|Last week I reviewed the decision of the Alberta court of Appeal in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance. In that decision, the Alberta Court of Appeal held that damage done by one contractor to the work of another was not recoverable under a Builders’ Risk policy because it fell within the exclusion for “faulty workmanship”.
This week, let’s review the decision in Acciona Infrastructure Canada Inc. v. Allianz Global Risks Insurance Co. In this decision, the British Columbia Supreme Court held that the “faulty workmanship” exclusion did not apply.
Acciona was the design-build contractor for a hospital project. Campbell Construction Ltd. (“CCL”) was the principal sub-contractor for the construction of the concrete structure, including designing and building the concrete formwork, placing and finishing the concrete and undertaking the required shoring. During construction, there was cracking and over-deflection of the concrete slab.
The trial judge found that the over deflections and cracking were caused by the failure of the formwork/reshoring procedures to account for the unusually thin design of the slabs. The trial judge also found that the over deflection and cracking of the concrete slabs fell within the Policy and constituted damage that was fortuitous.
With respect to the exclusion for “faulty workmanship”, the trial judge found that the formwork and shoring/reshoring procedures constitute a defect in workmanship, which fell within the exclusion. The judge then considered what damages were so excluded: the entire claim, as submitted by the insurer, or only those costs that would have been incurred to remedy or avoid the resulting damage, those being the costs of implementing proper formwork and shoring/reshoring procedures, as submitted by the insured. The trial judge adopted the latter submission and set forth his reasons as follows:
Read in its entirety, I find that the intent of clause 5(b) is to exclude those costs rendered necessary by one of the named defects, but is limited to costs “which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.” In other words, the excluded costs are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred, but the exclusion does not extend to exclude the cost of rectifying or replacing the damaged property itself; the excluded costs crystallize immediately prior to the damage occurring and are thus limited to those costs that would have prevented the damage from happening. … The approach is to exclude the cost that would have been incurred to rectify the defect if that effort had been put in hand immediately prior to the damage…..
The “damage” in issue here is the cracking and over deflection of the concrete slabs. The “defect in material workmanship” is the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs. Applying clause 5(b), the excluded costs are those that would have remedied or rectified the defect before the cracking and over deflections occurred i.e. the costs of implementing proper formwork and shoring/reshoring procedures or incorporating additional camber into the formwork. (underlining added)
The contrast between this decision and that in Ledcor v. Northbridge could not be starker. In this decision, the court held that the insured was entitled to recover the full damages resulting for the mis-installation of the concrete slab. Certainly, the slab and the faulty work in installing it were connected, yet the B.C. court held that the purpose of the exclusion was only to eliminate the recovery of the cost of the faulty work, not the resultant damage. In Ledcor v. Northbridge, the Alberta court of Appeal disallowed the damages claimed in that case because they were connected, physically or systematically, to the faulty work.
It seems that the words in the Builders’ Risk policy providing for the exclusion for “faulty workmanship” and the exception for “resulting damages” are speaking like the Delphic oracle, and only the Supreme Court of Canada can solve the riddle.
Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.
(2014), 33 C.L.R. (4th) 210, 2014 CarswellBC 2471
Building contracts – Builders’ risk Insurance- Exclusion for faulty workmanship – Exception for resulting damages
Thomas G. Heintzman O.C., Q.C., FCIArb April 1, 2015