The scope and interpretation of faulty workmanship exclusions in multi-peril policies

May 12, 2020 | Debra Curcio Lister, Mark Puszczak

In Condominium Corporation No. 9312374 v Aviva Insurance Company of Canada, 2020 ABCA 166, the appellant condominium corporation (the “Corporation”), had engaged a contractor and an engineer to provide rehabilitation and maintenance work with respect to the parkade area in its condominium complex.

The scope of work specifically involved the repair and remediation of the parkade membrane, which required that the contractor and engineer cut into the membrane of the parkade surface. However, in carrying out the work the contractor and engineer cut too deeply into the parkade slab, causing damage to the parkade’s structural integrity.

The Corporation held a multi-peril policy of insurance with the respondent insurer, Aviva (the “Policy”), which contained a clause excluding coverage for “the cost of making good […] faulty or improper workmanship.” The exclusion clause also contained an exception which clarified, “This exclusion does not apply to loss or damage caused directly by a resultant peril not otherwise excluded in Coverage A of Section I.”

When the Corporation sought indemnification under the Policy for the repair of the structural damage, the insurer denied coverage on the basis of the faulty workmanship exclusion.

Lower Court Decisions

On the first hearing of the matter, a Master of the Alberta Court of Queen’s Bench held that the damage to the structural integrity of the parkade was covered under the Policy. On appeal to a chambers judge, the Master’s decision was overturned and it was held that the damage to the structural integrity of the parking structure was not a “resultant peril” within the meaning of the exception to the exclusion. The trial judge’s decision was then appealed by the Corporation.

Court of Appeal Decision

The Alberta Court of Appeal overturned the trial judge’s decision and held that the structural damage to the parkade fell within the exception to the faulty workmanship exclusion, thereby bringing it within the coverage under the Policy.

A central aspect of the appeal was the applicability of the analytical framework set out in the Supreme Court of Canada’s 2016 decision in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC 37 (Ledcor). While the Corporation argued that Ledcor provided the operative interpretive framework in the matter before the Court, Aviva argued that Ledcor was distinguishable as it dealt with the interpretation of faulty workmanship exclusions in builders’ all-risk policies (as opposed to all-risk property policies), and that the language in the policy before the Court differed from that at issue in Ledcor.

The Court began by observing that the Ledcor framework need only apply if the provision in question is ambiguous. As the Policy provided no definition of the term “resultant peril,” the Court found both the exclusion and the exception contained the requisite ambiguity, which it sought to resolve by the application of the following principles of interpretation (as set out in the Supreme Court of Canada decision in Progressive Homes Ltd. v Lombard General Insurance Co. of Canada, 2010 SCC33, and adopted in Ledcor):

  • The interpretation should be consistent with the reasonable expectations of the parties, so long as that interpretation is supported by the language of the policy;
  • The interpretation should not create an unrealistic result; but rather a result consistent with the commercial reality existing;
  • If ambiguity remains, contra proferentum can be employed to construe the policy against the insurer who drafted the policy;
  • A corollary to the contra proferentum rule is that coverage provisions in insurance policies are to be interpreted broadly, and exclusions interpreted narrowly; and
  • The insured has the onus of establishing that the loss or damage falls within the coverage provided by the policy. If there is coverage, the insurer has the onus of establishing that an exclusion applies. If the insurer is successful in doing so, the onus shifts back to the insured to show that the loss or damage falls within an exception to the exclusion.

Drawing from Ledcor, the Court noted that the purpose of a policy of insurance can inform the parties’ reasonable expectations thereunder, then observed that multi-peril or all-risk policies share a similar purpose with builders’ risk policies, that being to provide broad coverage for fortuitous loss or damage, as well as affording the insured certainty, stability and peace of mind.

In discussing the faulty workmanship exclusion, the Court pointed to the rationale underlying such exclusions generally being that while insurers may be prepared to insure risks relating to problems caused by faulty workmanship, they are not prepared to insure the quality of the workmanship itself.

The Court then observed that the cost of making good faulty or improper workmanship is informed by the scope of the work contracted for and, as a result, that the consideration of what constitutes faulty or improper workmanship is limited to the scope of the contract in question (in this case, that being remediation and repair work to the parkade membrane).

In addressing the wording of the exclusion clause and exception, the Court rejected Aviva’s interpretation that faulty workmanship having given rise to a resultant peril was insufficient to come within the coverage (instead suggesting that the faulty workmanship must cause a second, resultant peril which causes separate, distinct damage in order to come within the exception), which it construed as drawing a distinction between a peril and damage. The Court criticized this argument as an attempt to “parse certain words to ground [Aviva’s] argument that the correct interpretation of the exception in the policy […] must involve different occurrences.”

Instead, the Court looked to Black’s Law Dictionary to distill a meaning of the term “resultant peril,” and, in doing so, found the term to mean a “consequence that causes a risk of loss to person or property.” From this definition, the Court reasoned that the resultant peril in question was the loss of structural integrity of the parkade, or the risk of structural collapse.

This interpretation provided that the structural integrity damage, as a resultant peril, was captured by the exception and the Policy coverage as a result. The Court found that this conclusion was consistent with commercial reality as well as with other jurisprudence regarding the interpretation of faulty workmanship clauses in insurance contracts, while still providing that the cost of making good the faulty workmanship, a sum of some $500,000.00, fell under the exclusion clause and was not covered by the Policy.

Although it reached this conclusion without resort to the principle of contra proferentum, the Court did note that the result would have been the same had it done so.

Conclusion

The key takeaways from the Court of Appeal decision for insurers and insurance practitioners are threefold:

  • The Court of Appeal’s approach to the matter confirms that the Ledcor framework is not confined in its application to faulty workmanship clauses in builders’ risk policies. On account of the parallels drawn by the Court, it may be expected that the analysis in Ledcor can be extended to multi-peril and all-risk policies of insurance as well.
  • The Court of Appeal’s decision serves as a recent affirmation of the relevant principles which are to be applied in the resolution of ambiguous insurance contracts provisions.
  • The result reached by the Court of Appeal also serves as an indication of courts’ inclination to limit the scope of faulty workmanship exclusion clauses. As a result, it may be expected that if an insurer intends to exclude coverage for faulty workmanship and any risk of loss which faulty workmanship creates, they would likely need to employ very clear policy language beyond that which was under consideration in this case in order to do so.

Disclaimer

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