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

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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.

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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/

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Supplier And Manufacturer Of Copper Piping Liable For Failure To Meet City’s Watermain Sterilization Process

Jeff

By: Jeffrey A. Brown, Partner


The Ontario Superior Court of Justice rendered a decision[1] involving a product liability claim that considered new legislation and guidelines arising from the Walkerton water crisis. This case suggests that even if there has been no specific discussion about a product between the buyer and seller, a Court might still find that the buyer has relied on the seller regarding the suitability of a product if the seller had previously provided advice. The decision also suggests that if a supplier knows that a product will be used for an application that has to meet specific local standards, the supplier needs to make an inquiry of the manufacturer to ensure that it meets those standards.

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In this case, the plaintiff, Brantford Engineering and Construction Ltd. (“Brantford Engineering”), was hired by an engineering firm to install watermains in the City of Brantford (“the City”). The specifications for the project called for the use of copper tubing in the watermain system. Brantford Engineering retained Underground Specialties Cambridge Incorporated (“the Supplier”) to obtain the copper piping to be used in the project. The Supplier hired Wolverine Tube (Canada) Inc. (“the Manufacturer”) to manufacture the copper tubing.

As a result of the Walkerton water crisis in 2000, the Ontario government instituted the Safe Drinking Water Act, 2002 (“the Act”), which established minimum water standards throughout Ontario, including the necessity of maintaining a chlorine residual at all times in the water system. Chlorine is used as a disinfectant to eliminate pathogens that can lead to sickness and death. Pursuant to the Act, municipalities were permitted to establish higher standards than those set out in the Act. The City chose to do so, and required a two-step sterilization procedure involving a chlorination test and a chlorine residual test, which had to be met prior to the connection of the watermain to the municipal water system.

Although the copper piping met the chlorination test, it repeatedly failed the chlorine residual test. The Manufacturer did investigations and obtained a report which suggested that the copper’s protective layer was attacked during the “superchlorination process” during the first part of the City’s sterilization test, which caused the copper to corrode and dissolve and have a negative impact on the chlorine residual level (the second part of the sterilization test). The Manufacturer failed to disclose this report to Brantford Engineering, the Supplier and the City.

Ultimately, Brantford Engineering ordered plastic pipe from the Supplier which was installed as a replacement watermain and passed all tests. Brantford Engineering brought a claim against the Supplier for breach of contract under the implied warranties of the Sale of Goods Act (“the SGA”) and against the Manufacturer for negligence, for the losses it incurred to replace the pipe and incidental costs.

Liability of Supplier for Breach of the Implied Warranties

In order to find a breach of the implied warranty, it is crucial to find that the buyer relied on the seller’s skill or judgment. The Court found that Brantford Engineering’s expertise was in the installation of watermains, but the Supplier was knowledgeable about the material it supplies on watermain projects, and the Supplier’s general manager (“GM”) knew that the City required that the watermain pass the sterilization process before it could be connected to the water distribution system. The Court also found that the Supplier’s GM knew of the special purpose of the copper pipe and would be “applying his knowledge” to the City’s requirements.

The Court found that the Supplier had breached the warranty of reasonable fitness. In reaching this conclusion, the Court made three curious statements:

  1. The court noted that the Supplier’s GM had “provided advice and recommendations in the past”. However, it is unclear why prior recommendations would have any bearing on the question of whether Brantford Engineering had relied on the Supplier for this specific project. The Court noted that there had been “no specific discussions” regarding the piping used for this project.
  2. The Court stated that it is of no consequence that the type of copper tubing was specified by the engineering firm that had retained Brantford Engineering. Apparently, the Court believed that the Supplier was under an obligation to tell Brantford Engineering that copper tubing would not meet the City’s sterilization procedure.
  3. The Court held that the seller is obliged to be diligent in acquiring information, and cannot simply rely on the manufacturer. In this regard, the Court stated that it had “long been known a chemical reaction can occur when copper comes in contact with chlorine, particularly when chlorine is of a high concentration”, and that the Manufacturer had this information.

Although not strictly necessary, the Court also found that the copper piping was not of merchantable quality, and therefore the Supplier also breached the implied warranty of merchantable quality under the SGA. However, merchantability is a question of whether a good is generally saleable in the market, and it is not clear that the copper piping would not have been saleable for use in other watermains that were not subject to the City’s more stringent requirements.

Finally, the Court held that the exclusion under the Supplier’s limited warranty did not exclude the implied warranties under the SGA, because the warranty did not use explicit language to exclude “statutory conditions” of fitness or merchantability, which a long line of cases have said is necessary to exclude the implied warranties under the SGA. Interestingly, the Court considered the limited warranty even though it was not in the contract documents, but was solely contained in subsequent documents (i.e. packing slips, invoices) after the contract was signed. The Court said that because prior dealings between Brantford Engineering and the Supplier contained the limited warranty, the post-contractual documents would be considered even though the impact of the warranty stated therein was unclear.

Liability of Manufacturer in Tort

The liability of the Manufacturer in tort also raises some interesting questions. The Court rejected the Manufacturer’s argument that the pipe only had to meet ASTM standards, given that the Manufacturer knew the product was going to be used in watermains. The manufacturer was unaware of the City’s requirements. Indeed, on cross-examination, when the Manufacturer’s witness was asked if they made any inquiries into municipal sterilization specifications following the Walkerton crisis and the legislation that followed, the witness responded “Why would we?”

The Court found that the Manufacturer had a “due diligence obligation” to ensure that its product met regulatory and municipal standards, and that it should have made inquiries after the introduction of the Act. This ruling suggests that a manufacturer can be found liable if its product is sold in municipalities where it does not meet local standards, even if the product would meet standards elsewhere.

The Court also found that the Manufacturer had breached its duty to warn given that it failed to disclose the report that set out the reasons why the copper piping was failing.

Footnote

[1] Brantford Engineering and Construction Ltd. v. Underground Specialties Cambridge Inc., 2014 ONSC 4726, 2014 CarswellOnt 11423.

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/

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Broad Exclusions Do Not Apply Simply Because Peril Is In Chain Of Causation

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By: Lawrence G. Theall, Partner


The Ontario Court of Appeal recently held that a broad contributing cause exclusion does not apply simply because an excluded peril was included in the chain of causation. In O’Byrne v. Farmers’ Mutual Insurance Co.,[1] negligence of the insured’s tenant set in motion a chain of events ultimately leading to an oil spill after a furnace broke down. The “all risks” policy included an exclusion for “loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by: …e) centrifugal force, mechanical or electrical breakdown or derangement…” The insurer argued that since the furnace broke down, the loss was due to multiple causes including “mechanical derangement” of the furnace. The Court disagreed and looked at the evidence to determine the real cause of the loss.

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The insured owned a two-story apartment building which was insured pursuant to an “all risks” insurance policy issued by the Farmers’ Mutual Insurance Co. (“Farmers'”). An oil fired furnace was located in one of two residential apartments on the second floor. The tenant there inserted a piece of cardboard into the primary control of the furnace between two sets of contacts in order to bypass the thermostat, “presumably to keep the furnace in constant hot operation while she was away.” While the tenant was absent, there was a significant spill of heating oil from the furnace on to the apartment floor which leaked through the floorboards and saturated the main floor beam and ceiling of the building’s lower commercial units. The insured sought coverage under the policy. The insurer denied coverage for damage caused by the leaked oil. One ground for denial was reliance on the mechanical breakdown or derangement exclusion found in the “Perils Excluded” section of the policy as follows:

This Form does not insure against loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by:… (e) …mechanical or electrical breakdown or derangement in or on the “premises”…

The trial judge found on the evidence that the cause of the discharge of oil was the tenant inserting a piece of cardboard into the control panel. This, in turn, bypassed the thermostat which forced the furnace to run an excessively high temperature, causing the ignition component to fail [i.e. re-ignite] and oil to be pumped continuously without burning. Consequently coverage was provided under the policy.

Farmers’ agreed that one of the causes (i.e. the tenant’s negligence) was covered by the Policy. It argued that the other cause (i.e. the breakdown of the furnace) was “mechanical derangement” within the exclusion which should have been applied by the trial judge because the loss “was caused indirectly”, “resulted from”, “was contributed to” or “was aggravated by” a failure in the operation of the furnace due to a mechanical defect or derangement. It relied on a decision of the Supreme Court of Canada (Derksen[2]) as authority for the proposition that an exclusion can be worded to apply in case where there are multiple causes of a loss so as to exclude the entire loss.

The Court of Appeal disagreed and held that the oil spill was not a multi-causal loss. The loss in this case was not produced by two independent causes operating together, as was the case in Derksen[3]. It was caused by the tenant’s negligence (i.e. the proximate cause) that in turn led to a chain of events that culminated in the oil spill:

The fact that an element of the furnace ceased to operate does not engage the application of the mechanical exclusion. …it is not sufficient to find that some type of mechanical or electrical breakdown or derangement occurred: it is essential to examine the cause of that occurrence. The failure of a mechanical element of the furnace was not another cause of the oil damage, but rather something that occurred only after the tenant interfered with the proper operation of the furnace. Simply put, the oil damage was the result of external interference, and not a defect in the furnace.

The Court also added that, in any event, the oil damage was not the result of an internal defect in the furnace, but only occurred after the tenant interfered with its proper operation. The “mechanical derangement” exclusion consequently had no application to the facts of the case.

Footnotes

[1] 2014 ONCA 543 (C.A.).

[2] Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 S.C.R. 398 (S.C.C.).

[3] In Derksen one independent cause was the negligent clean-up of the construction site where the operator placed a metal plate on the rear tow hook of a truck and the other independent cause was the negligent operation of the truck from which the plate flew off injuring the plaintiffs. They were independent concurrent causes because, although both needed to happen for the loss to have occurred, the operation of the vehicle was not a natural sequence or consequence of negligent site clean-up.

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).

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

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