Author: Corbin Devlin
The Alberta Court of Appeal has issued an important decision that
narrows the scope of all risks insurance coverage. The court was
grappling with the question whether damage to a project resulted from
“poor workmanship” or is “resulting damage.” The “cost of making good”
poor workmanship is excluded from coverage under the typical all risks
policy, while resulting damage is covered.
Scratched Windows
The claim arose during the construction of the EPCOR Tower in Edmonton (Ledcor Construction Limited v Northbridge Indemnity Insurance Company). The subcontractor Bristol was hired to clean the exterior of the building when the project was nearly complete. Bristol scratched the windows on the tower by using inappropriate tools and methods, and the glass had to be replaced at great expense.
The insurer denied that the replacement cost was covered by the all risks insurance policy. In 2013, a judge determined the replacement of the glass was covered. In particular, the trial judge found that the insurance policy was not clear as to whether replacing the glass was a cost of making good faulty workmanship, or a cost of repairing resulting damage. The trial judge said that any ambiguity in the insurance policy must be resolved in favour of the claimant. The cost of replacing the glass was therefore covered.
A Reversal
Now, the Alberta Court of Appeal has reversed this decision by the trial judge, saying that the all risks policy is not ambiguous at all. The court says that the “dividing line” between poor workmanship and resulting damage is determined by “physical or systemic connectedness”. Some property damage caused by faulty workmanship may still be covered. But the damage was excluded from coverage in this case because the scratched windows are too closely connected to the window cleaning work.
The Court expresses a principle of general application as follows: “The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.”
Connected and Foreseeable
Other words, the Court is saying that property damage is excluded from all risks insurance coverage if the damage is the foreseeable and direct result of faulty workmanship. Sounds straighforward? To interpret the policy in this particular case required a trial and a detailed examination of the nature of the work, the various parts of the project, the foreseeability of the damage, and other factors. The question of “physical or systemic connectedness” still leaves plenty of room for disputes over the scope of coverage.
There is no doubt the Court has endorsed a narrower interpretation of all risks insurance coverage. But it is important to note that the specific wording of all risks policies may vary, and different circumstances might result in an interpretation more favourable to the claimant, in cases of property damage caused by faulty workmanship.
Scratched Windows
The claim arose during the construction of the EPCOR Tower in Edmonton (Ledcor Construction Limited v Northbridge Indemnity Insurance Company). The subcontractor Bristol was hired to clean the exterior of the building when the project was nearly complete. Bristol scratched the windows on the tower by using inappropriate tools and methods, and the glass had to be replaced at great expense.
The insurer denied that the replacement cost was covered by the all risks insurance policy. In 2013, a judge determined the replacement of the glass was covered. In particular, the trial judge found that the insurance policy was not clear as to whether replacing the glass was a cost of making good faulty workmanship, or a cost of repairing resulting damage. The trial judge said that any ambiguity in the insurance policy must be resolved in favour of the claimant. The cost of replacing the glass was therefore covered.
A Reversal
Now, the Alberta Court of Appeal has reversed this decision by the trial judge, saying that the all risks policy is not ambiguous at all. The court says that the “dividing line” between poor workmanship and resulting damage is determined by “physical or systemic connectedness”. Some property damage caused by faulty workmanship may still be covered. But the damage was excluded from coverage in this case because the scratched windows are too closely connected to the window cleaning work.
The Court expresses a principle of general application as follows: “The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.”
Connected and Foreseeable
Other words, the Court is saying that property damage is excluded from all risks insurance coverage if the damage is the foreseeable and direct result of faulty workmanship. Sounds straighforward? To interpret the policy in this particular case required a trial and a detailed examination of the nature of the work, the various parts of the project, the foreseeability of the damage, and other factors. The question of “physical or systemic connectedness” still leaves plenty of room for disputes over the scope of coverage.
There is no doubt the Court has endorsed a narrower interpretation of all risks insurance coverage. But it is important to note that the specific wording of all risks policies may vary, and different circumstances might result in an interpretation more favourable to the claimant, in cases of property damage caused by faulty workmanship.
Thanks for sharing such useful article.
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