Canadian Underwriter

Engineering Insurance Conference speaker explains defective design, workmanship exclusions

October 13, 2015   by Greg Meckbach, Associate Editor

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There has been “little interpretation,” by Canadian courts, of the London Engineering Group (LEG)’s exclusion clauses for construction insurance, though a recent decision emphasized what was considered “defective workmanship,” a construction lawyer suggested at the recent 42nd Annual Engineering Insurance Conference (AEIC).

Exclusions in construction insurance policies were discussed at the Annual Engineering Insurance Conference (AEIC)

Dan Boan, a partner with the construction and public-private infrastructure projects sector group at Borden Ladner Gervais, gave a presentation Thursday on the LEG 1, 2 and 3 clauses.

The LEG 2 clause was in a course of construction policy written for Acciona Lark Joint Venture (ALJV) – a joint venture of Acciona Infrastructure Canada Inc. and Lark Projects (2004) Ltd. that built a section of Royal Jubilee Hospital in Victoria in 2009 – court records indicate. ALJV was partly successful in its lawsuit against the insurers who denied a claim arising from concrete slabs which had over-deflected and cracked.

The LEG 2 clause was considered by the British Columbia Court of Appeal, in its decision released August 5.

ALJV’s course of construction policy excluded “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,” according to court records.

The policy was written by Allianz Global Risks U.S. Insurance Company, Zurich Insurance Company Ltd., Temple Insurance Company and GCAN Insurance Company.

In 2014, a B.C. court found that when the concrete slabs were deflecting, cracking and bending, that constituted direct physical loss of or damage to insured property. The court found that there was a defect in workmanship, but that defect was in “improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs.”

ALJV was awarded $8.5 million, which included $7.149 million in costs relating to repair of the slabs. The court ruled that ALJV’s $4-million claim, for increased subcontractor costs, were not covered by the policy. Those rulings was upheld on appeal.

B.C.’s appeal court “emphasized that the slabs were not the defective workmanship,” Boan said last Thursday at AEIC, which is part of the Canadian Boiler & Machinery Underwriters Association (CB&MUA). “It was the shoring and form work that was the defective workmanship. So they were drawing a distinction between the two. Lots of people would say, ‘Well, didn’t one cause the other?’ but that’s where they draw the line.”

The court concluded that the cost of putting in proper formwork “would have been minimal,” Boan added.

“What the trial court said, and the (B.C.) court of appeal agreed with them, was the cost of remedy was the shoring work …. so that would have been a very minor cost, so they should get the cost to fix the concrete slabs,” Boan said. ALJV was represented by BLG, but Boan did not personally work on the case.

He noted that the LEG 1 exclusion clause provides a broader exclusion and narrower coverage than LEG 2. LEG 1 excludes “loss or damage due to defects or material workmanship design plan or specification.”

LEG 3, in turn, is a broader exclusion than LEG 2, Boan added.

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

“There’s been little interpretation in the courts as to what is the meaning of” the LEG 1, 2 and 3 exclusion clauses, Boan suggested.

The concept of fortuity, he added, was “discussed at length” in the ALJV case.

AEIC was held at the St. Andrew’s Club in at the Sun Life building in downtown Toronto.

Boan also discussed the Supreme Court of Canada decision, in 2008, in Canadian National Railway Co. versus Royal and Sun Alliance Insurance Co. of Canada.

In 1993, a railway tunnel was under construction beneath the St. Clair River between Sarnia, Ont. and Port Huron, Mich. Work stopped when dirt penetrated the cutting head of a tunnel boring machine.

CN was covered by a builder’s risk insurance policy, covering the railway against all risks or direct physical loss or damage. The policy excluded the “cost of making good … faulty or improper design.” The insurers were RSA, Axa Assurances Inc., Continental Casualty Company of Canada, Reliance Insurance Company, Aviva Canada Inc. and St. Paul Fire and Marine Insurance Company.

In 2004, an Ontario court held the insurers liable for $29.6 million. The trial judge concluded that although the design was defective, it was not improper or faulty according to the “state of the art at the time the design was finalized.” That ruling was overturned in 2007 by the provincial appeal court but restored the following year by Canada’s highest court.

The trial judge concluded “that in the context of this particular project, given the state of the art, risk of failure on this job in the circumstances encountered was simply not a risk foreseeable (or foreseen) by the experts, even as a remote or unlikely possibility,” Mr. Justice Ian Binnie wrote on behalf of the four Supreme Court of Canada judges who ruled in favour of CNR. “His concern was with foreseeability of risk, as it should have been, not the particular mechanism of failure.”

Three of the seven judges dissented.

That was “a very important case” in construction insurance law, Boan suggested at AEIC.

“As long as the people designed what was state of the art and they took into account foreseeable risk … if it fails, then it doesn’t mean it’s faulty design,” Boan said. The case dealt with the question of what standard engineers are being held to, in designing projects, he suggested.

“Canadian courts are still applying a test of foreseeability,” Boan added. “It’s unclear whether the court will get to a test for ‘state of the art’ workmanship, going forward, based on the comments in the CN case.”

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