Dispute over ‘faulty workmanship’ exclusion on construction project could reach Supreme Court of Canada

A construction contractor who unsuccessfully sued Northbridge Indemnity Insurance Company over a disputed claim, under an all risks policy that excluded “making good faulty workmanship,” is applying for leave to appeal with Canada’s highest court.

Ledcor construction was the general contractor for the EPCOR Tower in Edmonton. The project owner, Stations Lands Ltd., had an all-risks policy with Northbridge, covering direct physical loss or damage, with Ledcor as a named insured.

As the project was nearing completion, Bristol Cleaning was hired to clean windows. During the cleaning process, the windows were damaged and had to be replaced.

The insurance policy excluded “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.”

In a decision released Oct. 7, 2013, Mr. Justice Terry Clackson, of the Court of Queen’s Bench of Alberta, ruled that the cost of replacing the windows is covered.

But that ruling was reversed on appeal earlier this year.

Last May, Ledcor filed for leave to appeal with the Supreme Court of Canada, which is scheduled to release Sept. 24 its decision on whether to hear Ledcor’s appeal.

In 2013, Justice Clackson found that the insurance policy was ambiguous.

“It is plausible that excluding the cost of ‘making good’ faulty cleaning simply excludes the cost of having someone else do it right. That is the plaintiffs’ position,” Justice Clackson wrote. “It is also plausible that ‘making good’ faulty cleaning extends to the damage done by the faulty cleaning. That is the defendants’ position.”

Citing case history, Justice Clackson applied the contra proferentem rule in finding against the insurer.

But in a decision released March 27, 2015, the Alberta Court of Appeal found that Station Lands’ policy with Northbridge was unambiguous. The court noted that there is a “dividing line” between “physical damage that is excluded as ‘making good faulty workmanship’, and physical damage that is ‘resulting damage,'” which is covered.

“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 appeal court noted that the damage to the windows was “directly caused” by the cleaning.

“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,” the appeal court wrote. “That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.”