Supreme Court Of Canada Finds Insurers Liable For Malfunction Of Machinery

The Supreme Court of Canada has overturned an Ontario Court of Appeal decision and ordered a group of property insurers to cover the costs related to a damaged tunnel boring machine under an all-risk policy.

In Canadian National Railway Co. v Royal and SunAlliance Insurance Co. of Canada, a panel of four Supreme Court of Canada judges (with three more dissenting), found a group of six insurers liable to the CNR for nearly $30 million, plus $1.15 million in costs.

In 1993, CNR was building a railway tunnel under the St. Clair River between Sarnia, Ont. and Port Huron, Michigan. The CNR paid a premium of $890,000 for an all risks policy that insured it against all risks of direct physical loss or damage, with an exclusion for faulty or improper design.

A tunnel boring machine (TBM) was designed and built specifically for the task — at the time it was to be the largest TBM of its kind and was described as “state of the art.”

During construction, the TBM was halted when dirt penetrated its cutting head and threatened the integrity of the main bearing that drove the machine forward.

The project was delayed for 229 days, greatly increasing costs. Repairs were done and eventually the tunnel boring was completed in late 1994.

The trial judge found that despite the TBM’s failure, the innovative design did “accommodate” within the then limits of the state of engineering knowledge of all foreseeable risks encountered in the digging conditions.

“He acknowledged that the design proved in the result to be defective, but found that it was not “improper” or “faulty” according to the state of the art at the time the design was finalized,” and found the insurers liable, Supreme Court Justice Binnie wrote.

The Ontario Court of Appeal, on the other hand, ruled that a design must “‘take into account,’ ‘accommodate,’ ‘provide for’ and ‘withstand’ all foreseeable risks however unlikely or remote.

The Supreme Court set aside the Court of Appeal’s decision and restored the trial judgement.

“In my view, the “all risks” policy afforded the CNR greater protection than that which the majority in the Court of Appeal was prepared to allow,” Justice Binnie wrote.

“The policy did not exclude all loss attributable to “the design,” but only loss attributable to a ‘faulty or improper design.’ The design exhausted the state of the art but left a residual risk. Failure is not the same thing as fault or impropriety. In my view, the insurers did not meet the onus of bringing the loss within the exclusion.” •