The Alberta Court of Appeal recently considered whether the cost to correct structural damage caused by a contractor was covered by a multi-peril insurance policy that excluded coverage for faulty workmanship.
In Condominium Corporation No. 9312374 v Aviva Insurance Company of Canada, 2020 ABCA 166 [Aviva], the Alberta Court of Appeal held that the framework for interpretation of ambiguous builders’ risks insurance policies in Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC 37 [Ledcor] also applies to ambiguous multi-peril insurance policies. Where a policy is ambiguous, a court must interpret it in light of the parties’ reasonable expectations as informed by the policy’s purpose and commercial reality. Ultimately, whether particular remediation costs are covered or excluded will depend on the outcome of the analysis set out in Ledcor and Aviva and on the scope of work in the construction contract.
The dispute in Aviva centred around an agreement between the Plaintiff, Condominium Corporation No. 9312374 (the “Owner”), Durwest Construction Systems Alberta Limited (“Durwest”) and Williams Engineering Canada Inc. (“Williams”) to rehabilitate and perform maintenance work on the surface of the Owner’s parkade. The work performed by Durwest and Williams compromised the structural integrity of the parkade.
The contract between the Owner and Durwest and Williams specified that they were to repair and remediate the parkade membrane only and were not to perform work that would impact the structural integrity of the concrete slab. On June 11, 2011, Durwest and Williams cut too deeply into the parkade slab while performing work on the parkade membrane, which caused damage to the structural integrity of the parkade (the “Property Damage”).
At the time the Property Damage occurred, the Owner was insured by Aviva Insurance Company of Canada (the “Insurer”) under a multi-peril insurance contract (the “Policy”). The Policy provided broad coverage to the Owner against all risks of direct physical loss or damage to the Owner’s condominium complex. The Insurer denied the Owner coverage for the cost of remediating the Property Damage on the basis of 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.
The Policy also provided that “Coverage A of section I insures, except as otherwise provided, against all risks of direct physical loss of or damage to the insured property.” The Insurer denied coverage on the basis that the Property Damage was attributable to faulty workmanship and was, therefore, caught by the above exclusion, and the exception to the exclusion did not apply.
The Aviva decision arose from an agreement between the Owner and Insurer to seek a determination of whether the Insurer was obligated to cover the cost of repairing the Property Damage on the basis of an Agreed Statement of Facts.
Lower Court Decisions
The Owner was successful at first instance, when a Master summarily decided in an unreported decision that “property damage” (as defined in the Owner’s Statement of Claim) attracted coverage under the Policy. A Justice of the Alberta Court of Queen’s Bench overturned the Master’s decision on the basis that the Property Damage was not a resultant insured peril but rather a result of an excluded peril – faulty workmanship. In doing so, the Justice distinguished Ledcor, partially on the basis that the Policy was an all-risks property insurance policy rather than the builders’ risk policy that was at issue in Ledcor. Further, the lower court held as follows at paras 32 – 33:
In Ledcor, the policy talked of property damage not otherwise excluded, calling it resulting damage. It made no reference to the perils insured against.
In the case before me, however, the exception to the exclusion is that the faulty workmanship exclusion does not apply to loss or damage caused by a resultant peril not otherwise excluded; that is to say, loss or damage caused by an otherwise insured peril. 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 (ie not excluded) peril occurs, then the exception to the exclusion does not apply.
The Alberta Court of Appeal reversed the lower court’s appellate decision. In doing so, it reviewed the facts in Ledcor and held that since the wording of the Policy was ambiguous, the Alberta Court of Appeal would apply the interpretive framework set out in Ledcor to resolve the ambiguity, notwithstanding that the Policy was an multi-peril insurance policy rather than a builders’ risk policy. The Alberta Court of Appeal held that both the faulty workmanship exclusion clause and the exception to this exclusion in the Policy were ambiguous because “resultant peril” as found in the exception for “loss and damage caused directly by the resultant peril” was not defined in the Policy.
In particular, the Alberta Court of Appeal held that that the principles of insurance contract interpretation set out in Ledcor applied, such that its interpretation of the Policy must be consistent with the reasonable expectations of the parties and commercial reality.
The parties’ Agreed Statement of Facts contained no information to inform the factual matrix, which would allow the Alberta Court of Appeal to determine the reasonable expectations of the parties. Accordingly, the Alberta Court of Appeal adopted the holding of the Supreme Court of Canada in Ledcor, which had determined that the purpose of builders’ risk policies is to provide broad coverage for fortuitous loss or damage, affording the policyholders certainty, stability and peace of mind. The purpose of the Policy was, therefore, held to be the same as the purpose of the builders’ risk policies considered in Ledcor.
Decision on Coverage
Ultimately, the Alberta Court of Appeal held in Aviva that the cost of making good the Property Damage was covered by the Policy. The Alberta Court of Appeal found that these remediation costs were covered because the parties reasonably expected that while the cost of making good faulty or improper workmanship within the scope of work contracted for would be excluded, the consequences of faulty workmanship could be covered by the Policy. In the course of its analysis, the Alberta Court of Appeal adopted a principle set out by the Court of Appeal for Ontario in Monk v Farmers’ Mutual Insurance Company (Lindsay), 2019 ONCA 616 at para 46:
…A homeowner expects to be covered for unexpected or resulting damages which are not directly related to the scope of his or her contract with a contractor. In the circumstances, a homeowner who purchases an all risk policy should be entitled to expect that the exclusion for faulty workmanship or for property while being worked on will be interpreted narrowly and the exception for resulting damage will receive a broad interpretation.
As such, while it was undisputed that the Policy did not cover the cost to make good faulty workmanship by Durwest or Williams, whether the repair cost of the Property Damage that was the result of faulty workmanship fell within the Policy was informed by Durwest and Williams’ scope of work. If the Property Damage was a direct part of the scope of work, it would constitute faulty workmanship and the repair cost would not be covered; but if the Property Damage resulted from faulty workmanship but was itself outside of the scope of work, the repair cost would be covered. The scope of work in this case was easy to determine: Durwest and Williams were to remediate and perform maintenance on the parkade membrane only and were not to cut into the slab. As such, it was uncontested that the cost to make good the repair and remediation work to the membrane was not covered by the Policy because it fell within the faulty work exclusion. In contrast, the Owner and the Insurer disagreed as to whether, as an insured peril, the structural damage caused by the cut into the parkade slab would be covered by the Policy.
To exclude the Property Damage repair cost from coverage, the Alberta Court of Appeal would have had to hold that the cost to make good the Property Damage was both excluded as faulty workmanship and outside of the exception to the faulty workmanship exclusion for “loss or damage caused directly by a resultant peril” not otherwise excluded.
However, since the Policy did not define “resultant peril,” the Alberta Court of Appeal interpreted that term to mean a “consequence that causes a risk of loss to person or property.” The risk to property resulting from the Property Damage was the possibility that the loss of structural integrity of the parkade could cause a collapse. As such, although it was faulty workmanship that caused the loss of the parkade’s structural integrity, since the loss of structural integrity was not faulty workmanship in and of itself, as informed by the scope of work, the Alberta Court of Appeal held that the cost to make good the damage to the parkade slab was covered by the Policy. This result was commercially sensible because it fulfilled the parties’ reasonable expectations that the Policy would provide broad coverage for fortuitous or unexpected loss and damage – the loss of the parkade’s structural integrity – without indemnifying Durwest and Williams for their faulty rehabilitation and maintenance of the parkade membrane.
The significance of this case is two-fold:
- the Alberta courts will apply the interpretation framework set out in Ledcor to both ambiguous builders’ risks insurance contracts and multi-peril insurance contracts; and
- the exclusion for faulty workmanship in insurance contracts may not apply to exclude the consequences of faulty workmanship, depending on the scope of work in issue.
Accordingly, when assessing the extent of a property owner’s insurance coverage in the context of damage during a construction project, it is important to carefully review the exclusions in the owner’s insurance policy and the exceptions to those exclusions in the context of the contractor’s scope of work.