determine the dividing line between the physical loss that was excluded because it was the ‘costs of making good’, and that which was covered because it was ‘resulting damage’.
The Workmanship Argument
The Court of Appeal rejected a ‘narrow interpretation’ contended for by Ledcor that the term ‘workmanship’ only covers efforts that result in the creation of some physical product. Their argument in effect was that any trade contractor that was merely providing labour or services would not be engaged in ‘workmanship’. The Court of Appeal found that this narrow interpretation was outside the scope of the normal interpretation of the word ‘workmanship’ which generally encompasses any application of skill or effort to a task.
Further, the Court of Appeal observed that it was not supported by the words of the construction contract. The wording of the insurance policy did not support this interpretation either, there being nothing in it to indicate that only the creation of physical products are caught by the term. Not surprisingly in light of these matters, the Court of Appeal found that the trial judge had correctly rejected this argument.
The Multiple Contractors Argument
Ledcor was said by the Court of Appeal [at 33] to have placed great emphasis on the fact that Bristol Cleaning did not supply the glass, but was only cleaning it. They argued that the exclusion does not apply to damage by one contractor to the work of another. The Court of Appeal [at 34] considered that this argument contained ‘echoes’ of the ‘workmanship’ argument, as on the interpretation contended for no damage done by any mere service or labour provider would be excluded. The Court of Appeal considered that this conclusion would not reconcile easily with the wording of the insurance policy or the context in which it was operating.
Firstly, the Court of Appeal considered it to be artificial to try to draw a dividing line under the construction contract between the product created by the work of other contractors and the work done by Bristol Cleaning. The Court of Appeal noted that in effect Bristol Cleaning’s ‘work’ included replacing the damaged glass even if it was installed by another trade contractor. To say therefore that the exclusion in the policy only applied to a trade contractor ‘making good’ its own work sought to sever that replacement work, which was still work which had to be done before Bristol Cleaning could claim substantial completion.
Secondly, as Ledcor had conceded that there must be some ‘physical damage’ caught by the exclusion (and that the exclusion was not merely limited to the cost of redoing the cleaning), the Court of Appeal observed [at 36] that it must be physical damage to something that pre-existed prior to the cleaning work and was presumably created by another contractor.
Thirdly, the Court of Appeal observed [at 37] that the insurance policy in question was what was described as a ‘blanket’ wrap up policy covering the entire project and the various project participants. In this context the Court of Appeal was of the view that it did not make sense to interpret the policy such that damage would be covered by the insurance if the work was done by two trade contractors, but not if it was all done by one trade contractor [citing Pentagon Construction (1969) Co. Ltd. v United States Fidelity and Guarantee Company].9
Fourthly, the Court of Appeal noted [at 38] that under a multi year policy such as that under consideration it did not make any difference if there was a temporal gap between the installation of the windows and the window washing that damaged them. The Court of Appeal expressed the view that it did not depend on the exact sequence or timing of the various constituent tasks required to build a complex building, and that further it did not matter that Bristol Cleaning was retained directly by the owner, rather than by a general contractor. The Court of Appeal went on to note that the scheme of insurance was that all activities on the site were to be covered by one policy, and that there was nothing in the policy wording to suggest that coverage depended upon the contractual relationships of the parties, but rather that coverage depended upon the type of ‘damage’.
Finally, the Court of Appeal observed [at 39] that there was nothing in the policy wording to support Ledcor’s argument that the key to the exclusion is the identity of the person who performed the work that is subsequently damaged. The Court of Appeal noted that Ledcor’s argument would lead to the conclusion that coverage under the policy depended on how the work was divided up, and that such an approach might create an incentive to artificially divide up the work as finely as possible, as then the maximum amount of damage would be covered. Conversely it would be dangerous for an owner to hire the one contractor to do all of the work, as on this argument nothing would be covered.
The writer considers there to be considerable force in a number of these observations made by the Court of Appeal in relation to ‘the multiple contractor’s argument’.
Physical or Systematic Connectedness
The insurers put forward what was referred to in oral argument as a ‘geographic’ theory, which was that the physical damage excluded by ‘making good faulty workmanship’ is ‘the cost of repair of physical damage directly caused by faulty work to the part of the property being worked on’. Under this theory, all damage to the part of the work actually being worked on is excluded: it did not matter which contractor did the original work.
In this case, Bristol Cleaning was working on the windows and it was the windows that were damaged, the damage directly arose from the cleaning activities, and therefore repairing that damage was excluded as ‘cost of making good’. On the other hand, if Bristol Cleaning had damaged some other adjacent work, that would be ‘resulting damage’ which would be covered.
The Court of Appeal stated [at 46] that while the insurers’ position was somewhat too narrowly stated, it was nonetheless attractive and came close to being consistent with the wording of the policy. The Court of Appeal noted that it (or a variation of it) had the advantage of providing a fairly clear line between what was covered and what was not covered, and that there were numerous cases which had held that the exclusion is not limited to the cost of re-doing the faulty work, but also extends to the cost of repairing the thing actually being worked on.
The Court of Appeal went on to state [at 48]:
‘…..the exclusion cannot simply be limited to the cost of re-cleaning the windows; the "resulting damage" cannot be the same as the workmanship itself, because a thing cannot "result" from itself.’
The Court of Appeal concluded however [at 50] that the ‘geographic’ test contended for by insurers’ ‘was not quite sufficient nor fully accurate’.
The Court of Appeal went on to state [again at 50]:
‘The proper test can more properly be described as a test of the connectedness between the work, the damage and the physical object or system being worked on. The application of the test will depend on an examination of the factual context, but the primary considerations will be:
- The extent or degree to which the damage was to a portion of the project actually being worked on at the time, or was collateral damage to other areas. The test will be relatively easy to apply when the damage is caused directly by the work to the very object being worked on. There may be cases where several parts of the project work together as one system. Work on one part of the system may cause damage to another part, but repairing that damage might still properly be characterised as the cost of making good faulty workmanship if there is sufficient systemic connectedness;
- The nature of the work being done, how the damage related to the way that work is normally done, and the extent to which the damage is a natural or foreseeable consequence of the work itself. If the damage is a foreseeable consequence of an error in the ordinary incidents of the work, then it presumptively results from bad workmanship; and
- Whether the damage was within the purview of normal risks of poor workmanship, or whether it was unexpected and fortuitous.
The degree of physical or systemic connectedness is the key to determining the boundary between "making good faulty workmanship" and "resulting damage".’
The Court of Appeal when then seeking to apply these considerations to the factual matrix concluded [at 52] that in this instance the damage was caused directly by the actual doing of the cleaning by Bristol Cleaning. The scraping and wiping motions that caused the damage were the actual ‘work’. The scraping and wiping forces that caused the damage were intentionally applied to the windows as a core part of the work to be done. The damage was not ‘accidental’ or ‘fortuitous’.10 Fixing the resulting damage was ‘making good the faulty workmanship’ that caused the damage.
The Finding of the Court of Appeal
In allowing the appeal and finding in favour of the insurer, the Court of Appeal expressed the view [at 56] that the key was to find the dividing line between physical damage that is excluded as ‘making good faulty workmanship’ and physical damage that is ‘resulting damage’ which was covered by the policy. In favouring physical or systematic connectedness as the test,11 the Court of Appeal found that the exclusion and exception considered by it, excluded from coverage the cost of redoing the work, but also excluded damage connected to that work, such as damage caused to the very object of part of the work on which the faulty workmanship was being applied.
In noting again that the policy of insurance was not a construction warranty agreement, the Court of Appeal found that the damage to the windows being worked on at the time (which was excluded in addition to the costs of redoing the exterior clean of the EPCOR Tower), was not only foreseeable but was highly likely or even inevitable to occur if the work was done in a faulty way.
The Court of Appeal concluded [at 57] that the presumptive test is that damage which is physically or systematically connected to the very work being carried on is not covered. It was noted that whether coverage is nevertheless extended under that test in a factual context of any particular case would depend on a consideration of the factors identified by it [at 50] above.
Ledcor Construction Ltd v Northbridge Indemnity Insurance Co., 2016 SCC 37 – Supreme Court of Canada
Ledcor appealed the decision of the Court of Appeal of Alberta to the Supreme Court of Canada.
The Appeal was heard in March 2016 with the Supreme Court delivering its judgment on 15 September 2016.
The reasons for judgment were delivered by Wagner J (McLachlin CJ and Abella, Moldaver, Karakatsanis, Gascon, Côté and Brown JJ concurring) with Cromwell J delivering separate concurring reasons.
The Supreme Court found that the physical and systematic connectedness test established by the Court of Appeal was unnecessary and allowed the appeal.
The Supreme Court majority found that while the language of the exclusion clause was ambiguous, the general principles of contractual interpretation led to the conclusion that the exclusion clause served to exclude from coverage only the cost of redoing the faulty work, that is the cost of re-cleaning the windows. The Supreme Court found that the damage to the windows and therefore their cost of replacement, was covered.
In delivering the reasons for judgment Wagner J stated [at 5]:
‘…I am of the view that the exclusion clause serves to exclude from coverage only the cost of redoing the faulty work. This interpretation is dictated by the general rules of contractual interpretation. It best represents the parties’ reasonable expectations, as informed by the purpose of builder’s risk policies, aligns with commercial reality, and is consistent with the jurisprudence on the matter. In this case, the cost of redoing the faulty work is that of re-cleaning the windows. Therefore I …would …hold that the window’s replacement cost is covered under the insurance policy.’
Wagner J noted [at 54] that the Court of Appeal proceeded on the premise that because the base coverage under the policy was for ‘physical loss or damage’, that the exclusion clause needed to exclude from coverage some physical loss. The judge observed [at 55] that this initial premise led the Court of Appeal to search for a dividing line between the physical damage that was part of the ‘cost of making good’ and therefore excluded from coverage, and physical damage that is ‘resulting damage’ and therefore covered as an exception to the exclusion. The judge observed that in its quest to establish this dividing line, the Court of Appeal fashioned a new test of ‘degree of physical or systematic connectedness’ which it was said was ‘the key to determining the boundary between making good faulty workmanship and resulting damage’.
Wagner J went on to say [at 56]:
‘In my respectful view, the premise from which the Court of Appeal proceeded is flawed. The "Faulty Workmanship" exclusion need not encompass physical damage. Although [e]xclusions should ….be read in light of the initial grant of coverage…..this Court has stressed that "perfect mutual exclusivity" [between exclusions and the initial grant of coverage] in an insurance contract is not required...’
Then [at 58]:
‘…perfect mutual exclusivity is neither provided for under the Policy nor should it be required when interpreting the Exclusion Clause…..[and] adopting this premise led the Court of Appeal down an improper analytical path toward establishing a new and unnecessary test…’
The judge being of the view that the general rules of contractual interpretation provided the answer to whether the damage to the Tower’s windows was covered under the Policy.
The judge was of the view [at 61] that while the language of the exclusion slightly favoured the interpretation advanced by the Insured’s, it was nonetheless ambiguous.
The judge considered [at 63] that the application of the general principles pointed to one interpretation consistent with the reasonable expectations of the parties and commercial reality: the faulty workmanship exclusion served to exclude from coverage only the cost of redoing the faulty work, as the resulting damage exception covered costs or damages apart from the cost of redoing the faulty work. As such, excluded under the Policy was the cost of re-cleaning the windows, but the damage to the windows and therefore the cost of their replacement was covered. In light of that conclusion the judge did not consider it necessary to turn to the contra proferentem rule.
Reasonable Expectations of the Parties
As there was no factual matrix to assist in understanding the parties intentions and the Policy was a standard form contract, the judge was of the view [at 66] that the purpose behind builders’ risk policies was crucial in determining the parties’ reasonable expectations as to the meaning of the Exclusion Clause.
In finding [at 71] that the insured’s position on the meaning of the Exclusion Clause better reflected the purpose of builders’ risk policies, the judge drew heavily upon dicta from the Supreme Court decision in Commonwealth Construction Co. v. Imperial Oil Ltd,12 in which the court had stated that the purpose of builders’ risk policies was to provide certainty and stability by granting coverage that reduces the need for private law litigation.
Despite recognising [at 69] that such policies do not in fact insure against ‘all risk’ and contain ‘various exclusions’ the judge said [at 70]:
‘….an interpretation of the Exclusion Clause that precludes from coverage any and all damage resulting from a contractor’s faulty workmanship merely because the damage results to that part of the project on which the contractor was working would, in my view, undermine the purpose behind builder’s risk policies. It would essentially deprive insured’s of the coverage for which they contracted.’
The writer would respectfully observe that while the Court of Appeal’s adoption of physical or systematic connectedness was in no way convincing (and that test is not one which would find favour in this country), blanket statements by the Supreme Court as to ‘the purpose’ of builder’s risk policies risk losing sight of the fact that the coverage which will be afforded in any particular case is ever dependent upon the structure of the insurance policy and its conditions and exclusions.
For example in the Australian case of Walker Civil Engineering v Sun Alliance & London Insurance PLC13 Sheppard AJA who delivered the leading judgment of the NSW Court of Appeal said [at 74,684]:
‘…..It is important I think to reach a conclusion on the meaning of the words "part" and "any other parts" where used in the limitation to the exclusion clause. In my opinion "part" is not a reference to a part such as a tank or gasket; it is a reference to the part of the work being carried out by the appellant…’
That case accordingly affords an example of where damage was excluded precisely because it resulted to that part of the project on which the contractor was working.
For this reason the writer would question the utility of broad statements such as that made by the Supreme Court [at 70 above], although in context it might be seen that the statement was directed towards the rejection of the physical or systematic connectedness test established by the Court of Appeal.
The weight afforded by the Supreme Court to that court’s much earlier decision in Imperial Oil in seeking to divine the ‘purpose’ behind ‘all risks’ policies is also somewhat curious. While the Supreme Court in that case certainly considered the avoidance of project participants fighting amongst themselves as being a relevant factor, the significance of the embrace by the court of the notion of ‘pervasive interest’ was in what was said to flow from it, Grandpre J stating that ‘the several insureds must be considered as one’ and that therefore an action could not be brought by one insured against another. That however addresses a different issue to the one that the Supreme Court in Ledcor was asked to consider.
The Supreme Court’s suggestion [at 72 -74] that further support for the insured’s position could be found in commentary contending that all-risk coverage under builders’ risk policies was intended to be broad and the faulty workmanship exclusion narrow is (respectfully) similarly unconvincing, and would not be a factor likely to influence the courts in this country in relation to interpretation of a policy of insurance.
The further finding by the Supreme Court of the ‘irrelevance’ of the service contract which Bristol entered into as an additional factor in support of its conclusion as to the reasonable expectations of the parties, seems contrary to the direction taken by the English Courts in cases such as Co-operative Retail Services Ltd v Taylor Young Partnership & Ors14 in which Brooke LJ urged for the approach advocated by Dillon LJ in an earlier case: ‘what does the contract provide?’.
No Unrealistic Results
The Supreme Court stressed [at 78] the need to avoid interpretations that would bring about unrealistic results or that the parties would not have contemplated in the commercial atmosphere in which they sold or purchased the policy.
Wagner J said [at 79 and 80]:
‘In my opinion, it is commercially sensible in this context for only the cost of redoing a contractor’s faulty work to be excluded under the faulty workmanship exclusion. Such an interpretation strikes the right balance between the two undesirable extremes… Furthermore such an interpretation does not, in my view transform the insurance policy into a construction warranty. It does not inappropriately spread the risk, nor would it allow or encourage contractors to perform their work improperly or negligently. Importantly, Bristol is precluded from receiving initial payment for its faulty work and then receiving further additional payment to repair or replace its faulty work…’
The writer very respectfully would suggest that the interpretation adopted by the Supreme Court arguably does transform the insurance policy into a construction warranty when one considers that the policy insured all of the activities carried out on the project and all of the project participants. In this regard it should be borne in mind that cleaning up after construction was part of the overall work for which Ledcor was responsible.
As to the concern expressed by the Court of Appeal that the approach (contended for by insurers) might create an incentive to artificially divide up the work as finely as possible, Wagner J did not find this persuasive, saying [at 82] that it was premised on a theoretical concern which did not reflect the commercial reality of construction sites on the ground, and that it was unreasonable to expect that the owner of a property or general contractor would divide up work exclusively on the basis of potential coverage under their insurance policy.
Most curiously (given the obverse nature of the policies and the differing purposes to which they are directed) the judge noted [at 83] that precluding from coverage only the cost of redoing faulty work broke ‘...no new ground in the world of insurance’ as it mirrored the approach which courts have adopted when construing similar exclusions to comprehensive general liability insurance policies (noting that while they insure against the risk the insured’s work might cause bodily injury or property damage they generally contain a ‘work product’ exception which excludes from coverage the cost of redoing the insured’s work).
Ensuring Consistent Interpretation
Wagner J [at 84] opined that a construction of the Exclusion Clause which would exclude from coverage only the cost of redoing the cleaning work, was also consistent with the existing case law, the judge being of the view that many of the faulty workmanship and faulty design decisions could be read as limiting the faulty workmanship exclusion to only the costs of redoing the work.
Having opined thus, the judge went on to say that as these cases were highly fact specific the result that the Court’s reach will be largely dictated to by the particular circumstances of each case.
Notwithstanding that the judge had earlier concluded when considering the reasonable expectations of the parties that Bristol’s contract was ‘an irrelevance’, the judge then stated [again at 84]:
‘…More specifically, whether certain damage falls within the resulting damage exception to the faulty workmanship exclusion will greatly depend on the scope of the contractual obligation pursuant to which the faulty workmanship was carried out.’
The judge then noted [at 85] that having regard to Bristol’s contract, redoing Bristol’s faulty work did not require Bristol to install windows in good condition, and as such the cost of the window’s replacement represented ‘resulting damage’ and was covered under the Policy. Conversely if Bristol had been responsible for the window’s installation, and the windows had been damaged in the course of the installation process, the damage to the windows in such circumstances would not have constituted ‘resulting damage’ and would have been excluded from coverage.15
This again respectfully seems to bring into play the very exercise which the court appeared anxious to avoid [at 66] when seeking support for its approach to the ‘reasonable expectation of the parties’ test, and to the writers mind sits somewhat incongruously with its earlier comment [at 74]:
‘…..the service contract between Station Lands and Bristol has no bearing on the reasonable expectations of the parties to the Policy with respect to the meaning of the Exclusion Clause and whether damage to the windows would be covered.’
Wagner J then reviewed some of the faulty workmanship cases to illustrate how an interpretation which limits the scope of the faulty workmanship exclusion to the cost of redoing the faulty work is consistent with jurisprudence. In doing so, the judge again emphasised the importance to be placed on the parties contractual obligations.
For example in considering the outcome of the decision in Sayers & Associates v Insurance Corp of Ireland Ltd16 the judge said [at 87]:
‘The Court’s statement is clear: since the subcontractor was contractually required to install the electrical equipment and keep it dry, and its failure to take adequate protective measures resulted in it failing to comply with said contractual obligations, the damage to the equipment could not be considered to be resulting damage.’
When reviewing the further case of Ontario Hydro v Royal Insurance17 in which the court held that the cost of making good the improper workmanship was the cost of replacing the tubing which was the object of the proceeding, the judge said [at 88]:
‘In my view, the court reached this conclusion because replacing the tubing was necessary for the contractor to fulfil its contractual obligations to design the boiler system, to acquire the material and to supervise the commissioning of the boiler. Thus the cost of redoing the work encompassed the cost of replacing the tubing.’
Wagner J however expressed the view [at 92] that these decisions [and others cited and considered] were not inconsistent with holding that the faulty workmanship exclusion precluded from coverage only the cost of redoing the faulty work. The judge also noted that in faulty design cases the design is integral to the whole of the item and that accordingly the cost of repairing damage to that item will be included within the cost of redoing the faulty work and the resulting damage exception will necessarily apply to damage to items other than to the item being designed.
The judge finally indicated that another case from the Quebec Court of Appeal (Commercial Union Cie D’assurance Du Canada v Pentagon Construction Canada Inc)18 demonstrated that the case law on the interpretation of the faulty workmanship exclusion and resulting damage exception is not unanimous.
The Supreme Court, for the reasons set out above allowed the Appeal.
While agreeing with the disposition of the Appeal, Cromwell J wrote concurring reasons, two paragraphs from which [119 and 120] are set out below:
‘The question this case raises, boiled down to its essentials, is this: Is the cost of replacing a window that was scratched by a window cleaner while cleaning it the "cost of making good faulty workmanship" (which is excluded from insurance coverage) or the cost or repairing "physical damage [that] results" from faulty workmanship (which is covered)? The answer proposed by Wagner J. is that it is the cost of repairing the physical damage, because the exclusion applies only to the cost of redoing the faulty work, in this case, re-cleaning the windows: para. 5. The legal principle is that "making good faulty workmanship" means "the cost of redoing the faulty work". However, this principle does not seem to me to operate at a very high level of generality.
Applying the principle turns on two considerations: the scope of the "faulty work" and the nature of "redoing" it. We could say that the window cleaners’ faulty work did not require them to install windows in good condition: para. 81. But this seems to me to be the assertion of the conclusion rather than a reason for it. Presumably, the window cleaners’ work was to clean the windows without destroying them; if their faulty work destroyed the windows, why should we say that "redoing" their work does not involve replacing the windows? In sort, I am not convinced the principle that the exclusion only relates to "the cost of redoing the faulty work" can operate at a very high level of generality. Rather, its application in other cases will ultimately be decided on a case-by-case basis in light of the particular circumstances of the particular case.’
Conclusion
While the latest ‘instalment’ in Ledcor is a decision of the Supreme Court of Canada, as it emanates from a common law jurisdiction it may be persuasive in Australia. This was observed in All Covers and Accessories Pty Ltd v Sidawi19 where Victorian Associate Justice Mukhtar on appeal relied on a decision of the Court of Appeal for British Columbia, observing and following High Court of Australia authority in Cook v Cook.20
The diametrically opposed approaches of the Alberta Court of Appeal and The Supreme Court of Canada highlight the inherent complexity in this area of insurance policy interpretation.
In the writer’s respectful view, aspects of both decisions are unsatisfactory.
Even on the Supreme Court’s formulation there appears to be likely to be many instances where what has been found to be recoverable under the policy of insurance in the Ledcor case may not be recoverable in what might at first appear to be identical factual circumstances. But by ‘scratching below the surface’ these may be delineated having regard to the contractual rights and obligations assumed by project participants. Yet the operation of first party project policies has not previously thought to have been dependent upon such matters.
Further complicating this area are the existence of a variety of insurance policy exclusions which have the potential to operate quite differently to the exclusion clause under consideration in Ledcor.
For example, if considering a loss scenario such as this under a policy containing a LEG 2 Exclusion, it is necessary to keep firmly in mind that a defect in ‘workmanship’ can bring about a defective condition of property insured, but the quality of the work is not itself property insured, and it is the cost of repairing damage to the property insured which is the subject of the operation of the exclusion.
If guidance is to be obtained from the decisions noted above it is (consistent with Cromwell J’s dicta) that each matter needs to be considered in the context of its factual matrix and the conditions and exclusions of the insurance policy under which the claim is advanced.
.....
1 Holmes Construction Wellington Limited v Vero Insurance New Zealand Limited (Unreported, New Zealand District Court, Harrop J, 4 December 2007). See also Mead ‘Contract Works Insurance: Scratched glass claims’ Australian Insurance Law Bulletin, April 2010.
2 HC, Dunedin, CP3/00, 8 September 2000, William Young Jay.
3 [1978] Lloyds Law Reports 93, 98 – per Robertson J.
4 (1981)126 DLR (3D) 681.
5 Ibid [684].
6 [2015] BCWLD 5448.
7 Mead ‘A leg up or no leg to stand on? At long last; judicial consideration of LEG 2’ Australian Insurance Law Bulletin March 2016.
8 2008 BCSC 271 at para 104, 60 CCLI (4th) 59.
9 [1977] 4 WWR 351 at p. 360, 77 DLR (3rd) 189 (BCCA).
10 Respectfully this finding appears to ignore the distinction between a deliberate act and intended consequences. It is arguably only where both the act and consequences are deliberate/intended that the loss loses its character as a fortuity.
11 Respectfully, the Court of Appeal appears to have fashioned new terminology to describe the operation of policy response in a factual matrix, when one might have assumed that a more orthodox approach based on principles of policy construction to the facts of the case may have led to the same outcome.
12 [1978] 1 S.C.R 317.
13 (1998) 10 ANZ Ins Cas 61-418.
14 (2000) 74 Con LR 12.
15 Given that the policy provides first party cover intended to insure the interests of all project participants, it is surprising to the writer that its operation might be seen to depend upon the identity of the project participant who lodges a claim and the nature of the contractual obligations assumed by that party.
16 (1981) 126 D.L.R (3d) 681 (Ont. C. A).
17 [1981] O.J No. (QL) (H.C.J).
18 [1989] R.J.Q 1399 (C.A).
19 (2012) 36 VR 113; [2012] VSC 48; BC201200635 [36].
20 (1986) 68 ALR 353; [1986] HCA 73; BC8601384.
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