Breach Of Covenant To Obtain Fire Insurance Coverage For Another Party Means No Claim May Be Made Against That Party: Ontario Court Of Appeal

Those involved in building projects should always be alert to court decisions dealing with insurance, or insurance clauses in contracts, even if those contracts are not building contracts. Those decisions will inevitably impact the interpretation of insurance clauses in building contracts.

So the decision of the Ontario Court of Appeal in Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc., (2016), 130 O.R. (3d) 2016 ONCA 246 should be noted by those involved in the building industry and construction law. In a landlord-tenant setting, the court held that when a tenant covenanted in the lease to obtain fire insurance covering the tenant’s property in which the owner would be named as an additional insured, and failed to obtain insurance in which the landlord was so named, the tenant and its insurer could not recover against the landlord even though the fire was caused by a contractor hired by the landlord.

Changing landlord, tenant and contractor to owner, contractor and subcontractor, the same result would likely apply in the building contract setting.


The lease required the tenant to obtain insurance against all risks of loss or damage to the tenant’s property. If fire insurance was not provided by that insurance, the tenant was required to carry insurance against the risk of damage to its property caused by fire. The lease also required the tenant to include the landlord as an additional insured on the liability and property damage policies. In the lease, the landlord indemnified the tenant for damage arising from the act, default or negligence of the landlord, its agents, contractors and others, and the tenant indemnified the landlord in similar language. The property damage insurance obtained by the tenant did not name the landlord as an additional insured.

A welding contractor engaged by the landlord caused a fire while working at the premises, causing damage to the tenant’s property and business. The limits of the tenant’s property damage insurance policy did not cover the tenant’s losses. The tenant sued the landlord to recover its property and business losses. It sought to recover both the subrogated losses and the uninsured losses.

The motion judge granted summary judgment against the landlord. The landlord’s appeal was allowed by the Court of Appeal.

Decision of the Ontario Court of Appeal

The Court of Appeal held that, by agreeing to obtain insurance against “All Risks of loss or damage to the Tenant’s property” and “against the risk of damage to the tenant’s property within the Premises caused by fire”, the tenant assumed the risk of loss or damage to its own property caused by fire. That covenant relieved the landlord from liability for that loss or damage, even if caused by the landlord’s negligence, unless the lease elsewhere provided to the contrary. The lease did not provide elsewhere to the contrary. The court concluded:

“Here, the parties specifically agreed that the tenant would insure against the risk of loss or damage to its property by fire. That is the very risk that materialized. No coverage exclusion applied under the Lumbermen’s policy and the tenant’s claim was paid to the extent of the policy limits. The fact that, as it happens, the tenant was underinsured for this risk does not mean that its failure to obtain full protective coverage can be laid at the landlord’s door.”

The Court of Appeal also held that the tenant’s failure to obtain insurance, which named the landlord as an additional insured barred its subrogated claim against the landlord, for two reasons.

First, as already found, the tenant had assumed the relevant risk so the tenant’s insurer could be in no better position.

Second, the tenant’s covenant to add the landlord as an additional insured, if honoured, would have barred a subrogated claim by the tenant’s insurer since an insurer cannot sue another insured under the same policy. The court said:

“The tenant’s insurer can be in no better position than that of the tenant itself….where, as here, the risk of loss or damage by a specific peril passes to one contracting party under the terms of its insurance covenant, there is no basis for the covenantor’s insurer to assert a subrogated claim against the beneficiary of the covenant. Simply put, because the covenantor (in this case, the tenant) has contractually assumed the risk of liability for loss or damage caused by a specific peril, neither it nor its insurer can seek to recover for loss or damage caused by that peril from the beneficiary of the insurance covenant (in this case, the landlord). Further, had the tenant complied with its s. 8(5) obligation to have the landlord named as an additional insured on its property damage insurance policy, no right of subrogation for the tenant’s property loss or damage due to fire would arise. An insurer cannot assert a subrogated claim against its own insured…”

Finally, the Court of Appeal held that the covenant whereby the landlord indemnified the tenant did not over-ride the insurance clause, but only applied in the event that the insurance to be obtained by the tenant did not cover the loss. Referring to the approach taken by a judge in a previous decision, the court said:

“Applied to the facts of this case, this interpretive approach gives meaning to all the challenged provisions of the lease. It holds the tenant to its contractual bargain under the tenant’s insurance covenants to assume responsibility for the risk of loss or damage to its own property caused by fire and requires the landlord to indemnify the tenant under the landlord’s indemnity covenant for those types of risks against which the tenant is not required to insure. It also ensures that, under the immunity provision, the landlord is not exposed to negligence claims where the tenant has agreed to insure against an underlying risk, such as fire… “


In this decision, the Ontario Court of Appeal has followed and applied previous decisions of that court and the Supreme Court of Canada holding that an insurance clause in a contract, requiring one party to take out insurance, necessarily places the risk of loss specified in that insurance clause on the party required to take out that insurance. Neither that party nor its insurer may then sue the other party for that loss. That result flows from contract law.

And if the insurance clause requires that party to name the other party as an insured in the policy, that is icing on the cake. Due to the principles of subrogation, the insurer cannot sue the other party. That result flows from insurance law.

Perhaps the most interesting aspect of this decision is its resolution of the conflict or tension between the insurance clause and the indemnity clause in the lease. On their face, these clauses seem totally at odds with each other. But then the principles of contract interpretation swing into play. A way must be found to reconcile these seemingly opposing paragraphs. And the court has said that the way to do so is to allow the insurance clause to operate within the coverage that the insurance clause says the party obtaining it is to secure, and to allow the indemnity clause to operate outside that coverage.

Insurance clauses and the impact of a failure to obtain insurance conforming to that clause in the context of construction projects, were discussed by me in previous articles dated February 20, 2012 and June 24, 2012.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., Chapter 14, parts 7and 8.

Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc, (2016), 130 O.R. (3d) 2016 ONCA 246

Insurance – insurance clauses – subrogation – indemnity clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 29, 2017

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.


Faulty Workmanship Exclusion In A Builders’ Risk Policy Excludes Only The Cost Of Re-Doing The Faulty Work: Supreme Court Of Canada

In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, the Supreme Court of Canada has issued a definitive decision about the scope of the “faulty workmanship” exclusion in Builders’ Risk insurance policies. The Supreme Court has held that the clause only excludes coverage for the cost of re-doing the faulty work, and does not exclude the cost of repairing the damaged work.

In this landmark decision, the Supreme Court has set at rest the ongoing debate about the proper interpretation of this clause, a debate which has embroiled the construction and insurance industries for many years.


During the construction of a building, the windows which had been installed were dirtied. Before the project was completed, the owner hired cleaners to clean the windows. Because the cleaners used improper tools and methods, they scratched the windows. The windows had to be replaced and the building’s owner and the general contractor made a claim for the replacement cost under the builders’ risk insurance policy covering the project. The insurers denied coverage, asserting that the claim fell within the policy’s exclusion for the “cost of making good faulty workmanship”.

Proceedings Below

The trial judge in Alberta held that the clause was ambiguous and applied the contra proferentem rule to find that the claim was not excluded.

The Alberta Court of Appeal reversed the trial judge’s decision. It applied a test of physical or systemic connectedness to decide if the physical damage was excluded as the “cost of making good faulty workmanship” or covered as included within the exception for “resulting damage.” The Court of Appeal concluded that the damage to the windows was excluded because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.

These decisions were reviewed by me in my articles dated December 27, 2013 and March 30, 2015.

The Supreme Court reversed the Court of Appeal’s decision and re-instated the trial judge’s decision.

The Exclusion and Exception

In the policy in question, the Exclusion for “faulty workmanship” and the Exception to that exclusion for “resulting damage” read as follows:

“This policy section does not insure:

…(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.”

The Supreme Court’s Reasoning

Justice Wagner delivered the judgment for all the judges of the Supreme Court of Canada on this issue. Justice Wagner arrived at his decision through the following reasoning:

  1. The Court of Appeal had held that the Exclusion must relate to physical damage since the policy covers physical damage. The Court of Appeal then went on to develop a new theory about how the Exclusion should be construed in light of that requirement.

The Supreme Court held that this conclusion by the Court of Appeal was wrong. The mere fact that the policy covered physical damage did not require that the exclusions also relate to physical damage. The Supreme Court pointed to several other exclusions in the policy that clearly did not relate to physical damage.

  1. There were two competing interpretations of the Exclusion. The Insureds said that only the cost of redoing the faulty work — in this case, cleaning the windows — is excluded from coverage. The Insurers said that the Exclusion covers not only the cost of redoing the faulty work, but also the cost of repairing that part of the insured property or project that is the subject of the faulty work.

On balance, and while the Supreme Court was of the view that the clause was ambiguous, the Supreme Court favoured the Insured’s interpretation, stating its reasons as follows:

“The word “damage” figures only in the exception to the Exclusion Clause; it is not included in the language setting out the exclusion itself, i.e., the “cost of making good faulty workmanship”. As such, “making good faulty workmanship” can, on its plain, ordinary and popular meaning, be construed as redoing the faulty work, and “resulting damage” can be seen as including damages resulting from such faulty work. “

  1.  Any ambiguity in the Exclusion should not, in the first instance, be resolved by reliance on the contra proferentem rule, as that is a rule of last resort. Rather, the ambiguity should be resolved by reference to the true purpose of the policy. The Supreme Court expressed its conclusion on this point as follows:

“…the purpose of these polices is to provide broad coverage for construction projects, which are singularly susceptible to accidents and errors. This broad coverage — in exchange for relatively high premiums — provides certainty, stability, and peace of mind. It ensures construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst the various contractors involved. In my view, the purpose of broad coverage in the construction context is furthered by an interpretation of the Exclusion Clause that excludes from coverage only the cost of redoing the faulty work itself — in this case, the cost of recleaning the windows.”

The Supreme Court was of the view that the Insurers’ interpretation of the Exclusion would re-introduce the very uncertainty that the insurance was intended to eliminate:

“Consequently, an interpretation of the Exclusion Clause that precludes from coverage any and all damage resulting from a contractor’s faulty workmanship merely because the damage results to that part of the project on which the contractor was working would, in my view, undermine the purpose behind builders’ risk policies. It would essentially deprive insureds of the coverage for which they contracted.

[71] In my opinion, therefore, the Insureds’ position on the meaning of the Exclusion Clause better reflects and promotes the purpose of builders’ risk policies. In the words of this Court in Commonwealth Construction, it keeps “to a minimum the difficulties . . . created by the large number of participants in a major construction project” and “recognizes the realities of industrial life” (p. 328). Their position finds additional support in some of this Court’s other comments in that case, at pp. 323-24, where it was emphasized that these policies exist to account for the fact that work of different contractors overlaps in a complex construction site and “there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole”. (underlining added)

  1. The contract between the owner and the window cleaning company was irrelevant to the proper interpretation of the insurance policy, and the Court of Appeal erred in referring to that contract in interpreting the policy. After all, the window-cleaning contract was between different parties than the policy, and was entered into years after the policy was placed.

Moreover, the fact that the cleaners’ contract provided that the cleaners accepted responsibility for its work and agreed to pay for damages arising from its work did not preclude coverage under the policy. As in the present case, insurance contracts often have deductibles or limits, and the contractor may be responsible within those features of the policy.

  1. The Court of Appeal’s new “physical and systemic connectedness test” did not solve the alleged disconnect between the policy’s coverage and the cleaners’ obligation for damages under its contract with the owner. The cleaners would be liable for collateral damage to areas where it was not working, yet there would still be coverage under the policy for this damage. In these circumstance, the Supreme Court said: “In effect, there would be dual responsibility for payment, under both the Policy and the service contract, even though, as discussed above, the Court of Appeal stated it would be artificial to draw the dividing line where such dual responsibility would result.”
  1. The Insureds’ interpretation of the policy was commercially sensible, best reflected the reasonable expectations of the parties and did not result in an unreasonable result:

“As already discussed above, the interpretation advanced by the Insureds in these appeals best fulfills the broad coverage objective underlying builders’ risk policies. These policies are commonplace on construction projects, where multiple contractors work side by side and where damage to their work or the project as a whole commonly arises from faults or defects in workmanship, materials or design. In this commercial reality, a broad scope of coverage creates certainty and economies for both insureds and insurers. In my opinion, it is commercially sensible in this context for only the cost of redoing a contractor’s faulty work to be excluded under the faulty workmanship exclusion. Such an interpretation strikes the right balance between the two undesirable extremes… “ (underlining added)

  1. The Insureds’ interpretation “did not transform the insurance policy into a construction warranty. It does not inappropriately spread risk, nor would it allow or encourage contractors to perform their work improperly or negligently.” The Supreme Court noted that the cleaners were “precluded from receiving initial payment for its faulty work and then receiving further additional payment to repair or replace its faulty work” and that the “cost of redoing faulty or improper work is excluded from coverage.”
  1. The Insurers argued that Insureds’ interpretation of the policy would create an incentive for the owner or contractor to divide up the work, in order to maximize the amount of damage that would be covered under the policy. To this suggestion, the Supreme Court said:

“With respect, I do not find this persuasive. It is premised on a theoretical concern that does not reflect the commercial reality of construction sites on the ground. In my view, it is unreasonable to expect that the owner of a property or the general contractor on a construction site will divide up work exclusively on the basis of potential coverage under their insurance policy. Many other considerations, such as costs, subcontractor expertise and the risk of delay, will likely be more relevant in deciding how to allocate work.”

  1. The Supreme Court undertook a lengthy review of the cases dealing with the Exclusion for faulty workmanship. It concluded that the case law was consistent with its present decision once the facts in each case were understood. In each case, it is necessary to determine exactly what work was undertaken by the contractor or sub-contractor whose work was allegedly faulty. The Exclusion only excludes that work. In the present case, the cleaners were responsible for cleaning the windows, not installing them. Accordingly, the Exclusion applied to the work of re-cleaning the windows, not installing replacement windows.
  1. The Supreme Court pointed out the necessity to distinguish between cases dealing with Exclusion clauses relating to “faulty workmanship” and those relating to “faulty design.” In the latter cases, a contractor’s obligation to provide the design (and therefore the scope of the Exclusion) may be much broader than would be the case for a contractor’s obligation to provide work, and the factual circumstances that have been found to fall within the Exclusion for “faulty design” are not necessarily a guide to the circumstances that fall within the Exclusion for “faulty workmanship”.
  1. Interpreting the Exclusion Clause as precluding coverage for only the cost of redoing the faulty work was consistent with the accepted approach to interpreting similar exclusions to comprehensive general liability insurance policies. These policies usually contain a “work product” or “business risk” exception, which excludes from coverage the cost of redoing the insured’s work.
  1. If the general rules of contractual interpretation had not clarified the meaning of the Exclusion clause, and the clause still remained ambiguous, then the court would have reached the same conclusion on the basis of the contra proferentem rule.

In its decision, the Supreme Court also dealt with the standard of review to be applied by an appellate court when reviewing (as in this case, by the Court of Appeal or the Supreme court of Canada) the decision of a lower court interpreting a standard form contract such as a construction contract. A majority of the Supreme Court held that the review should be conducted according to a standard of correctness, not reasonableness. This important part of the Ledcor decision will be reviewed by me in a future article.


It will take some time to digest the full ramifications and impact of this seminal decision. This article has sought to identify the ingredients in the decision as a basis for further discussion.

Clearly, the decision results in a much narrower interpretation of the ”faulty workmanship” Exclusion than insurers have been arguing for, and one that does not depend upon the “resulting damage” Exception to achieve that interpretation.

This decision requires the parties to exactly determine the scope of the defaulting contractor’s work. The “faulty workmanship” Exclusion is limited to the cost of making good that work, and not the cost of correcting damage to the subject matter of that work.

How far this decision will impact the faulty “construction materials or design” elements of the Exclusion will have to await future cases. However, the logic of the Supreme Court’s decision would seem to apply to all three elements of the Exclusion: once the defaulting contractor’s work, materials or design is determined, the Exclusion applies no further.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 14, paras. 3(b), 4(b)

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37

Insurance – Exclusions and Exceptions- Builders’ and All Risk Insurance – Exclusion for faulty workmanship

Thomas G. Heintzman O.C., Q.C., FCIArb                                     September 18, 2016


This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

Faulty Materials Or Workmanship Exclusion In Insurance Policy Does Not Exclude Resulting Damage: Ontario Court Of Appeal


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

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:

  1. 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”.

  1. 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.”
  1. 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.”

  1. 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.


Should The Interpretation Of A Standard Form Contract Be Reviewed According To A Standard Of Legal Correctness?

Construction and builders liens

In its decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court of Canada held that the interpretation of a contract should have regard to the facts surrounding the making of the contract. For this reason, the review by a court of an arbitrator‘s decision interpreting the contract should not proceed on the basis that it involves a question of law alone. Rather, the decision must be reviewed on the basis that it involves a question of mixed fact and law.

However, this approach has recently been called into question in the case of standard form contracts. In three decisions, the Ontario Court of Appeal has held that a review of a decision interpreting a standard form contract involves a question of law, not a question of mixed fact and law: MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842; Monk v. Farmer’s Mutual Insurance Company (Lindsay), 2015 ONCA 911; Daverne v. John Switzer Fuels, 2015, ONCA 919. In Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205, 265 A.C.W.S. (3d) 289, the Court of Appeal also applied the legal correctness standard, and while it acknowledged that it could do so if the contract in question was a standard form contract, it preferred to apply that standard for reasons related to the Superior Court judge’s failure to consider the whole contract.

In MacDonald, the Ontario Court of Appeal explained why a standard of legal correctness should be applied to the review of a decision interpreting a standard form contract:

  1. The parties do not negotiate standard form contracts. Accordingly, a search for the intention of the parties in the surrounding circumstances is “illusory”, or a “mere legal fiction”.
  2. The interpretation of a standard form contract is significant to more than the immediate parties to the contract. The interpretation is important to all persons who are using that standard form. It is “untenable” for the contract to have one meaning for one set of parties who use it and another meaning for another set.
  3. The precedential value of a decision interpreting the contract is also of importance to all persons using the same standard form. Conversely, it is unacceptable for the contract to be given one interpretation by one judge or arbitrator and another interpretation by another judge or arbitrator.

The decisions in Monk, Daverne and Ross-Clair referred to the MacDonald decision.

In another earlier decision, however, the Ontario Court of Appeal held, applying Sattva, that the interpretation of an insurance contract is a matter of mixed fact and law: OSPCA v. Sovereign General Insurance Company, 2015 ONCA 702. That approach has been followed by the Quebec Court of Appeal with respect to the interpretation of a CGL insurance policy, relying on both the Sattva and OSPCA decisions.


Each of these four cases involved, first, a decision by a Superior Court Judge interpreting an insurance contract (or in Ross-Clair, a construction contract with the federal government), and then a decision of the Court of Appeal reviewing that lower court decision. It is noteworthy that in OSPCA, in which a “mixed fact and law” approach was applied, the Court of Appeal dismissed the appeal. In Macdonald, Monk, Daverne and Ross-Clair, where the stricter “matter of law” approach was applied, the Court of Appeal reversed the lower court decision. In the reasons in the last four cases, the prior OSPCA decision was not referred to. One could conclude that the different approach was material in arriving at the different conclusions in these cases.

The Monk case involved an issue that is of considerable interest to the building industry. The question was whether the “faulty material or workmanship” exclusion in an owner’s insurance policy excluded, not just the cost of making good the faulty material or workmanship of the contractor doing work on the owner’s building, but also the damages resulting from that faulty material or workmanship. This distinction between “faulty material or workmanship” itself, and “resulting damage”, is a recurring issue under the Builders’ Risk policies used in the construction industry. Interesting, in Monk, the Superior Court judge held that the resulting damage was excluded by the faulty material or workmanship exclusion, while the Court of Appeal held that it was not.

The Ross-Clair decision involved a construction contract with the federal government. The Superior Court judge held that the contractor had submitted a proper claim for extras which was required to be considered by the engineer. The Court of Appeal reversed, holding that the contractor’s claim was invalid because it did not provide sufficient particulars.

It would seem that the approach of the Ontario Court of Appeal in these last four cases has broad application to contracts in the building industry. Thus the CCDC contracts which are often used between owners and contracts appear to fall within the sort of standard form contracts that the Court of Appeal was discussing.

Whether these decisions establish new rules of contract interpretation and court review remains to be seen. If they do, then, there will be two separate sets of rules: one applicable to negotiated contracts, and the other applicable to standard form contracts. Whether this is a good idea will have to be addressed by the courts in the future.

On the other hand, it may be that, since the contracts were in a standard form and there were no negotiations or other relevant surrounding circumstances, these cases involved the exception to the normal “mixed fact and law” approach to the interpretations of contracts, namely that the interpretation involves an “extricable question of law”. In Sattva, the Supreme Court of Canada held that if such an “extricable question of law” does arise from the initial decision, then the interpretation of the contract, and the review by a court, is strictly a matter of law, and not a matter of mixed fact and law. If so, then these Ontario Court of Appeal decisions do not create a new rule applicable to standard form contracts. Rather, standard form contracts fit under the Sattva decision. However, while the Court of Appeal in MacDonald referred to the “extricable question of law” exception contained in Sattva, it did not base its decision on it. Nor did the Court of Appeal in the other cases adopt that approach.

Another possibility is that the Sattva decision applies to the review of arbitral decisions and these Ontario Court of Appeal decisions apply to the review of lower court decisions. In MacDonald, the Court of Appeal alluded to that distinction but considered that, nevertheless, the guidance in Sattva “must be heeded”. And in the OSPCA decision, the court expressly applied Sattva to the review of lower court decision interpreting a contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapters 2 part 3, 11 part 11 and 14 part 3(b)(ii)

Interpretation of contracts –Review of decisions interpreting contracts –insurance– standard form contracts

Thomas G. Heintzman O.C., Q.C., FCIArb                               June 12, 2016


This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

Claims By Equipment Supplier And Consultants Fall Within All Risk Insurance Umbrella

Claims By Equipment Supplier And Consultants Fall Within All Risk Insurance Umbrella

The owner and general contractor on a building project typically provide an “insurance umbrella” for the project. That umbrella will usually be referred to in the insurance clause in their building contract. That clause will provide that the owner or contractor will take out an All Risk Insurance policy which will apply to the project. That insurance clause, and the insurance policy taken out by one of them as a result of that clause, are of vital concern to all the subcontractors and other participants in the project, as they may be sued as a result of damage occurring during the project and they will want to have protection under the insurance.

There are a number of contract law and insurance law principles that apply to this situation. Often, those principles do not all arise or are not applicable in one situation. However, recently in DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., the Ontario Superior Court applied all of those principles to arrive at the conclusion that a subcontractor, equipment supplier and consultants could not maintain third party claims because all the claims fell within the insurance umbrella.


DCMS was the owner and developer of a retirement residence. It hired a concrete forming contractor, Outspan Concrete Structure, to do the concrete forming work on the project. Outspan hired Caribbean Tower Cranes (CTC) to provide a crane and crane operator. CTC in turn hired Magna Tech to inspect the crane before and after erection at the project site. Magna Tech was owned by a Mr. Perri. Magna Tech in turn hired a professional engineer, Lee, to review and supervise the inspection reports.

During the project, the crane fell onto and significantly damaged the partially completed residence.

The contract between DCMS and Outspan stated the following regarding the “All Risk Property Insurance” which DCMS was to take out and maintain during the project:

“All Risks Property Insurance, subject to the exclusions of the policy, against all risks of physical loss or damage occurring, including but not restricted to: earthquake, flood and will cover all materials, property, structures and equipment purchased for, entering into, or forming part of the work while at the site of the work and during construction, erection and installation. ..

The insurance shall cover the Owner on its behalf, the construction manager acting as agent or representative of the owner, all consultants and engineers (except for their professional liability), trade contractors, subcontractors and others having an insurable interest in the work, engaged in or connected with the construction, site preparation and related operations all as related to the project. …” (emphasis added)

The All Risk insurance policy which DCMS took out with Aviva stated that: “The Insurer hereby waives the transfer of such [subrogation] rights…of any Insured included in this policy against any other Insured…..” That policy named DCMS as the Insured, did not define or extend the meaning of Insured, and in particular, did not provide an expanded definition of Insured to include subcontractors or anyone else.

The insurer, Aviva, paid the loss arising out of this incident and then commenced an action in DCMS’s name against all the other participants in the project, including Outspan, CTC, Magna Tech, Perri and Lee. That action was discontinued by DCMS against Outspan and CTC, but those companies had in the meantime been third partied by Magna Tech, Perri and Lee. Outspan and CTC brought a summary judgment motion to dismiss the third party claims against them and to be removed entirely from the action.


The motion judge granted the summary judgment motion. So far as Outspan was concerned, it was a party to the building contract which contained the insurance clause and was entitled to enforce that clause. Under that clause, DCMS had agreed to take out all risk insurance and had thereby assumed the risk of loss falling within the policy.

CTC was also entitled to the benefit of the insurance clause in the contract between DCMS and Outspan, for three reasons:

  1. The Third Party Beneficiary Rule: CTC was performing part of the work referred to in the DCMS-Outspan contract. Therefore, it was entitled to the protections contained in that contract to the same extent as Outspan, under the third party beneficiary principles stated by the Supreme Court of Canada in such cases as in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd.:(1) the parties to the DCMS agreement intended to extend its benefit to CTC given that it is a “subcontractor” within the meaning of the insurance covenant; and, (2) the activities performed by CTC were within the scope of the DCMS agreement as it supplied the crane for the project which Outspan was required to provide under the DCMS agreement.”
  1. The No Liability Rule. Outspan and CTC could not be third partied by the other defendants since those other defendants were not liable to DCMS as they were themselves protected under the Third Party Beneficiary Rule: “…there can be no claim for contribution against Outspan and CTC by the other defendants as they are protected from liability by reason of the agreement between DCMS and Outspan.” This principle (that a defendant cannot assert a claim for contribution and indemnity if that person is not liable to the plaintiff) was stated by the Supreme Court of Canada in Dominion Chain Co. v. Eastern Construction Co.
  1. The No Subrogation against An Insured/Uninsured Interest Rule: Outspan and CTC were unnamed insureds under the Aviva policy because they had “an insurable interest in the construction project.” Accordingly, under basic insurance principles, Aviva could not maintain a claim against other insureds under the policy, even though those insureds were unnamed. In arriving at this conclusion, the court applied the principles stated by the Supreme Court of Canada in Commonwealth Construction Co. v. Imperial Oil Ltd. and sometimes this rule is referred to as the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.. As the Supreme Court said in that case, the “ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole” creates an insurable interest of all participants in the project.


This case provides a neat cross-reference to three contract and insurance principles that operate in the context of building projects. It is always a question of interpreting the building contract and/or the insurance policy taken out in respect of the project. But if the language of the building contract and policy reflect that intention – and the insurance policy should be written to reflect the insurance deal in the building contract – then it is logical that all three of these principles should either support (or contradict) the same conclusion, namely that the subcontractors and other persons engaged on the project are (or are not): carrying out the work of the general contract; not liable (or are liable) because the general contractor is not (or is) liable to the owner; or (or are not) engaged in the same project as the general contractor.

The factual matrix of the third party claims in this action was important. The damage occurred when the crane was on the site. Would the same result have occurred if the damage occurred off the site or arose from the supply of defective materials by a supplier? Would the language of the contract between the owner and DCMS (which referred to “equipment purchased for, entering into, or forming part of the work while at the site of the work”), or the Aviva policy have precluded such a claim? In other cases, suppliers have been found not to be unnamed insurers and not to fall within the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.

One aspect of this decision seems somewhat ironic. In applying the No Liability Rule, the court held that the other defendants, Magna Tech, Perri and Lee. were not liable to DCMS. Based on that finding, DCMS’s claim against those parties – which apparently were the only claims left by DCMS -must be dismissed. That result would seem to bring the action to an end. Yet, DCMS was not represented on the motion.

DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., 2015 CarswellOnt 12593, 2015 ONSC 4125, 258 A.C.W.S. (3d) 312

Building contracts – insurance – subrogation – third party beneficiaries

Thomas G. Heintzman O.C., Q.C., FCIArb                                           January 10, 2016

Can Conduct Relating To A Mediation Lead To A Higher Costs Award?

In Ross v. Bacchus, the Ontario Court of Appeal recently set aside an order of the trial judge awarding a higher level of costs because of the defendant’s conduct at the mediation. This decision emphasizes that, absent proof of bad faith, courts will be reluctant, at least in Ontario, to impose costs awards relating to the conduct of parties during settlement discussions.

The decision also opens up interesting questions about how participation in mediation and settlement discussion may be proven and how a standing offer to settle affects the court’s decision about the reasonableness of a party’s conduct at mediation.


In a personal injury case arising from a traffic accident, the jury awarded the plaintiff $248,000 and the judge ordered costs in favour of the plaintiff in the amount of $217,000. That costs award included $60,000 because the trial judge found that the defendant’s insurer had failed to attempt to settle the claim as expeditiously as possible, and had refused to participate in the mediation of the claim, as required by sections 258.5 and 258.6 of the Ontario Insurance Act. Those sections provide that a trial judge can take the insurer’s failure to perform those obligations into consideration when awarding costs.

The action was started in September 2010. The defendant’s insurer offered to settle for $40,000 in August 2011 and withdrew the offer in March 2012. About three weeks before the trial in November 2013, the plaintiff offered to settle for $94,065 plus prejudgment interest and costs and, for the first time, offered to participate in mediation. The defendant then offered to settle for $30,000 plus interest and costs and to participate in a half-day mediation, but counsel for the defendant stated that the insurers were “not interested” in settling the case. The plaintiff responded with an offer to settle for $79,065 plus prejudgment interest and costs.

A half-day mediation occurred four days before trial. After the six day trial and the jury’s award of $248,000, the trial judge ordered costs in favour of the plaintiff on a partial indemnity basis up to the plaintiff’s pre-trial offer and substantial indemnity costs after that offer. The trial judge awarded an additional $60,000 in costs in favour of the plaintiff by reason of the failure of the defendant’s insurer to comply with sections 258.5(5) and 258.6(2) of the Ontario Insurance Act.

Four points emerge from the Court of Appeal’s decision over-turning the judgment of the trial judge:

  1. The statement by the defendant’s counsel before the mediation that the defendant’s insurer was “not interested in settlement” was not a sufficient basis to conclude that the insurer would not make a bona fide effort to settle at the mediation. Effectively, the Court of Appeal said that posturing of that sort is part of the litigation and settlement process:

“An insurer’s statement on the eve of trial that it is not prepared to settle a claim cannot be equated with an insurer’s failure to “attempt to settle the claim as expeditiously as possible.” Nor can an insurer who actually participates in a mediation be declared to have failed to participate simply because the insurer indicated prior to the mediation that it was not prepared to settle the claim. A clear statement of the insurer’s position going into the mediation, even a strong statement, does not preclude meaningful participation in a mediation….. The trial judge assumed that because the insurer’s counsel advised that his client was “not interested” in settling the case, the insurer’s subsequent participation in the mediation was “a sham.” The assumption was unwarranted. A firm position strongly put going into mediation does not preclude meaningful participation in the mediation.”

  1. The plaintiff did not tender any evidence that the defendant had not participated meaningfully in the mediation. In writing for the court, Justice Doherty ducked the question as to whether evidence about the conduct of the mediation would have been admissible. He said that this question “raises an interesting legal issue. I need not get into that issue.” Rather, the court held that the plaintiff’s position failed because there was no evidence on the issue:

“If the respondent wanted costs for the insurer’s failure to participate in the mediation, it was incumbent on the respondent to lead evidence establishing the failure to participate in the mediation. Had the respondent attempted to do so, the question of the impact of the settlement privilege on the admissibility of evidence relevant to the insurer’s participation in the mediation may have come front and centre. On this record, the trial judge’s finding that the insurer did not participate in the mediation fails, not because the settlement privilege cloaks the mediation in confidentiality, but because the factual finding of the trial judge has no support in the evidence.”

  1. The fact that the defendant’s insurer had made offers to settle which was of considerable importance to the Court of Appeal. It referred to this fact several times in its judgment:

“There is no evidence that the appellant’s insurer failed to attempt to settle this claim as expeditiously as possible. The appellant made an “all-in” offer to settle for $40,000 in August 2011, less than one year after the action was commenced……. In any event, the insurer had made a settlement offer which was not revoked before trial…..

  1. The Court of Appeal held that the trial judge’s finding about the insurer’s motivation in rejecting the plaintiff’s offer and proceeding to trial were unsupported and irrelevant:

“…the trial judge was also influenced by what he saw as the insurer’s attempt to intimidate the respondent by refusing to make a counteroffer after the respondent’s last offer. The trial judge described the insurer as risking a trial for the sake of $50,000, the difference between the two offers…..Insurers, like any other defendant, are entitled to take cases to trial. When an insurer rejects a plaintiff’s offer and proceeds to trial, the insurer risks both a higher damage award at trial and the imposition of substantial indemnity costs after the date of the rejected offer. Both risks came to pass in this case. The insurer paid a significant financial penalty for its decision to proceed to trial. The costs provisions in ss. 258.5 and 258.6 do not address those risks, but instead address the failure to meet the specific obligations identified in those provisions. The trial judge’s assumptions about the insurer’s motivation for rejecting the respondent’s offer and proceeding to trial had no relevance to the determination of whether augmented costs should be awarded under the Insurance Act provisions.”


A number of lessons can be learned from this decision.

The first lesson is that a standing offer to settle can be powerful evidence of a bona fide intention to settle. So parties to litigation are well advised to make the best offer they can, if for no other reason than to avoid an order of costs based upon an unreasonable refusal to discuss settlement.

The second lesson is that it requires evidence to establish that a party has failed or refused to participate in mediation. This lesson may ultimately require a court to decide whether the conduct of a party at the mediation is admissible in evidence. It seems unlikely that such evidence will be admissible. Section 9 of the Ontario Commercial Mediation Act, 2010 states that mediations are confidential, unless the parties otherwise agree. The recent decision of the Supreme Court of Canada in Bombardier v Union Carbide emphasized the confidential nature of mediation, although it did find that, if a settlement is alleged to have been made during mediation, that fact can normally be proven.

The Bombardier v. Union Carbide case opens up the question of whether evidence of a total failure to mediate would be admissible. Say, the defendant attends the mediation with its insurer, and the insurer announces to the mediator: “We’re here but we decline to make or respond to any offer by the plaintiff or to engage in settlement discussions.” Would those facts be admission in evidence? There seems to be a powerful argument that they would be, and that the settlement privilege should not apply to a refusal to participate in settlement discussions. The mere fact that this conduct occurred in the mediation room rather than before the parties came to that room does not logically seem to make that conduct part of the mediation and preclude it from being proven. Rather, it would appear to be conduct which “preclude[s] meaningful participation in a mediation” as referred to by the Court of Appeal.

However, it seems unlikely that evidence about the conduct of a mediation itself, if a real mediation does commence, will be admissible in evidence. Accordingly, if a party does actually participate in mediation, it will be difficult to prove that it failed to do so in a bona fide manner, especially if it has made an offer to settle which was open until trial.

While this decision arose in the context of sections 285.5 and 285.6 of the Ontario Insurance Act, these issues could arise in any litigation or arbitration in which a party’s failure to make reasonable efforts to settle is an issue and, as a result, a higher amount of costs is sought by the other party.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 11, part 13(d).

Ross v. Bacchus, 2015 ONCA 347

Alternate Dispute Resolution – mediation – offer to settle – costs- insurance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                   November 8, 2015

Does Construction Insurance Apply To The Suppliers To The Project?

An important issue in construction projects is the identity of the persons covered by the insurance coverage which applies to the project. If one of the parties– say the owner or the contractor – takes out the insurance, does it cover subcontractors or suppliers? Typically the courts have been reluctant to find that the project insurance covers suppliers. And in Sable Offshore Energy Inc. v. Ameron International Corp., the Nova Scotia Supreme Court recently held that the construction insurance did not cover suppliers.


Ameron was a supplier to the construction project. The Lloyds’ project insurance policy taken out for the project stated as follows with respect to “additional insureds”:

“Any other company…. including, but not limited to, project managers, contractors, sub-contractors of any tier or with whom the Insured(s) in (a), (b), or this paragraph (c) have issued a Letter of Intent or with whom the Insured(s) have entered into written agreement(s) or contract(s) in connection with the subject matters of Insurance, and/or any works, activities, preparations connected therewith which are included in the Insured values hereunder.

Also to include vendors and suppliers, in respect of contracts solely for supply of raw materials, but only in respect of physical loss or physical damage as may be covered under Section1 of policy wording relating to cargo transits covered hereunder.”

Ameron argued that as a supplier it had “entered into a written agreement or contract” with the insureds and therefore was an additional insured.


The application judge disagreed, for three reasons:

First, that submission would render the second part of the Additional Insured provision redundant: all suppliers would be covered by the first paragraph. Accordingly, suppliers were only entitled to the more limited insurance referred to in the second paragraph.

Second, a review of the decided cases led the application judge to the view that suppliers are not generally covered by project-related construction insurance policies. The court said:

“The purpose of project insurance in cases such as these is to provide coverage to those who work on the project. In my view, vendors and suppliers are not in the same position. They do not work on the project and are not participants in the construction of the project. This is recognized, I conclude, in the decisions to which I have just referred.”

Third, the background facts persuaded the application judge that suppliers were not intended to be covered by the facts. In addition, the contra proferentem rule was not useful since that rule has a “limited role” and was not applicable when the parties had actually negotiated the provision and when there was no ambiguity in the clause. In any event, Ameron was a stranger to the insurance contract and had no standing to apply the rule.


This decision underlines how important it is to negotiate project insurance that each parties wants. This is especially so in the case of suppliers. The court will be reluctant to hold that project insurance is intended to cover suppliers unless that coverage is clear. If a supplier wants to be included within the insurance umbrella, it should ensure that that coverage is explicit.

The finding that Ameron did not have standing to submit that the contra proferentem rule applied seems rather odd. That rule is a rule of construction of contracts. It is used to interpret the contract whoever is relying on it. In particular, if it applies, then it applies against the person who prepared the contract, in this case the insurer. There does not seem to be a good reason why any party relying upon the contract should be precluded from relying upon that rule against the insurer, if the provision in question is ambiguous and the rule is otherwise applicable.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.) at chapter 14, part 3

Sable Offshore Energy Inc. v. Ameron International Corp., (2013), 337 N.S.R. (2d) 10, 2013 CarswellNS 878 (N.S.S.C.)

Building Contracts – Suppliers – Insurance- Additional Insureds

Thomas G. Heintzman O.C., Q.C. FCIArb                                                                  May 3, 2015


When Is Faulty Workmanship Excluded From A Builders’ Risk Policy?

One of the most difficult issues in construction law is the proper interpretation of an exclusion for faulty workmanship in a Builders’ Risk policy. The amounts in issue can be huge and if the exclusion applies, the absence of insurance can be serious.

Take for example the recent Alberta decisions in Ledcor Construction Limited v Northbridge Indemnity Insurance Company. Window cleaners were hired to clean the windows of the newly constructed building in the final clean up of the site. The cleaners scratched the windows, which necessitated very expensive replacement of the windows. The trial judge held that the damage was covered by the Builders’ Risks insurance policy, and not excluded by the faulty workmanship exclusion. The Alberta Court of Appeal has just held that the damage was excluded by that exclusion. This decision raises serious questions about the viability of Builders’ Risk insurance with respect to damage to another contractor’s work. I wrote about the trial decision in this case on December 29, 2013.


A company known as Station Lands retained Ledcor as the construction manager to coordinate the construction of the EPCOR Tower in Edmonton, Alberta. Station Land also contracted with various trades to construct the building. The owner obtained an All Risk Builders’ insurance policy from Northbridge. The policy covered all “direct physical loss or damage except as hereinafter provided”. The named insureds were the owner and Ledcor, and the additional insureds were the owners, contractors, sub-contractors, architects, engineers, consultants, and all individuals or firms providing services or materials to or for the named insureds. The policy was a “blanket” policy, designed to cover all actors and activities on the site.

The policy contained the “faulty workmanship” exclusion and “resultant damage” exception to that exclusion found in most Builders’ Risk policies. Those provisions read as follows:

“Exclusions…This policy section does not insure:. . .

(b)        The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage. (underlining added)

The windows were supplied and installed by one of the trade contractors. Station Lands retained another contractor, Bristol, to do the “construction clean” of the exterior of the building, including the windows.

Station Lands’ contract with Bristol was in a standard CAA format which provided that the owner would maintain “all risks” property insurance for the project naming the owner and construction manager as insureds and the consultants, contractors and subcontractors as additional insureds.

The Court of Appeal’s Decision

The Court of Appeal went through the following logic to arrive at its conclusion that the damage to the windows did not fall within the policy:

  1. Cleaning involves workmanship

The court rejected the respondents’ argument that cleaning is not workmanship because it does not create some physical product. In Bristol’s contract, work included “services” and the contract refers to Bristol’s “workmanship.” In the court’s view the “construction clean” was as much a part of the construction of the building “as the designing of the foundations, the hammering of the nails, and the pouring of the concrete.”

  1. Multiple contractors do not create “resultant damage”

The respondents argued “that the exclusion does not apply to damage caused by one contractor to the work of another…. All other damage it is argued, particularly damage to the work of other contractors, is “resulting damage”. The “cost of making good” only relates to the making good by any contractor of its own work product.”

The court noted that “this argument contains echoes of the argument that what Bristol Cleaning was doing was not “workmanship”, because the exterior cleaning involved did not create any physical product or structure.” The court rejected this argument for many reasons.

First, it held that:

“it is artificial (especially in the context of an all risks blanket insurance policy) to try to draw a dividing line between the product created by the work of other contractors, and the work to be done by Bristol Cleaning. GC 2.4 requires Bristol Cleaning to repair any damage it does to the work of other contractors. In effect Bristol Cleaning’s “Work” included replacing the damaged glass, even if it was installed by another trade contractor. To say that the exclusion in the policy only applies to a trade contractor “making good” its own work seeks to sever that replacement work. The “cleaning” work that Bristol Cleaning was required to do under the contract is said to be of a different character than the “repair of damage” work that is also required to be done by GC 2.4. Yet all this work had to be done before Bristol Cleaning could claim substantial completion.”

Second, the court noted that the respondents conceded that the exclusion is not limited to the cost of re-doing the cleaning and that there must be some “physical damage” caught by the exclusion. But, applying their theory, they could not point to any physical damage excluded in a case like the present one.

Third, this policy was a “blanket” wrap-around policy covering the entire project and all participants in the project. In this context, it was the court’s the view “it does not make sense to interpret the policy such that the damage would be covered by the insurance if the work was done by two trade contractors, but not if it was all done by one trade contractor.

Fourth, this policy was a multi-year policy. It does not make sense, in the opinion of the court, that activities occurring later in the project would be covered merely because they damaged work done earlier in the project. In its words: “Whether something is the “cost of making good faulty workmanship” for the purposes of a multi-year insurance policy, related to a single construction “Project”, does not depend on the exact sequence or timing of the various constituent tasks required to build such a complex building.”

Fifth, “the scheme of the insurance policy is that all activities on the site are to be covered by one policy. There is nothing in the policy wording to suggest that coverage varies depending on the contractual relationships of the parties; the coverage depends on the type of “damage”.

Sixth, there was “nothing in the wording of the policy to support the respondents’ argument that the key to the exclusion is the identity of the person who performed the work that is subsequently damaged.”

The court’s problem with the respondents’ position was summed up in the following paragraph:

“The respondents’ argument leads to the conclusion that coverage under the policy depends on how the work is divided up. Under the respondents’ theory, if a single contractor is retained to supply the glass, install the glass, and do the construction cleanup, the scratches on the windows would not be covered by the insurance. However, because some other contractor supplied the windows, the very same damage caused by Bristol Cleaning is covered. This approach might create an incentive to artificially divide up the work as finely as possible, as then the maximum amount of damage would be covered by insurance. On the other hand, it would be dangerous for the owner to hire a single contractor to do all the work, as then nothing would be covered. That cannot have been the expectation of the parties, and is not a commercially reasonable outcome. It is, as noted, inconsistent with the philosophy behind a “wrap-up” policy covering all contractors.

  1. The physical or systemic connectedness between the work and damage underlies the coverage and exclusion

The court accepted a variant of the insurer’s approach to defining the ambit of the coverage and the “faulty workmanship” exclusion. In doing so it relied upon the provision in Bristol’s contract requiring it to repair damage caused by it to the work of other contractors. It said:

If the workmanship itself directly causes the damage, then both re-doing the work and fixing the damage from the first attempt easily fall into the expression “making good faulty workmanship”. This test identifies a class of physical damage that is excluded from coverage by the exclusion clause, while recognizing a significant class of physical damage that would be “resulting” and therefore covered. It is also consistent with GC 2.4, which requires Bristol Cleaning to repair any damage it does to the work of other contractors. While that covenant is expressly found in this construction agreement, it would likely be implied in any construction contract; it is natural that if a contractor causes damage while doing its work, it should be required to repair that damage as the consequence of its own poor workmanship. The appellants’ interpretation is consistent with commercial expectations.” (underlining added)

However, the court slightly altered the test proposed by the insurer as follows:

“The proper test can more properly be described as a test of the connectedness between the work, the damage and the physical object or system being worked on. The application of the test will depend on an examination of the factual context, but the primary considerations will be:

(a)        The extent or degree to which the damage was to a portion of the project actually being worked on at the time, or was collateral damage to other areas. The test will be relatively easy to apply when the damage is caused directly by the work to the very object being worked on. There may be cases where several parts of the project work together as one system. Work on one part of the system may cause damage to another part, but repairing that damage might still properly be characterized as the cost of making good faulty workmanship if there is sufficient systemic connectedness;

(b)        The nature of the work being done, how the damage related to the way that work is normally done, and the extent to which the damage is a natural or foreseeable consequence of the work itself. If the damage is a foreseeable consequence of an error in the ordinary incidents of the work, then it presumptively results from bad workmanship; and

(c)        Whether the damage was within the purview of normal risks of poor workmanship, or whether it was unexpected and fortuitous.” (underlining added)

The court concluded this analysis by saying that the “degree of physical or systemic connectedness is the key to determining the boundary between “making good faulty workmanship” and “resulting damage”. (underlining added)

Here, the court said:

“the scraping and wiping motions that caused the damage were the actual “Work”. The damage was not “accidental” or “fortuitous”. The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done. Fixing the resulting damage is “making good the faulty workmanship” that caused the damage.”

The Court of Appeal acknowledged that the test it was propounding might lead to “extreme results in extreme cases”. It posed the situation of the window cleaner using a flammable solvent and causing the building to burn down. It acknowledged that such a loss would normally fall within the policy but said that “[e]xtreme cases should be decided when they arise. Whether these extreme situations call for a separate test, or are merely an exception to the connectedness test, need not be explored in this decision.”

The Court of Appeal concluded its analysis with this over-all approach:

“The key is to find the dividing line between physical damage that is excluded as “making good faulty workmanship”, and physical damage that is “resulting damage” which is covered by the policy. As demonstrated in the previous discussion, the wording of the policy and the weight of the case law supports the test for physical or systemic connectedness. The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.

“The principle just stated reflects the proper interpretation of this wording of the insurance policy. The presumptive test is that damage which is physically or systemically connected to the very work being carried on is not covered. Whether coverage is nevertheless extended under that test in the factual context of any particular case will depend on the consideration of the factors listed above (supra, para. 50). Those factors all engage elements of “causation” and “foreseeability”, concepts which are well known in the common law, when applying the policy wording to particular factual situations. The presumptive test stated above reflects the proper interpretation of the policy, but these collateral factors will come into play in applying the policy wording to particular factual situations, especially in extreme cases.”

On this basis, the Court of Appeal held that the damage to the windows did not fall within the policy.

  1. Contra Proferentem did not help

The Court of Appeal held that there was no need to resort to this rule of interpretation. These provisions of the Builders’ Risk policy had been interpreted many times and their meaning did not become ambiguous just because the circumstances raised difficult questions of the application of the policy to the particular facts.


This decision is a very important one and will take some time to digest. On a first reading, however, some of the remarks and the basis of the decision raise some apparent conflicts with prior decisions and raise fundamental issues about Builders’ Risk insurance.

  1. The Court of Appeal relies upon the provision of Bristol’s contract, requiring it to repair the work of others which Bristol damages, to supports the court’s “physical or systemic connectedness” test. Yet, that submission appears to be similar to the one which was rejected by the Supreme Court of Canada in the Commonwealth Insurance v. Imperial Oil There, the Supreme Court explained that the contractor’s obligation to repair work might well require it to perform work within the deductible but did not disentitle the contractor to protection under the policy. As the Supreme court said at paragraph 39 of that decision:

“That paragraph [in the building contract] does not negate the basic proposition that everyone involved in the construction of the project will be insured under a policy issued to all as a group. The reference to fault occurs because this policy stipulates a deductible of $10,000 and because it contains a number of exclusions, e.g., error in design and latent defect; that reference has no other purpose.”

  1. The Court of Appeal makes reference to the insurance contract not being a “construction warranty agreement.” That submission is one often relied upon by insurers, but was rejected in the Progressive Homes v. Lombard Insurance decision of the Supreme Court of Canada, where the court said that the proper approach is to interpret the policy, not arrive at a presumption as to what it means by saying that it will convert the policy into something else. At paragraph 45 of its decision, the Supreme court said:

“Lombard argues that interpreting accident to include defective workmanship would convert CGL policies into performance bonds. In my opinion, these general propositions advanced by Lombard do not hold upon closer examination.”

  1. The Court of Appeal equated Bristol’s work (“the scraping and wiping motions that caused the damage”) with intentional harm (“The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done.”) and then concluded that “fixing the resulting damage is “making good the faulty workmanship” that caused the damage.” This is a curious conclusion because it does not seem possible that Bristol intended to damage the windows. The damage occurred negligently, but fortuitously; otherwise the policy would not apply at all. As the Supreme Court said in Progressive Homes v. Lombard;

“Fortuity is built into the definition of “accident” itself as the insured is required to show that the damage was “neither expected nor intended from the standpoint of the Insured”. This definition is consistent with this Court’s core understanding of “accident”: “an unlooked-for mishap or an untoward event which is not expected or designed” ….When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.

  1. The basic proposition of the Court of Appeal appears to be that a Builders’ Risk policy does not cover damage caused by one contractor to the work of another contractor on the site. One must ask: where does the policy say that? Damage by one contractor to the work of another contractor seems such a foreseeable event. If the policy does not apply to that damage, should the policy clearly say so? And is this proposition consistent with the purpose of Builders’ Risk insurance as described by the Supreme Court in the Commonwealth v Imperial Oil decision:

“On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in court. By recognizing in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements opening the doors of the job site to the tradesmen, the courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, e.g. ,the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.” (underlining added)

Based upon this decision, contractors and subcontractors may want to obtain additional insurance to cover damage to each other’s work and property during the project. It appears that a Builders’ Risk policy may not cover that damage.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 14, paragraph 3(b)(ii)

Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 ABCA 121

Building contracts – Insurance – Exclusion for faulty workmanship – Exception for resultant damage

Thomas G. Heintzman O.C., Q.C., FCIArb                                  March 30, 2015


Is Loss Due To An Inevitable Event Covered By Property Damage Insurance?

A continuing issue relating to property damage insurance is whether loss which is bound to occur due to an unknown fault or defect in the structure is covered by the insurance policy. The policy may be a builders’ risk insurance policy maintained during a building project or an all-risk insurance policy maintained by a business. Insurers maintain that this sort of loss is not covered because the insurance covers fortuitous events, not inevitable events. Owners and contractors maintain that this loss is covered because the insured does not know of the circumstances giving rise to the loss and does not intend or expect the loss to occur. So they argue that, from their standpoint, the loss is fortuitous.

In 1422253 Ontario Ltd. v. Coachman Insurance Co., (2014), the Ontario Divisional Court recently adopted the second view and held that the loss fell within an all-risk policy even though the circumstances, which were unknown to the insured, inevitably caused the loss. While the loss did not arise during a construction project, the decision in this case is important for the development of the law relating to risk-based property damage insurance policies, including those used by the construction industry.

The facts

The plaintiff owned and operated a gas bar. The plaintiff had an insurance policy providing coverage for “all risks of direct physical loss or damage from any external cause.” Several automobiles broke down after filling up at the station. These events caused the plaintiff to hire a contractor to examine the underground gasoline storage tank. It was discovered that the fill-in pipe to the tank had developed cracks, allowing water to seep into the tank and contaminate the gasoline.

The plaintiff brought an action in which it asserted that it had coverage under its property damage insurance policy. The insurer defended, saying that the loss was an inevitable result of the circumstances, that the policy only covered fortuitous loss and that the loss was not fortuitous and therefore was not covered by the policy. The plaintiff said that the loss was covered because the plaintiff did not cause or contribute to the fault in the pipe and was not aware of and did not expect the fault or loss. The defendant brought a motion to dismiss the action by way of summary judgment. The motion judge agreed with the defendant that the loss was not fortuitous and not covered by the policy because it was the inevitable result of the circumstances.

The Decision

The Divisional Court reversed the decision of the motion judge. The court held that the proper test for coverage in an all-risk property damage policy is not whether the loss was inevitable due to the physical circumstances, but rather whether the loss was caused by the insurer or was expected to arise in the normal course of business of the insured, such as ordinary wear and tear and depreciation. In this case the pipe had been regularly inspected. The contractor who repaired the pipe said he had never seen such a broken fill-in pipe, and the owner of the gas station had never seen one as well. The court held that “although the cause remains unknown, that the fill-pipe cracked allowing water into the storage tank is exactly the type of fortuitous event that triggers coverage in the all-risk policy.” The court rejected the defendant’s “flood gates” assertion that allowing the claim would extend coverage to the normal risks or day-to-day events in the operation of a gasoline station.


The focus of this decision is on the nature of fortuity. The court held that the policy must be interpreted from a common sense business standpoint, and in this context, fortuity means not caused by the insured or not an expected result of the insured’s business activities. Interestingly, the word “fortuity” is not contained in these sorts of property damage insurance policies. Rather, the concept of fortuity is read into the policy as a necessary ingredient of insurance.  The policy could not have been intended to cover loss caused by the insured.  Nor could it have been intended to cover loss arising from the normal business activities of the insured.

The word “fortuity” has been coined to capture the unintended and unexpected nature of the insurance. But the nature and extent of “fortuity” still remains somewhat of a mystery, and a battleground between insureds seeking to recover their unexpected business losses and insurers seeking to minimize claims arising from normal business activities.  This decision tells us that the concept of fortuity will be determined from a business standpoint, not from the standpoint of physics.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter, part   

1422253 Ontario Ltd. v. Coachman Insurance Co., (2014), 117 O.R. (3d) 635 (Div. Ct.)

Insurance –  Builders’ Risk Property Insurance  –  Fortuity  –  Coverage

Thomas G. Heintzman O.C., Q.C., FCIArb                                            February 5, 2014

What are “Making Good”, “Faulty Workmanship” and “Resulting Damage” under a Builders’ Risk Policy?

The decision in Ledcor Construction Ltd. v. Nortbridge Indemnity Insurance Company is another attempt by a Canadian court to deal with the ambiguity in the Builders’ risk insurance policy. The wonder is that insurers and builders do not eliminate the exclusion for faulty workmanship, or clarify what the words “making good”, faulty workmanship” and “resulting damage” mean in this policy.  Instead they leave it up to courts to settle the issue on an ad hoc basis. And it’s no wonder that, in that situation, the courts must find that these ambiguous words provide, and do not exclude, coverage.

Coverage In A Builders’ Risk Policy

There are three elements in the coverage clause of a standard Builders’ Risk policy.

The first element is the “coverage wording”. This element defines, at its broadest, what the policy covers. The policy in the Ledcor case provided very broad coverage for property involved in construction. The policy said that there was coverage for property “undergoing site preparation, demolition, construction, reconstruction, fabrication, insulation, erection, repair or testing…”.  The case law makes it clear that this sort of coverage wording includes coverage for property damage arising from the negligence of the insured unless the policy says otherwise.

The second element of the coverage clause in a Builders’ Risk policy is the “exclusion wording”. In the Ledcor case, the wording took coverage away for “making good faulty workmanship, construction or design.” So the “exclusion wording” is apparently intended to exclude the repair of negligent workmanship. The insurers justify the inclusion of this exclusion on the basis that a property damage policy is not a professional liability policy, and that if coverage for negligence is to be obtained, it should be obtained in a separate policy, or by a further premium and amended wording in the Builders’ Risk policy.

The third element in the coverage clause in a Builders’ Risk policy is the “exemption wording.”  This wording in the policy in the Ledcor case exempted the exclusion if “physical damage not otherwise excluded by this this policy results.”  In this event, the exemption wording said that “this policy shall cover such resulting damage.”

What is one to make of this “wheels within wheels”? It’s like peeling an onion, or taking a Russian doll apart, layer by layer. Except that these layers are words, not physical layers. How does one know where one layer ends and the next begins?  The answer to that question is very important because the insured could make a decision to buy other coverage if it knew where the gap is in the Builders’ Risk policy. Since the insurer doesn’t tell the insured, the insured has to figure it out by reading the cases. And since the insurers don’t tell the insured, the courts inevitably decide the cases in favour of the insureds in case of doubt, of which there is almost always a lot.

Background To The Ledcor Case

Ledcor was the general contractor on a construction project. In the concluding portion of the project, Ledcor retained Bristol to clean the outside of the building. During the cleaning, Bristol scratched and damaged the windows of the building. The windows had to be replaced at considerable cost.  Ledcor and the owner made a claim under the policy.

There did not seem to be any dispute that the damage fell within the coverage element of the policy. There were two issues:

Did the exclusion wording apply? The insurer said Yes, because the scratching of the windows was due to faulty work. The insured said No because the exclusion clause is intended to apply to the costs of having the faulty work re-done, but not to the resultant damage of the faulty workmanship.

Second, did the exemption wording apply? Yes said the insured because the claim was based on resulting physical damage. No said the insurer because the damage in this case was not resulting physical damage, but damage caused directly by the window cleaner.

Decision of the Court

The Alberta Court of Queen’s Bench concluded that the work done by the window cleaning company, Bristol, fell within the words “faulty workmanship” in the exclusion wording. The court compared the present situation to the facts in another case in which the acid cleaning of a boiler was held to fall within the words “faulty workmanship” and the court in the Ledcor case agreed that both cleaning exercises amounted to “faulty workmanship”.

The court held, however, that the words “making good” are ambiguous. They could refer only to re-doing the work that was faulty, which is what the insured asserted. Or they could refer to the damage done by the faulty workmanship, which is what the insurer asserted. In the boiler case, the cleaning was part of the very installation of the boiler, and therefore arguably part of “making good” the work if that meant re-doing the work, including installing a new boiler.  But “re-doing the work” in the present case did not include installing new windows.

The court also considered the words “resultant damage” in the exemption wording and reasoned that these words must have been intended to complement the words “making good” in the exemption wording, so that the exclusion referred to “direct damage of the faulty workmanship as opposed to the indirect consequences.”

The court concluded that both of the interpretations advanced by the parties were reasonable. On balance the one suggested by the insured was somewhat more logical for two reasons.

First, since Builders’ Risk policies are intended “provide coverage for virtually any event which might occur by way of negligence, third party action or act of God, one could conclude that an exclusion as suggested by the [insurers] is inconsistent.

Second, “Bristol, as a sub-contractor, is an additional insured under the policy. Subrogation by the insurers against Bristol can be waived at the option of the [insureds]. Again, all of that suggests broad coverage inconsistent with what the [insurers] say is the effect of the exclusion.”

The Alberta Court of Queen’s Bench held that, at best, the clause was ambiguous and should be interpreted contra proferentem against the insurer.  Therefore, there was coverage under the policy.


This decision illustrates the need for insurers and insureds to refine the meaning of the coverage, exclusion and exemption wording of Builders’ Risk policies, or the futility of doing so.  The Ledcor decision means that the policy exclusion does not apply in two situations.

First, if the person who did the faulty work installed something, and whatever was installed caused damage to some other part of the construction, then the damage to that other part is not excluded. That sort of damage is “resultant damage” and not “direct damage” and therefore falls within the exception to the exclusion. One only has to review the decided cases to know how difficult it can be to determine in that sort of situation whether the damage is “direct” or “resultant”.

Second, and this is the nub of the Ledcor decision, if the person who did the faulty work did not construct or install anything, then the claim does not arise from “making good” that work, or is “resultant damage” and not “direct damage.”

However, if the person who did the faulty work also constructed or installed something upon which it did the faulty work (as in the boiler case), then if the “making good” requires the property to be re-installed, then there may be no coverage due to the exclusion.

Two further points can be made about this decision:

First, this decision is a very good example of the rule of interpretation that the words, and all the words, in a contract must be given meaning. Here the key words were “making good”. What do those words mean and why were they used? The insurer really wanted to read the exemption to read as follows: “physical damage arising from faulty workmanship….” instead of “making good faulty workmanship….”  After all, the policy covered “physical damage” and the exemption referred to “physical damage”.   But for some reason, the exemption doesn’t. It refers to “making good”. So the parties must have meant something different by those words than “physical damage.” The court concluded that they can’t and don’t mean “physical damage” because the parties didn’t use those words. Rather, in that context, the words must mean re-doing the work, not repairing the damaged property, at least in the absence of any other or better explanation of what the words mean.  

Second, this decision perhaps demonstrates the futility of the exemption for faulty workmanship. Surely contractors and their advisors do not go through the mental gymnastics to figure out all these permutations and combinations involved in coverage.  And should they have to, especially when all the parties to the construction project are intended to be covered by the policy? Would it not be better simply to eliminate the exemption for faulty workmanship? Since the policy covers all the sub-contractors on the project, would there really be much, if any, additional risk or premium?

Ledcor Construction Ltd. v. Nortbridge Indemnity Insurance Company, 2013 ABQB 585

Builders’Risk Policy – Construction – Sub-Contractors – Contractors – Damages – Insurance – Exclusion Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                        December 27, 2013