In its recent decision in Monk v. Farmers’ Mutual Insurance Company (Lindsay), the Ontario Court of Appeal has held that the exclusion for faulty materials or workmanship in an owner’s property insurance contract does not exclude the insured’s right to recover the resulting damage that the faulty materials or workmanship has caused.
This is a significant decision because owner’s insurance policies often contain an express exception for resulting damage arising from faulty materials or workmanship. The Court of Appeal has held that this exception may be read into the exclusion for faulty materials or workmanship itself.
The policy contained the following relevant provisions:
We do not insure: 2. the cost of making good faulty material or workmanship;
We do not insure loss or damage to: 4. Property (ii) while being worked on, where the damage results from such process or work (but resulting damage to other insured property is covered);
The Claim And Lower Court Decision
Monk made a claim under an insurance policy issued by Farmers for damage caused by a contractor during work on the exterior of her home. Farmers asserted that the claim was excluded under the “faulty workmanship” and “property being worked on” exclusions in the policy.
A motion was brought to interpret the policy. The motion judge held that the “faulty workmanship” provision excluded damage caused both directly and indirectly by the contractor. Although the “property being worked on” exclusion preserved coverage for indirect “resulting damage”, the motion judge held that it was “trumped” by the general “faulty workmanship” provision. The motion judge granted summary judgment to Farmers and dismissed Monk’s claim.
The Court of Appeal’s decision
The Court of Appeal reversed the lower court decision. It held that, on a proper interpretation of the “faulty material or workmanship” clause, that clause did not exclude resultant damage. It arrived at that conclusion by the following reasoning:
- Based on general principles of contract interpretation, an exclusion clause should be narrowly construed. It was not obvious that a clause excluding the cost of making good faulty workmanship precludes coverage for resulting damage. The court said:
“Insurers draft insurance policies knowing that exclusions of coverage will be interpreted narrowly and that ambiguity will be resolved in favour of the insured party. If an insurer wants to exclude particular coverage, especially for something as well-known as resulting damage, it should do so specifically rather than by implication”.
- While the motion judge considered it significant that “faulty workmanship” exclusions in insurance policies typically include an exception for resulting damage, this fact was “irrelevant to the proper interpretation of this insurance contract.”
- An interpretation of “faulty workmanship” that denies coverage for resulting damage is an “overly broad interpretation of the exclusion clause”. The Court of Appeal considered that the proper interpretation of that clause only excludes direct damage and not the resulting damage flowing from faulty workmanship. The Court of Appeal said:
“ It is not a matter of reading an exception into the exclusion, as the respondents submitted; it is a matter of interpreting the “faulty workmanship” exclusion narrowly in accordance with established principle.”
- The motion judge’s interpretation of the “faulty workmanship” exclusion resulted in an inconsistency or conflict with the ”property being worked on” exclusion. The former would exclude resulting damage from coverage, while the latter would include it within coverage. The motion judge solved that conflict by having the former clause over-ride the latter. This approach was wrong on a number of accounts. It did not resolve the ambiguity between the two clauses in favour of the insured, and it did not attempt to give meaning to both clauses, as it ought to have.
This decision will provide considerable guidance in the interpretation of owner’s insurance policies applicable to building projects. Normally, Builders’ Risk policies contain a “faulty material or workmanship” exclusion and a “resulting damage” exception to that exclusion. But the present case holds that the exclusion itself should be interpreted to not exclude resulting damage, at least if the exclusion is worded as the one in this case was worded.
It may be argued that this decision was due to the existence of the “property being worked on” exclusion in the policy, and the resulting damage exception in that exclusion. The contrary argument will be that the court’s conclusion was based upon its narrow interpretation of the faulty workmanship exclusion, and its reference to the “property worked on” exclusion was a supporting consideration.
See Heintzman and Goldsmith on Canadian Building Contracts, chapter 14, part 3(b0(ii)
Monk v. Farmers’ Mutual Insurance Company (Lindsay), 2015 ONCA 911,
Insurance – Exception for faulty workmanship or material – Exception for resulting damage
Thomas G. Heintzman O.C., Q.C., FCIArb September 5, 2016
This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.