Consequential loss goes to OttawaBY ROBERT KENNALEY
In a previous column on construction liability insurance, we pointed out that the insured’s own work is generally excluded from the scope of coverage under a CGL (comprehensive general liability) insurance policy. We pointed out these policies are not generally designed to cover the contractor’s own deficient work, but are drafted to cover damages caused unintentionally to either another person, or another person’s property. From a different perspective, it can be said that CGL insurance is intended to cover ‘accidents’ which occur in, or because of, the insured’s performance of its own work — and not the insured’s own work itself.
In practice, the distinction between an insured’s ‘own work’ and what might be considered accidental damage gives rise to the concept of ‘consequential’ or ‘resulting’ loss. An example we have used involves construction of a retaining wall which falls down: the CGL policy will generally not cover the cost of repairing or rebuilding the wall because the contractor did what he intended to do in building the wall, and there is no ‘accident.’ If the wall falls on a Volkswagen, however, the CGL policy will generally respond to the claim of the car owner. The damage is an unforeseen consequence of the construction deficiency, unrelated to the work itself. (There are often, we have said, exceptions to the own work exclusion set out in the policy. These include where the work is performed by a subcontractor of the insured or where the work fails due to a design defect and coverage for design is specifically included in the policy).
Differences of opinion
The concept of consequential loss can be confusing, however. It is sometimes difficult to draw a line between what is the insured’s own work and a consequence of that work. By way of example, if you build a house for someone, and after completion, the foundation fails such that the entire house needs to be torn down and replaced, would any of the reconstruction costs be covered under a standard GCL policy? The insured would argue that only the foundation failed, and that while the replacement of the foundation should be excluded for coverage the need to replace the rest of the home is a result of the failed work, and thus covered as consequential loss. (The insured would argue that the cost of replacing the rest of the house is akin to the Volkswagen). The insurer, however, would argue that the cost of replacing the rest of the house is nothing more than the cost of correcting the insured’s own deficient foundation, and therefore not brought within coverage.
Our courts have struggled in the application of the concept of consequential loss. The cases have depended on the facts of each particular case and on the wording of the particular policies. They have struggled, to some degree, to develop a predictable method of determining when rectification costs move from being the cost of correcting deficient work to the cost of rectifying the result, or consequence, of deficient work. We may soon, however, have some guidance from the Supreme Court of Canada on this topic.
Hope for clarity
Recently, the Supreme Court has agreed to hear an appeal in which it will be asked to consider the line between faulty workmanship and resulting damage in a CGL policy. The case under appeal, Ledcor v Northbridge Indemnity Insurance Company, involves an insurance policy which covered “direct physical loss or damage” to an owner’s property in the construction of a new building. The policy was subject to, among other things, the ‘own work’ exclusion.
On the facts of the case, and as construction was winding down, a company was hired to clean the exterior of the building, including the windows. The windows were damaged by the cleaning process and they had to be replaced. The insured made a claim for the replacement costs under the policy, and the insurer denied on the basis of the ‘own work’ exclusion, arguing that the damage was the ‘faulty workmanship’ of the insured and therefore not covered under the policy. At trial, the trial judge recognized the contractor’s work was faulty and that the “cost of making good” that faulty workmanship was excluded. The insured successfully argued, however, that while the cleaning work may have been faulty, the scratches to the windows were a consequence of that work, and not the work itself. The trial judge held that while the insurance would not respond to pay for the windows to be washed again (the ‘own work’), it should respond to the damage caused by the work — which included the scratches produced by the cleaning process.
The Alberta Court of Appeal overturned the trial decision. The court held that the purpose of the policy was to cover certain unexpected events and accidents. It declined to find coverage because, in the court’s view, a standard CGL construction policy is not intended to provide a “warranty” that construction is performed properly. The court expressly stated that, in its view, clarity needed to be brought to the law as regards the interpretation of CGL policies and scope of the ‘own work’ exclusion.
We are optimistic that the Supreme Court will bring some clarity to the scope of the ‘own work’ exclusion, which can be applied nationwide with some degree of predictability by insurance companies and their counsel. We also see the issue as being very significant to many CNLA members, and will report back once the court has rendered its decision.
Rob Kennaley practices construction law in Toronto. He speaks and writes regularly on construction law issues and can be reached for comment at 416-368-2522 or at firstname.lastname@example.org. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.