Builder’s risk policy must cover windows damaged by cleaning on building under construction: Supreme Court of Canada

Insurance firms writing an all risks policy for an office building under construction in Edmonton must cover the multi-million dollar cost of replacing windows damaged by cleaning, despite an exclusion for “the cost of making good faulty workmanship,” the Supreme Court of Canada has ruled.

In its ruling released Thursday in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., Canada’s highest court also suggested that in legal disputes over standard form contracts, interpretation is often a question of law subject to review for correctness, rather than a question of mixed law and fact.

Northbridge and five other carriers – Royal & Sun Alliance Insurance Company of Canada, Chartis Insurance Company of Canada, Commonwealth Insurance Company, GCAN Insurance Company and American Home Assurance Company – wrote an “all risks” policy for Station Lands Ltd. own of EPCOR Tower in Edmonton, the Alberta Court of Appeal noted in a decision released in 2015. The named insureds were Station Lands and Ledcor Construction Limited.

The policy insured “all risks of direct physical loss or damage.” One exclusion was for “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 Supreme Court of Canada found that the insurers “did not undertake to cover the ‘cost of making good faulty workmanship’, but they did promise to cover ‘physical damage [that] results’ from that ‘faulty workmanship'” Mr. Justice Richard Wagner wrote on behalf of six of the seven judges hearing the appeal from Ledcor and Station Lands.

The Sept. 15 ruling overturns a decision in favour of the insurers released March 27, 2015 by the Alberta Court of Appeal. A 2013 Court of Queen’s Bench of Alberta ruling against the insurers is now restored.

Court records indicate that as the EPCOR project was nearing completion during the summer of 2001, Bristol Cleaning was hired to clean windows, which were then damaged and had to be replaced.

“At the time construction neared completion, concrete splatter, paint specs, and other construction dirt remained on the windows,” the Alberta Court of Appeal noted. Bristol used “dull or inappropriate blades to scrape off the dirt,” and did not properly clean the blades, the Alberta Court of Appeal added. “It also used a non uni-directional’ cleaning method, and failed to follow the manufacturer’s cleaning instructions.”

The replacement cost of the windows was estimated at $2.5 million, wrote Justice Wagner of the Supreme Court of Canada.

In 2013, Mr. Justice Terry Clackson of the Court of Queen’s Bench of Alberta ruled the policy was ambiguous and the cost of replacing the windows is covered.

That ruling was overturned two years later in a unanimous ruling by Mr. Justice Jean Côté, Mr. Justice Jack Watson and Mr. Justice Frans Slatter. The Alberta Court of Appeal ruled the insurance policy was unambiguous.

“Because the base coverage is for ‘physical loss’, the exclusion ‘cost of making good faulty workmanship’ must exclude some physical loss, or the exclusion would be redundant,” the Alberta Court of Appeal wrote. “The clause then continues with the proviso that ‘resulting damage’ that is ‘physical damage not otherwise excluded’ is nevertheless covered. The key is to determine the dividing line between the physical loss that is excluded because it is the ‘cost of making good’ and that which is covered because it is ‘resulting damage.'”

The province’s appeal court ruled that the damage to the windows was foreseeable and “presumptively not within the scope of the insurance policy” because the builder’s risk policy “is not a construction warranty agreement.”

The Supreme Court of Canada disagreed, ruling that the policy “does not inappropriately spread risk, nor would it allow or encourage contractors to perform their work improperly or negligently,” Justice Wagner wrote. “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.”

Concurring with Justice Wagner were Chief Justice Beverly McLachlin, Madam Justice Rosalie Silberman Abella, Mr. Justice Michael J. Moldaver, Madam Justice Andromache Karakatsanis, Mr. Justice Clément Gascon, Madam Justice Suzanne Côté and Mr. Justice Russell S. Brown.

The ninth judge hearing the case – Mr. Justice Thomas Cromwell – wrote concurring reasons.

Related: Supreme Court of Canada to hear appeal over faulty workmanship exclusion in builder’s risk insurance policy

Among the cases cited were the 2010 Supreme Court of Canada ruling in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada.

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 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.”

In Northbridge vs. Ledcor, “the parties’ reasonable expectations, informed largely by the purpose of builders’ risk policies, point to the faulty workmanship exclusion serving to exclude from coverage only the cost of redoing the faulty work,” Justice Wagner wrote. “This interpretation aligns with commercial realities and is consistent with prior jurisprudence.

Another case cited in Ledcor was the Supreme Court of Canada’s 2014 ruling in Sattva Capital Corp. v. Creston Moly Corp. That dispute was not over an insurance contract.

Creston Moly, formerly Georgia Ventures Inc., had an opportunity to acquire a molybdenum mining property in Mexico and agreed to pay a finder’s fee to Sattva Capital. That fee was to be paid in Creston shares and the parties disagreed over “which date should be used to determine the price of Creston shares and thus the number of shares to which Sattva is entitled.”

An arbitrator and the B.C. Supreme Court ruled in favour of Sattva. That ruling was overturned on appeal but the Supreme Court of Canada restored the arbitrator’s ruling.

“Historically, determining the legal rights and obligations of the parties under a written contract was considered a question of law,” Justice Rothstein wrote in 2014 in Sattva. “This rule originated in England at a time when there were frequent civil jury trials and widespread illiteracy. Under those circumstances, the interpretation of written documents had to be considered questions of law because only the judge could be assured to be literate and therefore capable of reading the contract.”

Today, Justice Rothstein continued, “the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction,” and the “overriding concern is to determine the intent of the parties and the scope of their understanding.”

Judges must consider the “surrounding circumstances,” Justice Rothstein suggested in Sattva.

“Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix,” he added.

But the Sattva ruling “should not be read as holding that contractual interpretation is always a question of mixed fact and law, and always owed deference on appeal,” Justice Wagner wrote in Ledcor. “I would recognize an exception to Sattva’s holding on the standard of review of contractual interpretation.”

Where the dispute is over “the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix specific to the particular parties to assist the interpretation process,” Justice Wagner added. “This interpretation is better characterized as a question of law subject to correctness review.”