The application of faulty workmanship exclusions continues to be a subject of disagreement among judges, a Court of Appeal of Alberta ruling from last week shows.
The Court of Appeal of Alberta recently found that if a construction contractor causes damage that is outside its scope of work with the building owner, that damage might be covered, even if that’s not what the insurer intended.
Moreover, failing to define “resultant peril” can be a problem for the insurer.
In 2011, Condominium Corporation No. 9312374 contracted with two firms, an engineering company and a waterproofing and restoration contractor, to work on the surface of the parkade area of the condo complex. A contractor cut too deeply into the concrete slab, causing damage to its structural integrity.
Lawsuits against the contractors were settled, but the settlement did not cover the full cost of the loss. To recover the difference, the condo corporation made a claim with Aviva. The claim was denied due to the faulty workmanship exclusion.
Aviva wrote a multi-peril policy covering the condo corporation and the condo owners. It was not a builder’s risk policy, so it did not cover construction contractors doing restoration work.
Aviva relied on an exclusion to the cost of making good any losses caused by faulty or improper material; faulty or improper workmanship; and faulty or improper design. That exclusion has an exception for “loss or damage caused directly by a resultant peril” not otherwise excluded by the policy.
The claimant argued the exclusion applied to the work that the contractor was hired to do, not damage to the structural integrity of the parkade. The condo corporation cited the Supreme court of Canada’s 2016 ruling in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. against several insurers covering an all risks policy for an office building under construction in Edmonton.
In Ledcor, the building incurred damage to windows during cleaning. In restoring a 2013 Alberta Court of Queen’s Bench ruling, the Supreme Court of Canada noted the construction project’s insurers did not undertake to cover the “cost of making good faulty workmanship.” But those insurers did agree to cover physical damage results from that faulty workmanship, the court ruled.
Alberta Court of Queen’s Bench Justice Robert Hall initially found in 2018 that Ledcor is distinguishable from the circumstances of Condominium Corporation No 9312374.
This is because in Ledcor, unlike in Condominium Corporation No 9312374, the coverage dispute involved a builder’s risk or course of construction insurance policy. By contrast, the policy Aviva wrote for Condominium Corporation No 9312374 was an all-perils policy that covered the condo corporation and individual condo unit owners, but not a specific construction project. In Ledcor, the contractors were insured.
In Aviva’s case involving the condo and the parkade, there is an exception to the exclusion if damage was caused by a “resultant peril not otherwise excluded,” noted Justice Hall.
“So, for example, if the faulty workmanship caused a fire, damages arising from faulty workmanship which caused the insured peril of fire would be covered by the policy by virtue of the exception to the exclusion. However, if no insured (i.e. not excluded) peril occurs, then the exception to the exclusion does not apply.”
But in its 2020 ruling, Alberta’s appeal court found the policy language was ambiguous, meaning that the court should look to the “reasonable expectations” of both the claimant and the insurer.
The policy Aviva wrote for Condominium Corporation No. 9312374 does not actually define “resultant peril” in the exception to the exclusion for faulty workmanship, the appeal court found.
“The Supreme Court of Canada in Ledcor canvassed a selection of faulty workmanship cases and concluded that an interpretation of a faulty workmanship clause that limits the scope of the exclusion to the cost of redoing the faulty work was consistent with the established case law,” the appeal court wrote.
The Alberta Court of Appeal in Condominium Corporation No. 9312374 also cited the Court of Appeal for Ontario’s 2019 ruling in Monk v. Farmers’ Mutual Insurance Company (Lindsay).
Monk was a home insurance coverage dispute that arose in 2008 when Diana Monk hired a contractor to restore the exterior of her home. The work included cleaning, grinding, sanding and finishing the log exterior. Monk discovered damage to various parts of the home. She ultimately lost the coverage dispute but not over the exclusions. As it turned out, Monk and her broker disagreed over exactly when she filed her claim, with a judge ruling she first reported the loss in 2011 (agreeing with the brokerage) and not 2009, when Monk says she first told the brokerage about the loss.
Monk cross-appealed the trial judge’s finding on the exclusions, even though the trial judge ruled the claimant was too late reporting her loss. Had the Ontario Superior Court of Justice agreed that Monk filed her claim within two years, the insurer would have had to pay despite the exclusions. One was for “the cost of making good faulty material or workmanship. The other was for property “while being worked on, where the damage results from such process or work (but resulting damage to other insured property is covered).”
Monk’s contractor was hired to restore the exterior of logs and board and the batten structure using a wood restoration system, but not to install carpets, replace windows, doors, exterior fixtures or thermal pane glass units, the Ontario Superior Court of Justice found in Monk’s coverage dispute, a finding that was upheld on appeal.
“Like the Supreme Court of Canada in Ledcor, the Court in Monk (2019) concluded that the faulty workmanship exclusion applied only to the cost of redoing the faulty work originally contracted for; any “resulting damage” was covered,” the Alberta Court of Appeal wrote in Condominium Corporation No. 9312374.
In Condominium Corporation No. 9312374, the condo corporation had an agreement with its contractors in which the scope of work did not include any work that would impact the structural integrity of the concrete slab, the Alberta Court of Appeal noted.
“Therefore, the consideration of what constitutes faulty or improper workmanship is limited to the scope of the contract — that is, remediation and repair work to the parkade membrane.”
The unanimous ruling was made by appeal court justices Frederica Schutz, Dawn Pentelechuk and Rita Khullar.