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Multi-Risk Policies and Finding Coverage for the Consequences of Faulty Workmanship

December 14, 2020

The extent to which the “faulty workmanship” exclusion operates to remove from coverage damage closely related to such work has long vexed insurers, policyholders and the courts. Earlier this year, the Alberta Court of Appeal considered such an issue in Condominium Corporation No. 9312374 v Aviva Insurance Company of Canada, 2020 ABCA 166. At issue was whether structural damage caused by a contractor was covered under a multi-peril insurance policy that excluded coverage for faulty workmanship.

The facts of the case were relatively straightforward. The plaintiff, Condominium Corporation No. 9312374 (the “Condo Corp.”), contracted with Durwest Construction Systems Alberta Limited (“Durwest”) and Williams Engineering Canada Inc. (“Williams”) to rehabilitate and perform maintenance work on the surface of the parkade in the condominium complex. Under the contract, Durwest and Williams were to repair and remediate the membrane of the parkade. Although that work involved cutting into the parkade membrane, it was expressly stated not to include any work that would impact the structural integrity of the concrete slab. Nevertheless, in the course of completing the project, Durwest and Williams cut too deeply into the concrete slab, causing damage to the structural integrity of the parkade (the “Property Damage”).

At the time the Property Damage occurred, the Condo Corp. was insured under a multi-peril policy of insurance (the “Policy”) issued by Aviva Insurance Company of Canada (“Aviva”). The Policy specified that “Coverage A of section I insures, except as otherwise provided, against all risks of direct physical loss or damage to the insured property”, but also contained the following exclusion:

Exclusions …

G. Other Excluded Losses

Coverage A of Section I does not insure:

(b)  the cost of making good:

(i)   faulty or improper material;

(ii)  faulty or improper workmanship;

(iii) faulty or improper design.

This exclusion does not apply to loss or damage caused directly by a resultant peril not otherwise excluded in Coverage A of Section I.

Aviva denied the Condo Corp.’s claim for indemnity under the Policy on the grounds that the Property Damage came within the above-referenced “faulty workmanship” exclusion and was not saved by the exception to the exclusion. While it was undisputed that the cost to make good the repair and remediation work to the membrane was caught by the exclusion, the parties disagreed on whether  the structural damage caused by the cut into the parkade slab should be covered by the Policy.

Aviva and the Condo Corp. agreed to seek a determination of the coverage issue by way of summary trial based on an agreed statement of facts. A master of the Alberta Court of Queen’s Bench found that the Property Damage was covered by the Policy. Aviva’s appeal of that decision was successful, with a judge concluding that that the Property Damage was the result of faulty workmanship, an excluded peril. The Condo Corp. then appealed that decision to the Alberta Court of Appeal.

One of the issues before the court was whether the interpretive framework set out by the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (“Ledcor”) ought to apply to govern. Pursuant to that framework, where the policy language is ambiguous, general rules of contract construction must be employed to resolve that ambiguity in a manner consistent with the reasonable expectations of the parties, so long as that interpretation is supported by the language of the policy. It is only where ambiguity still remains after the above principles are applied that the contra proferentem rule be employed to construe the policy against the insurer, with the corollary of that rule being that coverage provisions in insurance policies are interpreted broadly and exclusion clauses narrowly.

Aviva took the position that the principles of interpretation set out in Ledcor had been articulated in the context of a builder’s risk contract of insurance and ought not to apply to the Policy. The court rejected this argument and held that these principles applied equally to the interpretation of a multi-risk policy of insurance such as the one before it. The purpose of the Policy was held to be the same as that of a builder’s risk policy, namely to provide broad coverage for fortuitous loss or damage and to provide the insured with certainty, stability and peace of mind.

The court went on to find that both the faulty workmanship exclusion clause and the exception to this exclusion in the Policy were ambiguous because the term “resultant peril” contained in the exception for “loss and damage caused directly by the resultant peril” was not defined in the Policy. Those words were interpreted to mean a “consequence that causes a risk of loss to person or property.”

According to the court, the loss of structural integrity to the parkade itself did not constitute faulty workmanship, but rather was a resultant peril within the meaning of the exception to the exclusion in the Policy.  On this point, the court looked specifically to the scope of work under which Durwest and Williams had completed the project, noting that it specifically excluded work that would impact the parkade’s structural integrity. On this reasoning, repair costs associated with Property Damage that formed direct part of the scope of work constituted faulty workmanship and were excluded, but Property Damage that resulted from faulty workmanship but itself outside of the scope of work were entitled to coverage. Such a finding was held to be a commercially sensible result that met the parties’ reasonable expectations of broad coverage for fortuitous or unexpected loss and damage.

The above decision suggests that the interpretative framework established in Ledcor should be used to resolve any ambiguity in a multi-peril insurance policy of insurance. As to whether the consequences of a contractor’s faulty workmanship will be covered in a particular case, both the wording of the “faulty workmanship” exclusion and the contractor’s scope of work will need to be carefully considered.

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