Significant SCC Decision Increases All Risk Insurance Coverage
Today, the Supreme Court of Canada (the “SCC”) issued a decision dealing with coverage under a builders’ risk insurance policy that has important implications for owners, contractors and insurance companies. At issue was the interpretation of the exclusion of coverage for “the cost of making good faulty workmanship,” which appears in many commercial risks policies.
Following installation of windows at a highrise commercial tower, the window cleaning company hired by the owner to remove paint from the windows scratched and damaged the surfaces by using improper tools and methods. The owner submitted a claim for the costs to replace the damaged windows. The insurance company denied coverage relying on an exclusion in the policy precluding coverage for the “costs of making good faulty workmanship”. There was an exception to this exclusion that the owner relied upon. This exception provided that coverage would still be available for physical damage resulting from the faulty workmanship.
The SCC confirmed that the insured has the initial burden of proof, and must establish that the scope of coverage encompasses the damages. In this standard form builders’ risk policy, the coverage was very broad and included all physical loss and damages. At trial, the insurance company conceded that the damage fell within the broad coverage. Once this initial burden is met, the insurance company had to establish that any exclusions in the policy applied. Thus, the issue to be determined was whether the physical damage to the windows resulting from the improper cleaning methods was covered by the policy as an exception to the exclusion.
In this case, the SCC overturned the Alberta Court of Appeal, agreeing with the owner that only the costs of cleaning the re-installed windows would not be covered as a result of the exception. They concluded that it is not necessary for an exclusion to have a direct correspondence to physical loss. Instead the exclusion could be limited to the costs of the faulty workmanship alone. The result was that the exclusion clause only applied to the cost of redoing the faulty work (i.e. the cost of re-cleaning the windows). The physical damage to the windows themselves was not excluded due the exception for resulting damage. The SCC agreed that both of the proposed interpretations from the owner and the insurance company were plausible such that the contract was ambiguous. The court resolved the ambiguity based upon the overarching purpose of the insurance contract which is to provide broad coverage. The owners’ interpretation furthered the purpose of the contract. Conversely the insurance company’s interpretation undermined the purpose of the policy. The insurance company was required to pay for the replacement costs of the windows and could only refuse to pay for the cleaning costs afterwards under the faulty workmanship exclusion.
The fact that the window cleaning company was different from the window installation company appears to be significant. If only one company had installed and washed the windows under a single contract, it seems that the exclusion clause would have precluded coverage for the cost of replacing the windows and subsequent cleaning. If there had only been one contract, the SCC appears to suggest that the faulty workmanship would relate to the entire scope of work for both installation and washing such that the faulty workmanship exclusion would have precluded coverage for the replacement costs.
The result of this decision is very significant for parties to construction insurance contracts which are variably referred to as builders risk, contractor’s risk, all risks, multi-risk and course of construction insurance. Typically these policies are issued to owners and general contractors to cover all physical risks to the construction site.
In light of this decision, it may be prudent for owners and contractors to separate work that poses significant risks of damaging other expensive portions of the project into separate contracts with different trade contractors. This could facilitate increased coverage under a builders’ risk policy by establishing a basis for owners and contractors to argue that faulty workmanship is limited to the scope of each contract and therefore any detrimental effect of poor performance by one contractor upon other another contractor’s work fits within the exception of resulting damage (and therefore the loss is insured). Arguably this would establish coverage for losses that would otherwise be excluded on the basis of faulty workmanship if all the work is performed under one contract. Overall, this decision certainly benefits owners and contractors by confirming a broader interpretation of builders’ risk policies.
Insurance companies should be aware that the exception for resulting damage from the exclusion of coverage for faulty workmanship will not afford them the degree of protection they may have intended, or believed to be in place based on prior case law. In this case, an improperly performed $45,000 window cleaning contract resulted in approximately $2.5 million in liability for the costs to replace windows that were damaged as a result of faulty workmanship.