B.C. Court Of Appeal Finds Costs To Remedy Damage Caused By Defective Workmanship Is Not Excluded By Workmanship/Design Exclusion

wright_Carousel (105x104)

By: Melissa A. Wright, Litigation Associate


The British Columbia Court of Appeal recently confirmed in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.[1] that a Workmanship/Design Exclusion does not exclude the costs to remedy damage caused by defective workmanship. The lower court decision was previously reported on in Covered. Acciona is the first case in Canada to consider the LEG 2/96, “Defects Exclusion” clause used in Course of Construction (“COC”) policies in Canada. While the outcome of this appeal decision is definitely pro-insured, the lasting impact of this decision will depend on whether the court’s reasoning is restricted to the unique facts of this case or applied more broadly to resulting damage claims generally.

Show More

Background

The Respondent was the contractor for an eight-story reinforced concrete structure being built as a major addition to the Royal Jubilee Hospital in Victoria, B.C. The contractor claimed over $14 million in damages from insurers under a COC policy for the costs to repair concrete slab floors that had “over-deflected” and did not meet the level surface functionality requirements for wheeled hospital equipment.

The policy’s insuring agreement provided coverage for “all risks of direct physical loss of or damage to the property insured” subject to exclusions in the policy. The insurer denied coverage on the basis of a workmanship/design exclusion clause which read as follows:

  1. all costs rendered necessary by defects of material workmanship, design, plan, or specification, and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan or specification.

Lower Court Decision

The trial judge accepted the expert evidence of the contractor that the over-deflection, cracking of the slabs and bending of the rebar was not caused by defective design. Rather it occurred as a result of improper formwork and shoring procedures, which did not account for the thin slab design. The damage was therefore covered by the insuring agreement. The trial judge interpreted the defects exclusion so as to only exclude those costs of repair that would have remedied the defect immediately prior to the occurrence of the damage, and based on the evidence the costs of implementing proper shoring/framework procedures were nil. The insurer appealed.

Court of Appeal Decision

The insurer argued on appeal that the over-deflection, bending and cracking was not “direct physical loss or damage to the property insured” but a manifestation of faulty workmanship. The Court of Appeal held that this argument was inconsistent with the trial judge’s finding of fact, that the defect (e.g., the faulty or defective shoring) caused actual physical damage (e.g., the over-deflection). Therefore, the greater than anticipated deflection was a fortuitous event. The Court of Appeal also did not accept that the slabs did not suffer physical loss or damage because they were never initially in a satisfactory state.[2] Accepting such an argument would have deprived the contractor of coverage for unfinished work product during construction.[3]

The insurer also argued that the trial judge erred in excluding only the costs of implementing proper shoring/framework procedures (which were nil). It submitted that the interpretation of the defects exclusion required a different inquiry than was undertaken in the resulting damage case law considered by the trial judge. The resulting damage case law addresses the distinction between resulting damage from an insured’s own work which is generally covered, and the cost of making good a defect in an insured’s own work which generally is excluded.[4]

The insurer relied upon the Alberta Court of Appeal decision in Ledcor Construction Ltd v. Northbridge Indemnity Insurance Co. (“Ledcor”),[5] which excluded from coverage the cost of replacing glass windows that suffered damage during the cleaning process caused by the faulty workmanship of a trade contractor on the basis that repairing the windows would be “making good faulty workmanship” since the damage was the direct result of the cleaning carried out by the trade contractor.[6] Based on Ledcor , the insurer submitted that the correct interpretation of the workmanship/design exclusion clause would lead to the exclusion of the entire claim.[7] The Court of Appeal disagreed, finding no error in the trial judge’s reasoning. The defects in the framing and shoring workmanship resulted in the damage to slabs, and therefore, there was no defect in the slabs themselves that could have been rectified to prevent the over-deflection, bending and cracking.[8] The Court of Appeal applied the Ontario Superior Court decision of PCL Constructors Canada Inc. v. Allianz Global Risks US Insurance Company (“PCL Contractors”),[9] which involved a similar exclusion clause that was interpreted as a deeming provision providing special treatment of loss or damage caused by faulty workmanship.[10] The effect of the clause in PCL Contractors was to classify the damage to be “resulting damage” and therefore covered under the policy. The fact that sufficient preventative measures would not have added to the costs in this case did not matter. The Court of Appeal was clear that if the parties had intended to exclude all damage caused by the actions under the control of the insured, that there was simple and direct language available to do so, in the form of exclusion clause LEG 1.[11]

The Court of Appeal dismissed the insurer’s appeal and affirmed the trial judge’s order, which awarded over $8 million to the plaintiffs for their costs incurred to remedy the concrete slabs.

Court of Appeal Decision

The insurer argued on appeal that the over-deflection, bending and cracking was not “direct physical loss or damage to the property insured” but a manifestation of faulty workmanship. The Court of Appeal held that this argument was inconsistent with the trial judge’s finding of fact, that the defect (e.g., the faulty or defective shoring) caused actual physical damage (e.g., the over-deflection). Therefore, the greater than anticipated deflection was a fortuitous event. The Court of Appeal also did not accept that the slabs did not suffer physical loss or damage because they were never initially in a satisfactory state.[12] Accepting such an argument would have deprived the contractor of coverage for unfinished work product during construction.[13]

The insurer also argued that the trial judge erred in excluding only the costs of implementing proper shoring/framework procedures (which were nil). It submitted that the interpretation of the defects exclusion required a different inquiry than was undertaken in the resulting damage case law considered by the trial judge. The resulting damage case law addresses the distinction between resulting damage from an insured’s own work which is generally covered, and the cost of making good a defect in an insured’s own work which generally is excluded.[14]

The insurer relied upon the Alberta Court of Appeal decision in Ledcor Construction Ltd v. Northbridge Indemnity Insurance Co. (“Ledcor”),[15] which excluded from coverage the cost of replacing glass windows that suffered damage during the cleaning process caused by the faulty workmanship of a trade contractor on the basis that repairing the windows would be “making good faulty workmanship” since the damage was the direct result of the cleaning carried out by the trade contractor.[16] Based on Ledcor, the insurer submitted that the correct interpretation of the workmanship/design exclusion clause would lead to the exclusion of the entire claim.[17] The Court of Appeal disagreed, finding no error in the trial judge’s reasoning. The defects in the framing and shoring workmanship resulted in the damage to slabs, and therefore, there was no defect in the slabs themselves that could have been rectified to prevent the over-deflection, bending and cracking.[18] The Court of Appeal applied the Ontario Superior Court decision of PCL Constructors Canada Inc. v. Allianz Global Risks US Insurance Company (“PCL Contractors”),[19] which involved a similar exclusion clause that was interpreted as a deeming provision providing special treatment of loss or damage caused by faulty workmanship.[20] The effect of the clause in PCL Contractors was to classify the damage to be “resulting damage” and therefore covered under the policy. The fact that sufficient preventative measures would not have added to the costs in this case did not matter. The Court of Appeal was clear that if the parties had intended to exclude all damage caused by the actions under the control of the insured, that there was simple and direct language available to do so, in the form of exclusion clause LEG 1.[21]

The Court of Appeal dismissed the insurer’s appeal and affirmed the trial judge’s order, which awarded over $8 million to the plaintiffs for their costs incurred to remedy the concrete slabs.

Footnotes

[1] 2015 CarswellBC 2210, 2015 BCCA 347; affm’g 2014 BCSC 1568 (CanLII)[Acciona].

[2] Acciona at para 54.

[3] Acciona at para 55.

[4] Acciona at para 58.

[5] 2015 ABCA 121 (CanLII)[Ledcor].

[6] Ledcor at para 8.

[7] Acciona at para 58.

[8] Acciona at paras 61-62.

[9] 2014 ONSC 7480 (CanLII)[PCL Contractors].

[10] Acciona at para 64 citing PCL Contractors at paras 23-25, 28.

[11] Acciona at para 69.

[12] Acciona at para 54.

[13] Acciona at para 55.

[14] Acciona at para 58.

[15] 2015 ABCA 121 (CanLII)[Ledcor].

[16] Ledcor at para 8.

[17] Acciona at para 58.

[18] Acciona at paras 61-62.

[19] 2014 ONSC 7480 (CanLII)[PCL Contractors].

[20] Acciona at para 64 citing PCL Contractors at paras 23-25, 28.

[21] Acciona at para 69.

Melissa A. Wright is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Melissa summered, articled and practiced at the Toronto offices of a prominent business law firm gaining corporate tax, dispute resolution and commercial litigation experience. Melissa graduated from the University of Windsor’s Faculty of Law in 2011 and was called to the Ontario Bar in 2012.

For more information, visit http://www.theallgroup.com/

Photo credit: Curtis Cronn via VisualHunt.com / CC BY-NC-ND

Show Less

Bullies And Their Parents Not Covered For Lawsuits Under Home Insurance Policy

Camille's Profile Photo

By: Camille M. Dunbar, Litigation Associate


In Unifund Assurance Company v. D.E.,[1] the Ontario Court of Appeal ruled that the parents of a school-age bully are not covered for their negligent supervision under their home insurance policy.

We recently reported on D.E. v. Unifund Assurance Company,[2] a trial level decision where the Court declared that an insurer, Unifund, had to defend and indemnify parents of an alleged school-age bully. The decision was overturned and the Court of Appeal’s reasoning is precedent-setting and instructive to both insurers and policy holders.

Show More

A claim was brought against the minor daughter of D.E. and L.E. (the “parents”), and two other Grade 8 students, for allegedly bullying a fellow classmate, causing her physical and psychological injuries. The parents were also sued for their alleged failure to control their daughter and prevent the bullying.

The parents were insured under a comprehensive homeowners’ policy that provided for liability coverage if their personal actions unintentionally caused bodily injury or property damage. The parents successfully obtained a declaration that Unifund had a duty to defend and indemnify them in the underlying action. Unifund appealed.

On appeal, the primary issue was whether either of two exclusion clauses in the policy saved Unifund from having to defend and indemnify the parents.

Justice MacPherson, writing for the Court of Appeal, relied on the three part test set out in Non-Marine Underwriter, Lloyd’s of London v. Scalera,[3] regarding an insurer’s to duty to defend and indemnify:

  1. whether the legal allegations against the insured are properly pleaded;
  2. whether any claims are entirely derivative in nature;
  3. whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer’s duty to defend.

Justice MacPherson found that the first two criteria were easily met, so he zeroed in on the third part of the test: whether the properly pleaded, non-derivative claims against the parents triggered Unifund’s duty to defend. He noted that the claims against the parents were described in terms such as “failure to take disciplinary action” and “failure to discharge their duty to prevent the continuous physical and psychological harassment.” When compared with the dictionary definition of negligence, which includes “failure to take proper care over something”, he found that the claims against the parents were squarely grounded in negligence.

Justice MacPherson then turned to one of the two exclusion clauses in the policy, which precluded coverage for:

failure of any person insured by this policy to take steps to prevent sexual, physical, psychological or emotional abuse, molestation or harassment or corporal punishment.

He dismissed the lower court’s finding of ambiguity, which was based on the lack of “express language” addressing whether “negligent failure to prevent physical abuse or molestation” was excluded under the policy. In support of this finding, he referred to a similar decision, where it was held that the policy excluded coverage for precisely the type of claim made against a babysitter for negligent supervision.

Justice MacPherson concluded that the exclusion clause was clear on its face and it applied to the claims as pleaded against the parents. As a result, he declared that Unifund did not have a duty to defend or indemnify the parents in the underlying lawsuit.

This decision makes it clear: neither school-age bullies nor their parents will be covered under a homeowners’ insurance policy that contains this specific exclusion. As bullying, and now particularly cyber-bullying, remains a sensitive issue for many Canadian schools, we expect this decision will have a precedential effect on similar claims. While insurers are entitled to choose what they cover, these cases always raise the question of how a policy that does not cover negligence that causes bodily injury can be referred to as “comprehensive”. It is also notable that at least one other insurer’s standard policy exclusion simultaneously refers to “the failure to supervise and the negligent supervision of any person”.

Footnotes

[1] 2015 ONCA 423.

[2] 2014 ONSC 5243.

[3] 2000 SCC 24.

Camille M. Dunbar is an associate at Theall Group LLP and maintains a broad civil/commercial litigation practice. Prior to joining Theall Group LLP, Camille summered and articled at the Toronto office of a prominent national business law firm, gaining commercial litigation experience in class proceedings, injunctions, franchise disputes, professional liability, employment law, municipal liability and negligence/product liability. Camille graduated from Osgoode Hall Law School in 2013 and was called to the Ontario Bar in 2014.

For more information, visit http://www.theallgroup.com/

Photo credit: trix0r via Visualhunt.com / CC BY

Show Less

Pure Economic Loss Claim Applies To Patent Defects That Are Not Imminently Dangerous

Jeff

By: Jeffrey A. Brown, Partner


The Manitoba Court of Appeal has held that a defendants’ motion for summary judgment should be dismissed, rejecting their argument that claims for pure economic loss for patent defects that are not imminently dangerous should not proceed to trial. This is yet another in a long line of cases interpreting the seminal Supreme Court of Canada decision in Winnipeg Condominium Corp. No. 36 v. Bird Construction Co.,[1] where the Court held a defendant liable for a dangerous defect even though there had been no damage to persons or property (i.e. a pure economic loss claim).

In Winnipeg Condominium Corp. No. 613 v. Raymond S.C. Wan Architect Inc.,[2] the defendant architectural firm and its principal had provided architectural services for the design and construction of a condominium. The condominium suffered from defects including water pooling in the lower levels of the building’s parkade. The plaintiff’s expert opined that the parkade was not in danger of imminent collapse, and that it might take decades before it would be in danger of collapse. Moreover, there would be indications of a pending collapse before it occurred.

Show More

The defendant architects stated that there were two principles arising out of the Bird Construction[3] case referred to above. First, that the reasoning in that case only applies to latent defects. Second, that recovery is limited to situations where the defect causes a real and substantial danger to persons or other property, or the imminent possibility of danger. They argued that the defect in the case at bar is patent, not latent, and that any potential danger arising out of the defect was years away from becoming dangerous, if at all.

The motion was heard by a Master at first instance.[4] The Master determined that although there was a latent defect at issue in Bird Construction, there is no mention of a latency requirement in the rest of the decision. Moreover, the Court referred to another decision of the Manitoba Court of Appeal[5] that permitted a claim for pure economic loss to proceed to trial even though it involved a patent defect (although the issue of a patent vs. latent defect was not argued before that court). With respect to the claim of an imminency requirement, the Court noted that this issue had been mentioned in Bird Construction and litigated in other decisions, and the courts have regularly permitted claims for non-imminent dangerous defects to proceed to trial. The Court noted that it would encourage reckless and hazardous behaviour if a defect was allowed to develop into an imminent defect before it could be the subject of a claim. It was more appropriate to permit the plaintiff to take steps to repair the defect before it cause injury. Thus, the Court denied the defendants’ motion and permitted the claim to proceed to trial.

This case was appealed to a judge in an unreported decision who adopted the Master’s decision and dismissed the appeal in a short endorsement. The defendants appealed to the Manitoba Court of Appeal, which dismissed the appeal. The Court agreed that since the law on liability for pure economic losses was still developing, it would be inappropriate to dismiss the claim before trial.

This case is an accurate statement of the law of pure economic loss, and protects the advances made in the Bird Construction decision. It makes little sense to require that a defect be imminently dangerous and/or a latent defect before a plaintiff could be entitled to claim for pure economic loss. We expect that if and when these issues are ultimately determined at trial, the Court will agree with the reasoning of the Court herein.

Footnotes

[1] [1995] 1 S.C.R. 85

[2] 2015 MBCA 49

[3] [1995] 1 S.C.R. 85

[4] 2014 MBQB 13

[5] Brett-Young Seeds Ltd. v. K.B.A. Consultants Inc., 2008 MBCA 36

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book)

For more information, visit http://www.theallgroup.com/

Photo credit: kennymatic via Visual hunt / CC BY

Show Less

A Cautionary Tale: The Party That Imposes Specifications For Methods And Materials Is Responsible For Its Defects

Jeff

By: Jeffrey A. Brown, Partner


The Ontario Court of Appeal has held that where a plaintiff has imposed the methods and materials that the defendant must use to complete a project, the defendant is absolved of responsibility if the project proves to be defective, as the risk has been allocated to the plaintiff. Although this decision is not a typical products case, the considerations are similar to those that a court reviews in a case involving the implied warranty of fitness under the provincial Sale of Goods acts.

In Bruell Contracting Ltd. v. J. & P. Leveque Bros. Haulage Ltd.,[1] the Ontario Ministry of Transportation (“MTO”) awarded a contract to Leveque Bros. Haulage Ltd. (“Leveque”) to resurface 17.9 kilometers of road. The contract imposed certain specifications regarding the methods that Leveque was required to use. Shortly after Leveque completed the work, the road deteriorated for a number of reasons. As a result, MTO insisted that Leveque remove the defective surface and reapply a new one. After the road was repaired, MTO refused to compensate Leveque for the additional work and Leveque brought an action against MTO for breach of contract.

Show More

MTO’s position is that there was an implied term in the contract that the binder and aggregate (which are the main components of the surface treatment) would be compatible and Leveque was obligated to test them to ensure their compatibility. It appears that the binder and aggregate required the addition of an anti-stripping additive to be compatible; however, the aggregate and binder were tested by MTO and met all tests required by the specifications. Leveque claimed that the road surface deterioration was caused, in part, by excessive application of the binder, as directed by MTO, and heavy truck traffic permitted by MTO before the road surface had cured.

The trial judge’s decision turned on the designation of the type of contract between MTO and Leveque: i) Performance Specification Contact; or ii) Method Specification Contract. In a Performance Specification Contract, the contractor must carry out the terms of the contract and adequately perform the task. If the contract is to resurface a road, the road must be resurfaced properly without defects. The contractor takes on a “performance” risk and, as a result, charges a higher price. In a Method Specification Contract, one party specifies the methods and materials that will be used in the project. These contracts place less risk on the contractor because the methods and materials are already specified, and the contractor is only required to follow the specifications. In these contracts, the contractor/expert takes on less risk and charges a lower price.

The trial judge accepted the evidence of the contractor’s expert who opined that the specified tools, emulsion, aggregate, equipment and instructions for surface preparation were controlled by MTO. Moreover, in comparison with other MTO contracts, there was no specific warranty, no requirement for compatibility testing, and no performance specifications. The trial judge accepted that this made the contract more consistent with a method specification contract.

The Ontario Court of Appeal affirmed the trial judge’s decision, finding no error in the characterization of the contract. The Court stated that since Leveque used the materials specified and applied them in accordance with the contract specifications, the responsibility rested with MTO.

This decision illustrates that the court will not imply performance requirements into a contract where the contract does not impose performance criteria. A contractor is entitled to simply follow the specifications and methods mandated in the contract, and take consolation in the assurance that a court will protect them if the resulting product is defective.

Note the relationship between the issues in this case and those involving products that are subject to the implied warranties in provincial Sale of Goods acts. The implied warranty of fitness set out in Sale of Goods acts implies a warranty on the seller that the product will be fit for its purpose unless it can be shown that the buyer did not rely on the expertise of the seller. In other words, the seller is not responsible if the buyer relies on its own expertise. The method specification contract vs. performance specification contract dichotomy in the case at bar is similar and is a way for the parties to appropriately allocate the risk of defect.

Footnote

[1] 2015 ONCA 273

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book)

For more information, visit http://www.theallgroup.com/

Show Less

Carefully Consider That Additional Insured Endorsement – It May Still Protect You!

wright_Carousel (105x104)

By: Melissa A. Wright, Litigation Associate


The Ontario Superior Court of Justice recently held that an additional insured was covered by a policy, where there was no direct claim against the named insured, even though the coverage was limited to claims arising from the negligence of the named insured.[1] The most common additional insured endorsements are generally speaking very restrictive in their application. As this case demonstrates, such an endorsement may still provide protection to an additional insured even where the plaintiff has no direct claim against the named insured.

The plaintiff hired Davis Systems of North Bay Nipissing (“Davis Systems”) to repair damage to a hotel that was caused by a fire. Davis Systems in turn subcontracted that work to Crystal Clean Carpet & Upholstery Specialist (“Crystal Clean”). Crystal Clean allegedly left a window open in the middle of winter, causing the pipes to freeze and burst.

Show More

The plaintiff sued both Davis Systems and Crystal Clean for damages resulting from Crystal Clean’s alleged negligence. Davis Systems cross claimed against Crystal Clean and brought a third party action against Crystal Clean’s insurer, Economical Insurance Group (“Economical”). Under the policy of insurance Davis Systems was listed as an additional insured.

While the plaintiff eventually consented to a dismissal of the action against Crystal Clean, the cross claim and third party claim continued. Economical and Crystal Clean together brought a Rule 21.01(1)(b) motion seeking a dismissal of the third party claim on the basis it disclosed no reasonable cause of action.

In order for Economical to have a duty to defend the action against Davis Systems, there must be the possibility of a duty to indemnify.

Economical and Crystal Clean argued that since the action against Crystal Clean had been discontinued, the true nature and substance of the claim was with respect to Davis Systems’ negligent acts and not with respect to liability arising out of the operations of Crystal Clean. It argued that the discontinuance was an acknowledgement by the plaintiff that the factual allegations could not support its claim; accordingly coverage for Davis Systems’ omissions relating to Crystal Clean’s operation could not be triggered.

The court did not accept Economical and Crystal Clean’s argument for the following reasons. First, the court did not know the reasons why the plaintiff discontinued its claim against Crystal Clean. Second, even if the discontinuance could be said to be an admission, it was not binding on Davis Systems. Third, the discontinuance could only be said to be an acknowledgment that the plaintiff’s claim against Crystal Clean could not succeed. It was not an acknowledgment in respect of the plaintiff’s claim against Davis Systems.

The pleadings alleged that Davis Systems was liable to the plaintiff for breach of contract as a result of Crystal Clean’s negligence. This allegation was, in the court’s view, within the coverage provided by the policy. Notably, the exclusion in the additional insured clause was restricted solely to Davis Systems’ own negligent acts. The clause read as follows:

[..] Davis Systems are hereby added to the policy as additional Insureds but only with respect to liability arising out of the operations performed by or for the named insured but excluding any negligent acts committed by such additional Insured. (Emphasis in original)

As there was no other factual basis for Davis System to be liable other than Crystal Clean’s negligence, the discontinuance against Crystal Clean did not change the factual basis upon which the plaintiff was seeking to find Davis Systems liable. The policy covered damages for Crystal Clean’s negligence when those damages were sought from Davis Systems. Accordingly, the motion was dismissed.

In this case, there was real value added by the additional insured endorsement even though the language of the clause itself was restrictive. Additional insured endorsements should be carefully reviewed by your counsel to ensure that your interests are being protected.

Footnote

[1] Innvest Real Estate Trust (o/a Travelodge Airport North Bay) v. 1328151 Ontario Inc. (o/a Paul Davis Systems of North Bay Nipissing) et al., 2014 ONSC 5891

Melissa A. Wright is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Melissa summered, articled and practiced at the Toronto offices of a prominent business law firm gaining corporate tax, dispute resolution and commercial litigation experience. Melissa graduated from the University of Windsor’s Faculty of Law in 2011 and was called to the Ontario Bar in 2012.

For more information, visit http://www.theallgroup.com/

Photo credit: amseaman via Visualhunt.com / CC BY-ND

Show Less

 

Product Liability Risks And Market Globalization

Jeff

By: Jeffrey A. Brown, Partner


Globalization of industry has resulted in materials and components often being supplied from multiple markets across the world. When something goes wrong, and claims arise, it can prove difficult to enforce your contractual rights to indemnity. What could go wrong?

Unfortunately, lots. If your client, as the manufacturer or local distributor, has not taken effective steps to ensure that its product is manufactured properly, your client could find itself facing substantial fines from regulatory authorities along with class actions that can put a serious dent in your client’s bottom line.

Show More

As experienced product liability litigators, we see a number of common difficulties that might be avoided through effective negotiations and risk allocation When advising your client, you should be discussing the issues outlined below as part of any supply agreement, particularly when it involves multiple jurisdictions.

Product Design:

  • Who is responsible for the design of the product or the particular component?
  • If the supplier is responsible, what steps can your client take to ensure that the component is acceptable?
  • Will there be a clear line between your client’s responsibilities and those of the supplier, which can be memorialized in the agreement?
  • Consider whether your client should be entitled to access all drawings for design and the manufacturing process. Do you want your client to be involved in the process or should it be left to the supplier in order to keep those roles clear and distinct?

Product Testing:

  • Who tests the product? It is preferable that all product testing be performed at an independent laboratory. If product testing takes place at the supplier’s facility, it should be performed under the supervision or audited by an independent party, and possibly including one of your company’s knowledgeable representatives. Again, it should be clear that the responsibility for testing and its accuracy will always rest with the supplier.

Product Certification:

  • Is independent certification necessary for the component, and if so, how is certification achieved?
  • Is the certification authority used by the supplier reputable? Your client’s defence that the product was certified to all safety standards, will ring hollow if the certification authority merely rubber-stamped the certification. Consider retaining independent counsel in the supplier’s jurisdiction with product liability expertise. Their assistance can help your client evaluate the certification process, and other local issues, making the process more efficient and reliable.

Design & Manufacturing Consistency:

Where a company has effectively managed the above risks, it often takes a company by surprise when its product ultimately experiences widespread failures: “We thought we did everything right!” Unfortunately, the supplier sometimes makes changes to its product or components without notice. Where your client is purchasing an integrated component, it may be impossible to identify changes just by looking at the product. The solution can be expensive. Therefore, consider the following:

  • The supply contract should include a right to audit the supplier’s facilities to ensure that the product is being made properly.
  • If the supplier’s component is such that a change could only be identified by testing, then your client may need to ensure testing is done on a regular basis.

Notice of Failure:

If something goes wrong, the only way to get ahead of the problem is to know it exists. In order to avoid disputes, suppliers may not reveal the existence of a problem, or the extent of it. Information sharing is crucial.

  • It may be that the component in your product is sold to other companies. You need to ensure that contract terms require that your client is immediately advised if there are failures in other products using that same component. Unfortunately, it is ultimately the integrity of your client’s supplier that dictates whether it will be forthright with your client regarding any failures, or whether it will try to “manage” the problems themselves.

The issues outlined above are a subset of the opportunities available to limit your risk of product failures. The financial stability of the supplier can be crucial. You should also attempt to manage risk via contractual provisions such as insurance, the right to control the defence of any claims, defined responsibilities, indemnification, and law of the contract.

Finally, you should consider how you will enforce all of these rights: can they be backstopped with some form of attornment, bonding or insurance so that you are not fighting jurisdiction battles when claims arise? Once you have considered all of these issues, you will be in a better position to impose responsibility on the supplier.

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book)

For more information, visit http://www.theallgroup.com/

Show Less

Insurance Clauses: Priceless Or Worthless?

LGT (105x104)hashim_Carousel

By: Lawrence G. Theall, Partner

And: Shaun A. Hashim, Litigation Associate


Contracts provide an ideal opportunity for the efficient allocation of risk, and insurance clauses can cover much of this ground, often with no concessions from your client. This opportunity can be lost when the clause does not really fit the particular transaction, or where the coverage is not available when later required. Even a carefully drafted clause may be worthless, if the parties do not turn their minds to how it will apply to the specific circumstances and avoid some common traps, as discussed below. For a more thorough discussion, please sign up for our upcoming CBA webinar “Negotiating and Drafting Effective Risk Allocation: Integrated Liability and Insurance Clauses” (Fall 2015).

Show More

Insurance certificates and erosion of limits: Many insurance provisions require the delivery of insurance certificates, presumably confirming the required insurance coverage is in place. However:

  • Certificates rarely contain key provisions, such as critical exclusions.
  • While they identify policy limits, they give no indication of whether or not those limits have been, or are at risk of, being eroded. It does not matter what coverage the policy provides, if its limits have been exhausted when the claim arises.

If multiple claims arise against a Named Insured, as a result of a defect, one or two settlements could quickly erode the policy limits, leaving nothing to pay any future claims against the additional insured.

Subsequent modifications/cancellation: The subsequent modification or cancellation of a policy can also be a problem. Clauses often contemplate that the insurer will be obliged to advise of material changes, but frequently it is not endorsed on the policy, and is therefore ineffective.

Additional insured: Adding a party as an “additional insured” is probably the most commonly used, and a largely misunderstood, risk allocation provision. There are two common misconceptions which often result in these clauses not achieving their desired goal. First, unless otherwise provided, the “additional insured” endorsement will provide that the party is only added for vicarious liability (i.e. the Named Insured’s acts and omissions). It is far better if the endorsement makes the company an additional insured with respect to all claims arising from or relating to the nature of the business being transacted, which will then cover claims arising from the company’s negligence. The second common misconception is that it is always good to be an additional insured. For many errors and omissions policies, as well as some general liability policies, this is not the case. These policies may contain an “insured versus insured” exclusion, which removes coverage for any claims asserted by one insured against another insured.

Stand Alone Policies: One solution to some of these issues is having a dedicated policy. Whether this is practical will vary from business to business. The construction industry frequently uses dedicated, project-based policies. These are intended to avoid disputes relating to who is at fault, ensuring the project can continue to completion when a claim does arise. It is also a good example of the economically efficient allocation of risk. Other businesses have similar opportunities. For example, while dedicated policies may not be as common in supply agreements, it is an option worth exploring. Another option to consider may be excess or umbrella policies, which may or may not be dedicated.

Conclusion:

So are your insurance clauses priceless or worthless? The answer is they can provide great value at little or no cost to your client. The value is often determined by thoughtful drafting, with a full appreciation of the transaction and the potential traps noted above. Consider the following when drafting or reviewing insurance clauses:

  • Get a copy of the insurance policy from the other party
  • Consider the issue of eroding limits
  • For larger contracts, the clause should include full details of what the insurance policy(ies) should and should not include
  • Consider drafting the additional insured endorsement and including it as a schedule to the agreement
  • Have the insured’s broker or risk manager confirm in writing that the insured party can comply with the requirements of the insurance clauses

Lawrence G. Theall is the founding partner of Theall Group LLP. He practices commercial litigation, insurance and product liability (including class proceedings), and has appeared before all levels of the Ontario and Federal courts, as well as the superior courts of Manitoba and Alberta. He is honoured to have been selected as a Lexpert Ranked Lawyer for Product liability and selected by his peers for Best Lawyers 2017  for Insurance, as well as in  Expert Guides in the areas of Litigation, Product Liability, Insurance and Reinsurance. He is an editor for the Insurance chapter to be published in Bullen & Leake & Jacob’s 3rd Edition of Canadian Precedents of Pleadings in 2017 and a co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book).

Shaun Hashim is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Shaun summered and articled at the Toronto office of a prominent national law firm, gaining commercial litigation experience in a wide range of disputes involving fraud, breach of fiduciary duties, employment law, and the oppression remedy. Shaun graduated from the University of Windsor’s Faculty of Law in 2014 and was called to the Ontario Bar in 2015. Shaun is an editor for the Insurance chapter to be published in Bullen & Leake & Jacob’s 3rd Edition of Canadian Precedents of Pleadings in 2017.

For more information, visit http://www.theallgroup.com/

Photo credit: ponyQ via Visual Hunt / CC BY

Show Less

Manufacturer Fails To Set Aside Jury Decision Imposing Liability For Failure To Warn

Jeff

By: Jeffrey A. Brown, Partner


A recent decision by the Ontario Court of Appeal, illustrates the difficulties faced by companies that try to challenge a jury’s findings. In Stillwell v. World Kitchen Inc.,[1] the plaintiff was injured when a Dutch oven he was washing broke into four large pieces, severely lacerating his wrist. The jury awarded damages of $1.1 million less 25% for the plaintiff’s contributory fault. The jury did not find that there was a manufacturing or design defect, but instead found that the defendants failed to adequately warn the plaintiffs. The warning that the product was prone to break if dropped or subjected to a hard impact was not found on the outside of the box or in the warning section of the manual, but was instead in the “Remember” section of the manual.

Show More

The jury provided the following answers with respect to the particulars of its negligence findings: a) the product’s warnings did not clearly state the difference between deep versus minor scratches; b) the warnings did not identify what constitutes a deep scratch and when the consumer should contact the manufacturer; and c) that the warning regarding accidental breakage from impact and subsequent potential injury should have been further emphasized in the manual and that warning should have been placed on the exterior of the box.

The defendants appealed on a number of grounds, including that there was no evidence to support the finding that the failure to warn caused or contributed to the accident. The defendants argued that since there was no evidence of scratches on the pot, a warning to discontinue use of the pot if it was scratched would have had no effect. They further argued that a more comprehensive warning would not have affected the injured plaintiff’s wife’s behavior, as she was already extremely safety conscious, nor would it have affected the injured plaintiff’s behavior as he never read the warnings.

The Court began its analysis by noting that the standard of review of jury verdicts is “exceptionally high” and that a jury’s verdict is entitled to a “fair and liberal interpretation in light of the evidence and of the circumstances”. It then noted that there was expert evidence that a deep scratch could cause, or be a sign of, internal stress, and that it appeared that the jury concluded that the breakage occurred due to a combination of an internal flaw and a physical impact to the Dutch oven caused by the injured plaintiff’s actions. The Court also found that even though no one noticed a deep scratch on the Dutch oven, it was open to the jury to find that the deep scratch could have been present and contributed to the internal stress.

The Court also accepted the appellant’s submission that there was no direct evidence about how the plaintiffs would have acted if an adequate warning had been provided, but still held that the jury was entitled to infer that the injured plaintiff’s wife would not have purchased the cookware if she had been adequately warned. Given that she was extremely cautious in her use and care of the product, the Court held that it was open to the jury to infer that she would not have purchased it had she been warned that the combination of internal stress and an impact could cause it to break and cause injury. The Court held that this finding was not plainly unreasonable and unjust, and the jury was acting judicially. Therefore, the appeal was dismissed.

This case illustrates the high hurdle that an appellant must scale in order to set aside a jury decision. Where there was no evidence of a “deep scratch”, it is unclear how a warning on the side of the box regarding the risk of product breakage in the presence of a deep scratch would have made a difference to the plaintiff’s actions. However, it is arguable that an “extremely cautious” person might not have purchased the cookware if that person was aware of the possibility of breakage as a result of a hard impact and internal stresses. It shows the permissible inferences that a jury can make are quite broad, given that there was no evidence about what the plaintiff’s wife would have done if faced with that particular warning.

Footnote

[1] 2014 ONCA 770.

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book)

For more information, visit http://www.theallgroup.com/

Photo credit: Steve Snodgrass via Visual hunt / CC BY

Show Less

What Killed The Bunnies? The Importance Of Causation

wright_Carousel (105x104)

By: Melissa A. Wright, Litigation Associate


A commercial rabbit farmer found out that the implied warranty of merchantability under Ontario’s Sale of Goods Act provides no protection where causation is not proven and the contractual documents provided no basis to determine the acceptable level of toxins and other contaminants in rabbit feed.

Show More

In Jones Feed Mills Ltd. v. Raivio,[1] a commercial rabbit farmer, Raivio, began purchasing standard rabbit feed from a manufacturer and supplier of commercial animal feed, Jones Feed Mills Ltd (“Jones Feed”). From May to August 2005, while using the standard mix provided by Jones Feed, Raivio experienced an average of 21.7 dead rabbits per day. Then, in August 2005, Raivio and Jones Feed entered into a Customer Formula Feed Agreement whereby Jones Feed agreed to provide Raivio with custom feed made according to specifications developed and provided by Raivio. The Customer Formula Feed Agreement did not provide for an acceptable level of toxins or other contaminants in the feed and contained no express warranty of fitness or merchantability.

During the fall, while using the custom feed formula, Raivio experienced high levels of mortality in his herd with 4,567 deaths in September, 3,100 in October and 2,300 in November. Raivio discontinued purchasing feed from Jones Feed in November 2005, and refused to pay outstanding invoices for the feed. Jones Feed sued Raivio, who counterclaimed on the basis that the feed was contaminated with an increased level of mycotoxins resulting in high levels of mortality in his herd, and that Jones Feed was liable for negligence and/or breach of contract.

At trial, Raivio’s expert did not persuade the trial judge that the increased mortality rate in his herd was caused by an increased level of mycotoxins in the custom feed supplied by Jones Feed. Jones Feed’s expert opined that it was difficult to conclude that feed contamination caused the massive losses suffered by the plaintiff, given findings from an experimental study on rabbits that suggested that rabbits were less sensitive than other species to mycotoxins. The trial judge noted that Raivio’s expert did not take into account the experimental study, even though he was part of the advisory committee for the study, nor did he provide a reply expert report to respond to Jones Feed’s expert report that considered the study. Moreover, on cross-examination, Raivio’s expert was forced to retreat from his position that rabbits were “sensitive” to mycotoxins.

With respect to the claim that Jones Feed breached the implied condition of merchantability under Ontario’s Sale of Goods Act,[2] Raivio argued that there were unacceptable levels of mortality in the rabbit herd, and that alone demonstrated that the feed was not merchantable. Given the Court’s findings with respect to causation, the Court rejected that argument.

In making this finding, the Court referred to a similar case, Clarence Kloosterhof’s Farm Services Ltd., v. Longley,[3] where the court held that there was a breach of the implied warranty of merchantability under the Sale of Goods Act because the feed was in excess of Agriculture Canada’s published tolerance level for vomitoxin. This finding was made despite a lack of medical evidence establishing a link between the impurities in the feed and problems in the herd. In contrast, in Raivio there was no established tolerance level for rabbit feed, so the implied condition of merchantability was not breached.

This case illustrates the importance of ensuring that your expert evidence can prove that the product caused the loss. Raivio was not only unable to provide sufficient expert evidence to prove the feed killed his rabbits, but in the absence of express warranties setting out an acceptable level of toxins or other contaminants in the feed, or a warranty of fitness, he had to pay for the feed as well. We feel bad for the bunnies. HAPPY EASTER!

Footnotes

[1] 2014 ONSC 4298, 2014 CarswellOnt 9979.

[2] Given that there was no evidence that Raivio relied on Jones Feed, Raivio did not pursue a claim for breach of the implied warranty of fitness.

[3] (2000) 186 N.S.R. (2d) 131 (N.S. S.C.)

Melissa A. Wright is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Melissa summered, articled and practiced at the Toronto offices of a prominent business law firm gaining corporate tax, dispute resolution and commercial litigation experience. Melissa graduated from the University of Windsor’s Faculty of Law in 2011 and was called to the Ontario Bar in 2012.

For more information, visit http://www.theallgroup.com/

Show Less

B.C. Supreme Court Finds Workmanship/Design Exclusion Does Not Exclude Costs To Remedy Damage Caused By Defective Workmanship

Camille's Profile Photo

By: Camille M. Dunbar, Litigation Associate


The British Columbia Supreme Court recently released its decision in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company,[1] which considered for the first time in Canada the LEG 2/96 clause, a workmanship/design exclusion clause. The Court also re-affirmed a number of insurance interpretation principles, particularly in relation to Course of Construction (COC) policies, including the definition of “damage to insured property” and whether a loss must be fortuitous in order to trigger coverage.

Show More

The plaintiffs were the design/build contractors for a $250 million public-private partnership (P3) project, which involved constructing a new hospital in Victoria, British Columbia. The project called for an eight-storey concrete structure, consisting of suspended concrete slab floors.

During construction, the concrete slabs “over-deflected”, resulting in a concave recession in the centre of the slab. Although testing showed that the over-deflected slabs met the necessary safety requirements, the slabs were unfit to meet the serviceability standards of a large hospital that required level floors for wheeled equipment. The Court accepted the plaintiffs’ expert evidence that the cause of the over-deflection was improper formwork and shoring procedures that failed to account for the unusually thin design of the slabs. Extensive remedial work was required to correct the deflection. The plaintiffs sought recovery of the remedial costs incurred from the defendant insurers under a COC policy (the “Policy”).

The Policy’s insuring agreement provided coverage for “all risks of direct physical loss of or damage to the property insured”, subject to Policy exclusions. In denying coverage, the insurers made the following arguments: 1) the over-deflection of the slabs were defects, and therefore did not constitute “damage” within the insuring agreement; 2) the loss was not fortuitous; and 3) the “defects in material workmanship” or “design” exclusion (“LEG 2/96”) excluded all losses under the Policy.

The Court noted that a COC policy is intended to provide the owner of a construction project with the promise that the contractors will have the funds to rebuild in case of loss, and to the contractors, the protection against the crippling cost of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset. It is in this context that the Court embarked upon its analysis.

The Court held that the over-deflection (as well as surface cracking and stretching of the rebar) constituted “damage” under the Policy. The Court noted that while some degree of deflection and cracking is expected, the slabs experienced significant degrees of deflection throughout the facility, resulting in permanent deformity which rendered the slabs unfit for its intended purpose. The slabs were left in an altered physical state, which courts have held to be the touchstone for a finding of damage.

As to the requirement of fortuity, the court stated that fortuity is inherent in the Policy as the risk undertaken by the insurer is intended to insure against possible, unintended consequences. What is required to trigger coverage is that the damage is both unexpected and unintended from the standpoint of the insured. The Court found that the over-deflection and cracking were unintended and unexpected, as the slabs were not designed to deflect to such a degree as to render them unfit for their intended use. Therefore, the fortuity requirement was met.

The Court then considered what it noted to be the central coverage issue: whether the loss was excluded under the LEG 2/96 workmanship/design exclusion. The wording of the exclusion is as follows:

This Policy does not insure:

(b) all costs rendered necessary by defects of material workmanship, design, plan, or specification, and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.

For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan or specification.

The Court held that, as worded, the exclusion was not limited to defective design of the work or facility as a whole. Rather, it included any “defects of material workmanship, design, plan, or specification”, which would include defective design of component pieces of the work, including the formwork and shoring/reshoring. The failure to account for the particular design was, the Court found, a defect in workmanship within the meaning of the exclusion. However, the Court noted that, when read as a whole, what is excluded under the LEG 2/96 clause are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred.

The “damage” in this case was the cracking and over-deflection of the slabs. The “defect in material workmanship” was the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs. Therefore, the LEG 2/96 clause excluded only those costs 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), which would have been minimal. Ultimately, the plaintiffs were awarded over $8 million for their costs incurred in remedy the concrete slabs.

This decision provides a welcome and thorough review of the general principles of insurance policy interpretation, and for the first time, a Canadian interpretation of the LEG 2/96 workmanship/design exclusion. The Court in Acciona was clear: where insurers have language available to them that will remove an ambiguity from the meaning of an exclusion clause or will clearly specify the scope of an exclusion, they should incorporate such language. Otherwise, the normal principles of interpretation will apply, including the principle that coverage provisions will be interpreted broadly and exclusion clauses narrowly.

The decision also provides helpful clarity on the definition of “damage” under a COC policy and the requirement of fortuity to trigger coverage.

Footnote

[1] 2014 BCSC 1568 (CanLII) [Acciona].

Camille M. Dunbar is an associate at Theall Group LLP and maintains a broad civil/commercial litigation practice. Prior to joining Theall Group LLP, Camille summered and articled at the Toronto office of a prominent national business law firm, gaining commercial litigation experience in class proceedings, injunctions, franchise disputes, professional liability, employment law, municipal liability and negligence/product liability. Camille graduated from Osgoode Hall Law School in 2013 and was called to the Ontario Bar in 2014.

For more information, visit http://www.theallgroup.com/

Photo credit: miamism via VisualHunt / CC BY

Show Less