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Insurer seeks leave to appeal $8.5-million award in disputed construction claim over defects exclusion clause


January 26, 2016   by Canadian Underwriter


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Allianz Global Risks US Insurance Company is applying to the Supreme Court of Canada for leave to appeal a ruling over a disputed $14.94-million property insurance claim arising from an addition to a hospital in Victoria, British Columbia.

Allianz wants to appeal an $8.5-million ruling, over a disputed course-of-construction insurance claim, to the Supreme Court of Canada

Essentially, Allianz and three other carriers that wrote a course-of-construction property policy are arguing that the losses caused by over-deflection of concrete slabs should not be covered due to an exclusion in the policy for “defects of material workmanship, design, plan, or specification.”

Court records indicate that in 2009, Campbell Construction Ltd. was the principal subcontractor – for a joint venture between Acciona Infrastructure Canada Inc. and Lark Projects (2004) Ltd. – on an eight-storey addition to Royal Jubilee Hospital. Campbell was responsible for “designing and building the concrete framework and placing and finishing the concrete slabs,” wrote Mr. Justice Peter Willcock, of the B.C. Court of Appeal, in a ruling released Aug. 5, 2015.

Concrete slabs were poured between Feb. 5 and June 29, 2009.

“As the work neared completion, it was noted that certain of the slabs were over-deflecting, resulting in concave recessions in the centre of the slabs,” wrote Mr. Justice Ronald Skolrood of the Supreme Court of B.C. in a decision released in 2014. “Further examination disclosed ‘significant and variable deflections’ on a number of the floor levels. The supporting rebar (within the slabs) had stretched beyond its flexural yield point, resulting in permanent deformity. In addition, many of the slabs had cracked in the vicinity of the support walls and columns. While the cracks varied in width and length, many were large enough for a credit card to be inserted.”

Load tests were conducted and the slabs were repaired, causing delays for other subcontractors.

Related: Engineering Insurance Conference speaker explains defective design, workmanship exclusions

Allianz — along with Zurich Insurance Company Ltd., Temple Insurance Company and GCAN Insurance Company — insured Acciona Lark Joint Venture (ALJV) for property in the course of construction. That policy had an exclusion for defective workmanship.

ALJV claimed $14.95 million under its policy, including $4.1 million in “costs directly incurred for repair of cracks, levelling and topping,” $2.06 million for cleaning and $4.05 million for increased subcontractor costs, among other things.

The insurers claimed the costs were outside the coverage of the policy.

In 2014, Justice Skolrood ruled that ALJV could not recover the cost of increased subcontractor costs, but could recover $7.14 million for costs related to slap repair, $1 million in indirect costs and $350,320 in profit margin, for a total of $8.5 million.

That ruling was upheld on appeal, in a decision released Aug. 5, 2015. On Oct. 1, Allianz applied for leave to appeal with the Supreme Court of Canada. Canada’s highest court announced Jan. 22, 2016 that all materials on application for leave have been submitted. The B.C. Court of Appeal ruled against Acciona when it cross-appealed the decision not to award it $4.05 million in increased subcontractor costs.

In 2014, Justice Skolrood found that the over-deflection, cracking and bending constituted “direct physical loss of or damage to the property insured” within the meaning of the clause describing the perils insured.

Related: Constructing Liability

The insurance policy had a clause excluding “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.”

The policy states: “For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan or specification.”

That exclusionary language was developed by the London Engineering Group (LEG). That and other LEG exclusions were the subject of a presentation October 8 at the 42nd Annual Engineering Insurance Conference, part of the Canadian Boiler & Machinery Underwriters Association (CB&MUA).

At the time, there had been “little interpretation in the courts as to what is the meaning of” the LEG 1, 2 and 3 exclusion clauses, said Dan Boan, a partner with the construction and public-private infrastructure projects sector group of Borden Ladner Gervais, at AEIC.

In Acciona, the B.C. Court of Appeal “emphasized that the slabs were not the defective workmanship,” Boan said at the time. “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.”

When he ruled mostly in favour of Acciona in 2014, Justice Skolrood cited the Supreme Court of Canada ruling, released in 2010, in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada.

Related: Faulty Powers

“In Progressive Homes, the Supreme Court [of Canada] rejected the argument advanced by the insurer that loss resulting from faulty workmanship can never be an accident or be fortuitous,” Justice Skolrood wrote in ALJV. “Rather, the Court found that loss flowing from negligent conduct may be characterized as accidental depending upon the specific facts. While the Court was considering a commercial general liability policy that had an express requirement that the loss be accidental, it noted that the concept of fortuity is built into the definition of ‘accident.'”

Progressive Homes had been sued by the B.C. Housing Commission, which alleged that four condominium developments had water damage due to defects. In 2007, Mr. Justice Bruce Cohen of the B.C. Supreme Court ruled that Lombard did not owe a duty to defend Progressive Homes under its CGL policy. That ruling was upheld on appeal, in a divided ruling.

It was overturned by the Supreme Court of Canada, in a unanimous ruling released in September, 2010. Canada’s highest court saw “no impediment” to ruling that defective workmanship could be an accident “unless of course it is not supported by the specific language of the policy,” wrote Mr. Justice Marshall Rothstein of the Supreme Court of Canada.

“Fortuity is built into the definition of ‘accident’ itself as the insured is required to show that the damage was ‘neither expected nor intended from the standpoint of the Insured,'” Justice Rothstein wrote in Progressive Homes, adding that an “accident is “an unlooked-for mishap or an untoward event which is not expected or designed.”