Canadian Underwriter
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Lessons in Policy Language


November 30, 2014   by Michael Teitelbaum, Partner, Hughes Amys LLP


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In Monk v. Farmers’ Mutual Insurance Co (2014 O.J. No. 3509), Ontario Superior Court Justice Koke summarily dismissed an action against the insurer, Farmers’ Mutual Insurance Co. (“Farmers’ Mutual”), and the broker, Muskoka Insurance Brokers Ltd. (“Muskoka Insurance”), by applying a plain and simple reading of the policy’s “faulty workmanship” exclusion.

The Facts

The action arose when the insured, retained a contractor, Pleasantview Restoration Systems (“Pleasantview”), to perform some restoration work on her home, which was insured under a standard homeowner’s policy issued by Farmers’ Mutual and arranged by Muskoka Insurance. Pleasantview was retained to restore the exterior logs, board and structure of the house.

At the conclusion of the work, the insured discovered deficiencies in the work done by Pleasantview; namely, stains on the windows, light fixtures, and the carpeting, scratches and marks on the windows, damage to the wooden window frames, and the windows in the doors were sinking within the doors because of the deterioration of the silicone.

Ms. Monk allegedly went to Muskoka Insurance when she discovered this damage, and was informed that her policy did not cover work done by an independent contractor, and that the contractor hired would be responsible for the damage. Muskoka Insurance denied this.

Ms. Monk sued Farmers’ Mutual under her policy and Muskoka Insurance based on an alleged breach of Muskoka Insurance’s contractual and fiduciary duty to her by failing to advise her in a timely way that she had a valid claim against Farmers’ Mutual.

Farmers’ Mutual and Muskoka Insurance brought motions for summary judgment for a dismissal. The basis for the summary judgment motion by Farmers’ Mutual was that the insured’s claim constituted costs of repairing faulty workmanship caused by Pleasantview, which is specifically excluded by her policy. The issue to be determined was whether some or all of the property damage fell within the “faulty workmanship” exclusion and how that exclusion interacted with the “property excluded” exclusion in the insured’s policy.

Issues Before the Court

The first issue before the court was the application of the “faulty workmanship” exclusion.

The “faulty workmanship” exclusion reads: “We do not insure … the cost of making good faulty material or workmanship.” The question before the court was what damages are included in the term “faulty workmanship?” The insured submitted that “faulty workmanship” extends only to work that was actually contracted by her to Pleasantview; the restoration of the exterior logs. The incidental, or corollary, damage from that workmanship, would not qualify as “faulty workmanship” under this exclusion.

The insured argued that a “faulty workmanship” exclusion is commonplace in standard homeowner’s policies; however, most policies further state that “resulting damage” is excepted. The insured submitted that other homeowners policies contained an exception in the “faulty workmanship” exclusion for any resulting damage.

The insured further argued that the “faulty workmanship” exclusion was developed in the context of the resulting damage exception, and therefore the resulting damage exception ought to be read into her policy.  Her final argument for including an exception for “resulting damage” in the “faulty workmanship” exclusion was that it is plain and obvious to the persons reading the contract that the “faulty workmanship” exclusion should not include “resulting damage.”

Farmers’ Mutual and Muskoka Insurance argued that the “faulty workmanship” exclusion is an unqualified exclusion, and does not contain an exception for “resulting damage.” Given this, they argued, there is no reason to read in or imply a “resulting damage” exception. The Court agreed with their position.

Justice Koke found that the damage in this case is “the exact type which, for policy reasons, should be excluded from [a] homeowners’ property insurance.” Justice Koke referred to Insurance Law in Canada, which states:

 “This [faulty or improper workmanship or design] exclusion is intended to preclude coverage for the cost of repairing faulty work or design. It would be an inappropriate spreading of the risk if the insured were able to recover such a loss.”

 Justice Koke reasoned that if resulting damage was covered it would mean that contractors would theoretically be able to charge full price for the work, be careless and save themselves money, and then rely on the homeowner’s insurer to pay for the cost of correcting the mistakes.

Additionally, Justice Koke found that, traditionally, courts have struggled with the issue of what constitutes “resulting damage,” leading insurers to remove this exception and provide greater certainty as to what is excluded in the policy.

Finally, with respect to this issue, Justice Koke refused to accept Ms. Monk’s argument that omission of the “resulting damage” exception was accidental as most standard homeowners’ policies include it; in His Honour’s view this omission was intentional. He agreed with Farmers’ Mutual and Muskoka Insurance that the exclusion of the “resulting damage” exception is intentional by the insurer not to limit the scope of the exclusion.

His Honour then considered another issue raised by Ms. Monk, which was that the “Property Excluded” clause in the policy did contain a “resulting damage” exception.

The “Property Excluded” clause read:

“We do not insure loss or damage to:

Property…(ii) while being worked on, where the damage results from such process or work (but resulting damage to other insured property is covered). “

The insured argued that her damages constituted damage to “property…while being worked on…” and that the “resulting damage” exception ought to extend coverage, in spite of the clear terms of the “faulty workmanship” exclusion.

Justice Koke disagreed and found that the “resulting damage” exception found within the “Property Excluded” clause could not extend to resulting damage caused by faulty workmanship. He stated:

            “The terms of the faulty workmanship exclusion clause are clear and unambiguous; they exclude all damages resulting from faulty workmanship and therefore they trump the exception for resulting damage in the property damage exclusion clause. Simply put an exception to an exclusion cannot override the clear and unambiguous provision of another general clause.”

Justice Koke reconciled these two provisions by explaining that the policy concerns driving them are different. Damage occurring to property while being worked on is not necessarily the result of faulty workmanship as there can be other causes such as accidents. Therefore, that damage ought to be treated differently than damage caused by faulty workmanship.  

The Claim Against the Broker

Ms. Monk alleged that in around April or May of 2009, when she began noticing the deficiencies in Pleasantview’s work, she went to the offices of Muskoka Insurance and made enquiries about making a claim. She alleged that Muskoka Insurance informed her that she was unable to make a claim as the damage was caused by a contractor and would not be covered under the policy.

Muskoka Insurance denied such an interaction took place. Ms. Monk alleged that she returned two more times in order to inquire about making a claim and was told each time that it would not be covered. Muskoka Insurance also denied these interactions. It was not until September 2011, when the insured alleged a fourth visit to Muskoka Insurance, and it claims this was the first visit from her, that Monk received an email from Muskoka Insurance informing her that she may have a claim and that her policy could cover the damage.

Muskok
a Insurance relied on an alleged admission by Ms. Monk at her examination for discovery that she does not have an enforceable claim against Muskoka Insurance if it is determined that there is no coverage under the policy. In the result, the action was also dismissed against Muskoka Insurance.

Comment

In terms of policy coverage and interpretation, the decision in Monk reiterates the importance of the wording of each provision of a policy. And it illustrates that insurers may wish to check the wording of their homeowners’ policies in respect of “faulty workmanship” to see if they are providing the coverage they wish to afford. The decision is currently under appeal.

Michael S. Teitelbaum is a partner with Hughes Amys LLP. Hughes Amys is a member firm of The Arc Group of Canada, a network of independent law firms across Canada.