Insureds not necessarily big winners in recent Supreme Court case

The Supreme Court of Canada decision in Canadian National Railway v. Royal and SunAlliance Insurance Company of Canada may not be as favourable to insureds as initially portrayed, according to an information bulletin from Ogilvy Renault LLP.
“While at first sight the ruling appears favourable to insureds holding policies that contain [faulty design] exclusion clauses, one needs to be mindful of the specific facts that were present in this case,” the bulletin notes.
In the decision, a group of insurers were ordered to pay for damages to a tunnel-boring machine under an all-risk policy that contained an exclusion for faulty or improper material, faulty or improper construction or workmanship and faulty or improper design, among other things.
Insurers determined the design was faulty in part because it did not ultimately do what it was designed to accomplish.
But the Supreme Court of Canada found, on the contrary, that 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,” Supreme Court of Canada Justice Ian Binnie wrote for the court. “Failure [of the device to work] is not the same thing as fault or impropriety [in the design].”
The authors of the Ogilvy Renault bulletin, Charles Alexandre Foucreault and Andre Legrand, note that the decision in this case “will likely signal a change in the analysis of faulty design exclusion clauses in all contracts of insurance.”
It may also trigger insurance companies to re-write their exclusion clauses.
“As Justice Binnie suggests in his reasons, there is nothing to prevent an insurers from changing the way they formulate their exclusion clauses and broadening the scope of such clauses to exclude coverage for all claims arising from any failure in the design of the insured property,” the authors note.
That being said, the authors add, both insureds and insurers will want to pay particular attention to the specific wording of any faulty design exclusions in the future.