In a recent decision, the Alberta Court of Appeal applied the Supreme Court of Canada’s analytical framework to a case involving an insurance company and property damage in a construction project.
What Happened?
The Condo Corp is made up of the owners of a large mixed-use commercial and residential project located in Calgary.
In June 2011, the Condo Corp contracted with a construction contractor and an engineering contractor (together, the “contractors”) to provide parking rehabilitation and maintenance work to the parking surface in the parkade area within the complex.
The contractors were to provide repair and remediation work to the parkade membrane. While their work included cutting into the membrane of the parkade surface, the contractors were not to perform any work that would impact the structural integrity of the concrete slab.
In June 2011, the contractors cut too deeply into the parkade slab while stripping and coating the membrane from the parkade, causing damage to the structural integrity of the parkade.
At the time the property damage occurred, the Condo Corp was insured under a multi-peril contract of insurance. The insurance company denied coverage for the claim on the basis of an exclusion clause in the policy that excluded “the cost of making good … faulty or improper workmanship.”
The Condo Corp commenced an action against the contractors. The action had been settled by mutual agreement, but a shortfall remained with respect to losses arising from the property damage.
Parties’ Positions
Much of the debate before the court rested on the applicability of the Supreme Court of Canada’s 2016 decision Ledcor v. Northbridge (“Ledcor”), in which the Supreme Court interpreted a clause excluding from coverage the “cost of making good faulty workmanship” but providing an exception for “physical damage” resulting from faulty workmanship. The case provides an analysis when it comes to applying faulty workmanship exclusions in builders’ risk policies.
In the lower case decision, the judge refused to apply a Ledcor-style interpretation to the Condo Property Policy’s faulty workmanship exclusion.
On appeal, the Condo Corp argued that Ledcor was the governing framework for the court’s analysis of the correct interpretation of the policy exclusion.
The insurance company argued that Ledcor was of no assistance to the court—first, because Ledcor involved a builders’ all-risk policy which was different than an all-risk property policy and, second, because the language of the insurance company’s exclusion clause differed from that in the exclusion clause under consideration in Ledcor.
Court of Appeal Decision
The Court of Appeal began by explaining the principles found in Ledcor:
“The Supreme Court of Canada determined the exclusion wording was ambiguous. By applying established principles of insurance contract interpretation, however, it concluded only one interpretation was consistent with the reasonable expectations of the parties and the existing commercial reality. The court held, “the faulty workmanship exclusion serves to exclude from coverage only the cost of redoing the faulty work, as the resulting damage exception covers costs or damages apart from the cost of redoing the faulty work. As such, excluded under the Policy is the cost of recleaning the windows, but the damage to the windows and therefore the cost of their replacement is covered”.
Ledcor’s approach to resolving ambiguous insurance contract language need apply only if we find similar ambiguity in the express language of the exclusion and the exception to be interpreted here.”
The court found that the analytical framework to resolve insurance contract ambiguity as outlined in Ledcor was appropriate in this case. It found that the parties reasonably expected that the cost of making good the faulty or improper workmanship (determined by the scope of work contracted for) would be excluded, but that the consequences of that faulty workmanship would be covered. The court stated that such an interpretation did not create unrealistic results because, among other reasons, loss of structural integrity to the parkade (and the building itself) was a loss covered by the terms of the policy. Further, such an interpretation was consistent with the jurisprudence.
As a result, the appeal was allowed and the Condo Corp was entitled to indemnity for the property damage.
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