London insurance market feels impact of Canadian court’s decisions

Introduction

Two decisions of the Canadian Court are sending ripples through the London market. Both arise out of construction disputes, and raise issues as to the application of LEG 2/96 and the faulty workmanship exclusion respectively.

Acciona Infrastructure Canada inc. V. Allianz Global Risks US Insurance Company, 2015 BCCA 347

This is a decision of the British Columbia Supreme Court which involved the interpretation of the LEG 2/96 defects exclusion in an all risks construction insurance policy. The claim concerned losses and costs incurred to repair damage to concrete slabs forming part of the new Patient Care Centre of the Royal Jubilee Hospital in the City of Victoria. Insurers argued that the damage to the concrete slabs, that included deformation of the steel within the concrete, did not constitute “direct physical loss of or damage to the property insured” within the meaning of the policy, and that the damage was excluded by the LEG 2/96 exclusion clause.

The trial judge did not find that the slabs were “defective”. The slabs were properly designed he said; the defect that resulted in the damage to the slabs was in the supporting structures and workmanship. Accordingly, the LEG 2/96 exclusion did not exclude the cost of rectifying “defective slabs” - because they were not defective. It excluded the cost of rectifying defective workmanship. The slabs were not part of the insured property containing the defect. In conclusion, the trial judge said the steel deformation was fortuitous because it was unanticipated and was thus not built into the design in the first place.

Ledcorp Construction Limited V. Northbridge Indemnity Insurance Company, Royal & Sun Alliance Insurance Company of Canada and Chartis Insurance Company of Canada 2016 SCC 37

A decision of the Supreme Court of Canada. During construction, the windows were coated with concrete splatter, paint specks and other construction dirt. The building’s windows were then scratched by the cleaners hired to clean them. The cleaners used improper tools and methods in carrying out their work, and as a result, the windows had to be replaced. The building owner claimed the cost of replacing the windows against a builders’ risk insurance policy. The insurers denied coverage on the basis of an exclusion contained in the policy for the “cost of making good faulty workmanship”.

The exclusion clause at the heart of the case was a standard form clause that denied coverage for the “cost of making good faulty workmanship” but, as an exception to that exclusion, nonetheless covers “physical damage” that “results” from faulty workmanship. The court ruled that the cleaner’s “work” was limited to the cost of the cleaning itself, and therefore the damage to the windows was considered “resultant damage”. Accordingly, the cost of re-cleaning the windows was excluded but the damage that resulted was not.

Interestingly, the court acknowledged that had the cleaning company’s “work” been defined more broadly, say for example, if it included responsibility for installing the windows in good condition, and not merely cleaning them, damage to the windows themselves would have been excluded.

Commentary

While the cases above are judgments delivered under Canadian Law, so would have persuasive weight in the English Courts at best, we are seeing that Insureds are importing the analysis used in the cases, across jurisdictions, to enhance their potential recovery.