Supreme Court of Canada Provides Guidance on ‘Faulty Workmanship’ Exclusions in All-Risk Insurance Policies

Article by Gordon A. Buck from Alexander Holburn Beaudin + Lang LLP

On September 15, 2016, the Supreme Court of Canada issued its highly-anticipated decision in Ledcor Construction Limited v. Northbridge Indemnity Insurance Company (“Ledcor“),1 which provides important guidance on the interpretation and application of standard “faulty workmanship” exclusions that typically appear in commercial all-risk insurance policies. While the Supreme Court decision brings greater certainty to an unsettled area of the law, it will have significant implications for both insureds and insurers going forward. The practical effect of the Supreme Court’s decision in Ledcor is to expand the scope of coverage that will be available under a commercial all-risk policy, even in cases involving faulty or improper workmanship.

The case arose out of the construction of the EPCOR Tower in Edmonton. During final construction clean-up, the sub-contractor hired to clean the windows used improper tools and methods which resulted in damage to the windows, necessitating their replacement. The owner and the general contractor claimed the cost of the window replacement under the builders’ risk insurance policy that the owner had placed for the project. The policy contained a standard exclusion for “the cost of making good faulty workmanship” but this exclusion was subject to an exception for “physical damage not otherwise excluded by this policy … in which event the policy shall insure such resulting damage”. The insurer denied coverage for the claim based on the exclusion, while the owner and the general contractor took the position that the cost to replace the windows was resultant damage arising from the sub-contractor’s faulty work, and therefore fell within the exception for resulting damage.

The trial judge in the Alberta Court of Queen’s Bench sided with the insureds, finding that although the sub-contractor’s cleaning work was faulty, the “making good” wording in the exclusion was ambiguous and therefore did not operate to exclude the cost of replacing the windows. The Alberta Court of Appeal allowed the insurer’s appeal, finding that the policy wording was not ambiguous, and concluding that the question of whether the window replacement was “resulting damage” should be resolved by applying a test of “physical or systemic connectedness” to the faulty work being carried out. The Court of Appeal concluded that in this case, the damage that occurred was to the very thing that was the subject of the faulty workmanship, and therefore the cost to replace the windows was excluded.

The Supreme Court of Canada allowed the insured’s appeal, and concluded that only the cost of re-doing the cleaning work would be excluded from coverage under the ‘faulty workmanship’ exception. The Supreme Court rejected the Court of Appeal’s “physical and systemic connectedness” test, and found that the exclusion clause was limited to the cost of re-doing the faulty work. The Supreme Court concluded that both the insured’s interpretation and the insurer’s interpretation of the ‘faulty workmanship’ exclusion and the ‘resulting damage’ exception were plausible on the wording of the policy, and therefore the exclusion was ambiguous.

The Supreme Court then concluded that the ambiguity should be resolved in favour of the insured, having regard to the reasonable expectations of the parties entering into the insurance contract. The Supreme Court noted that the purpose of builder’s risk policies was to provide broad coverage for projects while under construction, as well as broad coverage for all those involved in the project, in order to avoid disputes over responsibility for repair or replacement of components of the project. The Supreme Court concluded that to exclude coverage for the damage resulting to the part of the project being worked on would undermine the purpose of builder’s risk policies and would be contrary to the reasonable expectations of the parties.

In coming to its conclusion in Ledcor, the Supreme Court of Canada appears to have endorsed the approach taken by the British Columbia Court of Appeal in another case, Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co. (“Acciona“).2 There, the Court of Appeal held in favour of the insured in finding that the ‘faulty workmanship’ exclusion in a builder’s risk policy did not exclude the cost of repairing concrete slabs which over-deflected as a result of improper formwork and shoring procedures. The Court of Appeal in Acciona held that the only thing that was excluded from the loss was the cost of properly doing the formwork and re-shoring, while the damage to the slabs was covered as resultant damage arising from faulty workmanship.

In a broad sense, the Supreme Court of Canada’s decision in Ledcor can be read as a mere confirmation of the generally-accepted principle that coverage under a policy should be construed broadly, and exclusions construed narrowly. More specifically, however, the decision in Ledcor has now firmly established that the standard ‘faulty workmanship’ exclusions in commercial all-risk policies will only operate to exclude the cost of re-doing the faulty work.

As a practical matter, the effect of Ledcor will be to broaden coverage under all-risk policies, even in situations involving faulty workmanship or design. If insurers wish to exclude any damage that is in any way causally connected to faulty workmanship or faulty design, they will have to use clear language to that effect in the policy, or perhaps modify the wording of the exception providing coverage for resulting damage .

For their part, insureds under all-risk policies may wish to consider structuring their contractual arrangements to ensure that any work that poses a significant risk of causing damage to other parts of the project is subject to separate, discrete sub-contracts. The Supreme Court of Canada expressly noted in Ledcor that had the window cleaning company been responsible for installing the windows in good condition, as opposed to merely cleaning them, damage to the windows themselves during the installation process would have been excluded. It is possible, therefore, that coverage may depend at least in part on the scope of the insured’s work as defined by contract, and so insureds will want to give some thought as to whether there is a practical way to structure their contractual arrangements on a given project in order to minimize the application of the ‘faulty workmanship’ exclusion and thereby maximize potential coverage.

Court Finds It is an Abuse of Process For ICBC to File Inconsistent Pleadings From Single Collision

Today’s guest post comes from B.C. injury claims lawyer Erik Magraken

Interesting reasons for judgement were released today by the BC Supreme Court, Vernon Registry, finding it is an abuse of process for a defendant sued by multiple parties from a single collision to admit liability in one action but deny in the other “where there are no facts to distinguish the two”.

In today’s case (Glover v. Leakey) the Defendant was involved in a crash and injured two passengers.  One sued and fault was admitted and ultimately settlement reached.  The second sued but fault was denied.  In the midst of a jury trial the Plaintiff discovered the inconsistent pleadings and asked for a finding of liability.

Due to a misunderstanding the matter proceeded to verdict and the jury found the Defendant was not negligent.  Before the order was entered the Court considered the matter and found that the liability denial was an abuse of process, stripped the defence and granted liability in favour of the plaintiff.  In reaching this result Madam Justice Gropper provided the following reasons:

[67]         In considering my analysis of this application, I must note that the Insurance Corporation of British Columbia (ICBC), the Province’s public mandatory motor vehicle insurer had conduct of both the Glover and the Yeomans actions. The evidence provided is sparse, but it is clear that the adjuster in the Yeomans Action determined that liability would be admitted on behalf of Mr. Leakey whereas the adjuster in the Glover action determined that liability would be denied. I expressly find that ICBC knew of the inconsistent pleadings and that the insured, Kenneth Leakey knew or ought to have known of the inconsistent positions…

[93]         The defendant claims that to find these pleadings as inconsistent and an abuse of process will discourage admissions, contrary to public policy. I find that there is much larger public policy at stake. It is an abuse of process to allow a defendant to admit liability in respect of one passenger and deny liability in respect of the other where there are no facts to distinguish the two. Requiring a party, even ICBC, to file consistent pleadings is not onerous and, with respect, is a principled way to proceed. The pleading of inconsistent positions in this case cannot be condoned.

[94]         I have declared a mistrial in this case. It may appear that my decision on the abuse of process application is moot. It is not for three reasons:

1.               A declaration of mistrial means that the matter will proceed to a new trial.

2.                I grant judgment on the liability issue in favour of the plaintiff.

3.               The plaintiff seeks special costs related to the abuse of process and has asked for leave to provide further submissions in that regard.

[95]         Both parties may seek to appear to address the issue of special costs based on my finding of an abuse of process.

Judge rules some Stanley Cup rioters must pay for damaging vehicles

VANCOUVER _ A judge has ruled that some people who participated in the 2011 Stanley Cup riots in Vancouver are liable for damaging vehicles in the melee.

B.C. Supreme Court Justice Elliott Myers said in a decision released Friday that nine people who were criminally sentenced for participating in the riots must also pay the Insurance Corporation of British Columbia for damaging vehicles insured by the agency.

A report released by the B.C. government in January said 122 vehicles were damaged or destroyed in the five-hour riot that erupted on June 11, 2011, moments before the Vancouver Canucks lost Game 7 of the Stanley Cup final to the Boston Bruins.

I.C.B.C. sued 82 people for damages, and 27 settled out of court, while 35 were given default judgements and 10 young men took their cases to trial.

Myers said in his decision that nine of the men who went to trial are liable for damages to at least one vehicle.

But the judge declined to award the punitive damages I.C.B.C. requested, saying the defendants had all been criminally convicted and their sentences were punishment enough.

Myers said in his written decision that he did not “minimize the gravity” of the riot, noting that it threw a major city into complete disarray.

But the men, who were all between the ages of 16 and 38 at the time of their crimes, have already received sentences that took deterrence for others into account, Myers said.

“There comes a point when enough is enough,” he said.

The B.C. Criminal Justice Branch laid 912 charges against 300 suspects in the wake of the riot, including 246 adults and 54 youths.

The province said in January that 284 people pleaded guilty, while 10 chose to go to trial. Nine of those people were convicted. The Crown stayed proceedings against six others.

The Criminal Justice Branch had to create a riot-prosecution team for all of the cases, and their total expenditures were $4,976,765.

canada-press

Saskatchewan changing auto insurance to allow lawsuits against drunk drivers

By CKOM

THE CANADIAN PRESS

REGINA _ A new bill is being introduced in Saskatchewan to give families of those killed by a drunk driver the chance to file a lawsuit.

Don McMorris, the minister responsible for Saskatchewan Government Insurance, brought in the bill on Tuesday.

It includes 20 amendments to Automobile Accident Insurance Act.

Crimes triggering a lawsuit will now be expanded to include criminal negligence causing death or bodily harm, criminal negligence causing bodily injury, street racing, or flight from police.

These changes will impact those with no fault, reduced no fault or tort insurance coverage.

The law is expected to be passed during the fall session and come into effect Jan. 1.

Two previously promised recommendations will not become law this year because McMorris says the costs are too high right now.

One is updating amounts paid for living expenses to reflect current market rates, increasing the overall amount available for assistance to those with cognitive impairment and implementing a process for those with no-fault insurance to regularly review the amounts for alignment with market rates.

The other is ending the practice in no-fault coverage of reducing income benefits by the amount a customer receives through Canada Pension Plan disability.

McMorris estimated the cost to implement those recommendations at between $53 and $63 million in the first year with an extra $8 million each year after that.

“That’s a huge cost … we’re not going to back away from it but at this point as a financial decision 1/8we are 3/8 not able to move forward with it,” he said.

(CKOM)

canada-press

Polaris to recall 133,000 recreational all-terrain vehicles

Polaris to recall 133,000 recreational all-terrain vehicles

Source: REUTERS – Polaris Industries Inc will recall about 133,000 recreational all-terrain vehicles in the United States as they pose a fire risk.

Recall Summary

Name of product: Polaris RZR recreational off-highway vehicles (ROVs)

The recall involves RZR 900 and RZR 1000 vehicles of model years 2013 to 2016, the U.S. Consumer Product Safety Commission (CPSC) said in a statement on Tuesday.

The recalled vehicles, sold between July 2012 and April 2016 for $16,000-$26,000, can catch fire while driving, putting drivers and passengers at risk.

Polaris has received more than 160 reports of fire involving the models, resulting in the death of a 15-year-old passenger, the CPSC said.

Polaris will suspend the sale of affected vehicles until they are repaired, the U.S. consumer product safety watchdog said. The CPSC urged owners of the recalled vehicles to stop using them immediately.

Consumer Contact:

Polaris at 800-POLARIS or 800-765-2747 from 8 a.m. to 9 p.m. CT Monday through Friday and 9 a.m. to 5 p.m. CT Saturday and Sunday or online at www.polaris.com and click on “Off-Road Safety Recalls” on the main page of the Polaris web site.

Canada: “I Quit!” – “Not Yet, You Don’t.” Employer Awarded $35,000 For Wrongful Resignation

Canada: “I Quit!” – “Not Yet, You Don’t.” Employer Awarded $35,000 For Wrongful Resignation

Article by Brian Silva

By now, we all know what a wrongful termination is in the employment context. But how many have heard of a wrongful resignation? The Superior Court of Ontario recently reminded us that employers are within their rights to bring a wrongful resignation claim against an employee who fails to provide her or his employer with reasonable notice of resignation.

In this case, Gagnon & Associates Inc. (“GA”) hired Barry Jesso (“Jesso”) in 1996 for the shipping/receiving department. Within a year, Jesso had worked his way into a sales role. By 2006, Jesso was one of GA’s top sales associates, himself accounting for approximately 30 per cent of GA’s total sales – earning him $180,000 in salary. Jesso, however, felt he was underpaid and secured replacement employment with a competitor while still with GA.

Jesso gave GA notice of his resignation on July 14, 2006. His resignation was effective that same day and Jesso never worked at GA again.

In the months that followed, some of GA’s clients gave notice that they were taking their business to Jesso’s new employer. GA also had some difficulty finding an experienced salesperson to replace Jesso.

At trial, GA took the position that Jesso’s failure to provide adequate notice of his resignation prevented GA from implementing an appropriate transition plan, costing the company significant sales. Jesso took the position that he was not a managerial or fiduciary employee and was therefore not required to provide any additional notice of his resignation.

The Court agreed with GA, finding that the reasonable resignation period ought to have been two months and that Jesso’s departure resulted in lost sales:

39.  The notice required of an employee will be a function of that employee’s position with the employer and the time it would reasonably take the employer to replace the employee or otherwise take steps to adjust to the loss. 
40.  Although Jesso was a salesperson with no managerial responsibilities, he was a senior employee with ten years’ experience and was responsible for a significant percentage of GA’s sales.  The evidence at trial established that the market for experienced HVAC salespersons was limited and that a replacement hire could not be made until September of 2006.  In addition, Jesso knew that Comeau, the other senior salesperson would be leaving GA on the same day thereby putting GA in a significantly difficult position.  In these particular circumstances, a notice period of two months would have been appropriate.

The Court awarded GA $35,164 representing the loss in sales suffered by GA over the two month period following Jesso’s resignation.

Take home for employers

According to the Court, a reasonable resignation period is based on the employee’s position, length of service and the time it would reasonably take the employer to replace the employee or otherwise take steps to adjust to the loss.

While the right to bring a wrongful resignation claim against a former employee serves as a strong protection for employers who have suffered a loss resulting from the departure of an employee on inadequate notice, employers are better off protecting against these types of resignations by including language in employment agreements that sets out the precise amount of notice an employee must provide when resigning.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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