Canadian Underwriter

Exclusion for defect in material workmanship in construction insurance policy did not apply to deflecting concrete slabs: B.C. appeal court

August 20, 2015   by Canadian Underwriter

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The British Columbia Court of Appeal has ruled partly against four commercial insurance carriers, in a disputed claim on a course–of-construction policy, arising during construction on a hospital in Victoria.

The British Columbia Court of Appeal ruled four insurers must by $8.5 million to a construction contractor on a claim arising from deflecting concrete slabs

The insurers must pay $8.5 million to the contractor, as a result of a subcontractor placing concrete slabs that were later found to be deflecting, though the contractor is not covered for increased sub-contractor costs.

The claim arose from a construction project, of a 500-bed patient facility, in 2009 at the Royal Jubilee Hospital. The contractor was Acciona Lark Joint Venture (ALJV), a joint venture of Acciona Infrastructure Canada Inc. and Lark Projects (2004) Ltd.

ALJV sought claims damages and costs, of $14.95 million, from Allianz Global Risks U.S. Insurance Company, Zurich Insurance Company Ltd., Temple Insurance Company and GCAN Insurance Company. In essence, the court found that when concrete slabs were deflecting, cracking and bending, that constituted direct physical loss of or damage to insured property.

In August 2014, Mr. Justice Ronald Skolrood of the Supreme Court of B.C. awarded ALJV $8.5 million, which was comprised of $7.149 million in costs relating to repair of the slabs, $1 million in indirect costs and $350,000 in profit margin. Justice Skolrood denied ALJV $4 million in damages for increased sub-contractor costs on the grounds that the policy only covered direct losses to insured property.

That ruling was upheld, on appeal, in a decision released Aug. 5.

In 2008, ALJV had signed a design-build agreement to construct a 500-bed patient care facility at the Royal Jubilee Hospital in Victoria. A subcontractor for ALJV, Campbell Construction Ltd., was responsible for “designing and building the concrete framework and placing and finishing the concrete slabs.”

The slabs were poured between February 5 and June 29, 2009.

“As the work neared completion, it was noted that certain of the slabs were over-deflecting, resulting in concave recessions in the centre of the slabs,” Justice Skolrood noted. “Further examination disclosed ‘significant and variable deflections’ on a number of the floor levels. The supporting rebar (within the slabs) had stretched beyond its flexural yield point, resulting in permanent deformity. In addition, many of the slabs had cracked in the vicinity of the support walls and columns. While the cracks varied in width and length, many were large enough for a credit card to be inserted.”

One issue was a clause containing “standard exclusionary language developed by the London Engineering Group,” Justice Skolrood noted.

That exclusion was for “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.”

The exclusion clause added: “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.”

That exclusion, Justice Skolrood noted, is “commonly known as LEG 2/96 which LEG titles Model ‘Consequences’ Defects Wording.” He added LEG 2/96 “has not been considered by a Canadian court.”

Justice Skolrood disagreed with the insurers’ contention that those concrete slabs “were not damaged in the sense that their essential state was altered” and that the “poor design or construction of the slabs does not make the result fortuitous.”

He characterized the cracking and over-deflection of the slabs as a workmanship issue.

“The ‘defect in material workmanship”’ is the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs,” Justice Skolrood wrote. In applying the exclusion clause, “excluded costs are those that would have remedied or rectified the defect before the cracking and over deflections occurred i.e the costs of implementing proper formwork and shoring/reshoring procedures or incorporating additional camber into the formwork,” Justice Skolrood added. “There was no evidence on which to quantify these costs except to say that they would have been minimal.”

In a finding in favour of the insurers, Justice Skolrood noted that ALJV’s $4-million claim, for increased subcontractor costs, were not covered by the policy because the policy covered “direct losses to the property insured,” which in ALVJ’s case was costs associated with assessment and remediation of damaged slabs.

On appeal, the insurers argued that Justice Skolrood erred in finding that the over-deflection, cracking and bending constituted “direct physical loss of or damage to the property insured” within the meaning of the clause describing the perils insured.

“I would not accede to the Insurers’ argument that there cannot have been physical loss or damage in this case because the slabs had not cured into a satisfactory state before the over-deflection, bending and cracking occurred,” wrote Mr. Justice Peter Willcock of the B.C. Court of Appeal. “To accept that argument would be to deprive the Contractor of any insurance coverage for unfinished work during construction, which cannot be what the parties intended. The Policy, a course of construction policy, was clearly intended to afford coverage for damage to property that was in a partially finished state.”

The other two judges hearing the appeal – Madam Justice Kathryn Neilson and Madam Justice Nicole Garson – agreed.

On cross-appeal, ALJV argued that “the fact that the subcontractor costs arose out of its contractual duties to third parties, and were paid to those third parties, does not mean the costs were not covered.”

But the appeal court agreed with the insurers that “only the slabs were damaged and only those costs arising (directly or indirectly) from that damage was insured.”

ALJV had argued that “once it has been determined that insured property has been damaged by an insured peril, all proximate losses are covered,” and those proximate losses included “both costs incurred to remediate the damaged property and economic losses suffered to mitigate further loss to the insured property proximately caused by the insured peril.”

ALJV had cited a 2007 decision, by the U.S. District Court for New Jersey, in the case of Zurich American Insurance Company v. Keating Building Corporation, which required “losses to be covered if there is any doubt with respect to coverage.” Justice Willcock noted.

But Justice Willcock suggested that in Canada, a policy should only be read against the insurer if “there is an ambiguity which cannot be resolved by the general canons of contractual interpretation.”

He cited a unanimous Supreme Court of Canada ruling – released in 2010 – that Lombard General Insurance Co. had a duty to defend Progressive Homes Ltd. in a lawsui
t arising from buildings damaged by water leakage.

When interpreting insurance contracts, “the primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole,” Mr. Justice Marshall Rothstein, of the Supreme Court of Canada, wrote in Progressive Homes. When the policy language is ambiguous, a court “should prefer interpretations that are consistent with the reasonable expectations of the parties ….. so long as such an interpretation can be supported by the text of the policy,” Justice Rothstein added. Where general rules of contract construction “fail to resolve the ambiguity, courts will construe the policy contra proferentem – against the insurer.”