2014 ANNUAL SEMINAR. Current Issues in the Global Insurance Market

Transcription

1 2014 ANNUAL SEMINAR Current Issues in the Global Insurance Market

2 Part One Part Two 2014 Annual Seminar The Harmonie Group and Canadian Litigation Counsel in association with DAC Beachcroft 6 November 2014 (ALL RIGHTS RESERVED) A Review of Insurance for Construction Projects... 2 Alex Maltas and Deborah Flood With Great Power Comes Great Responsibility: Professional Negligence Damages Trends in Canada...26 Jim Tomlinson Exculpatory and Limitation of Liability Agreements...35 Anthony Ellrod State by State Analysis of Enforcement of Exculpatory Agreements...40 Anthony Ellrod Cyber and Privacy Risks: Class Action Exposures...53 Howard Borlack Lessons Learned from Superstorm Sandy...61 Glenn Jacobson Mind the Gap: Magic Words and Recent Developments Regarding Excess Policy Language Requiring Exhaustion of Primary Limits...65 Brad Jones Recent Developments in Class Actions...83 Brian Voke Legal Ramifications of Ebola Virus in the United States Dwayne Hermes and John Hardage 1

3 A Review of Insurance for Construction Projects Alexandre Maltas and Deborah Flood Whitelaw Twining Law Corporation The purpose of this paper is to provide a general overview of the various types of insurance policies for construction projects, along with a discussion on the issues that can commonly arise. The paper begins with a general discussion on GCL policies and then moves into the various exclusions and the other types of policies available. The paper will also consider the impact of recent case law in this area. 1. PRINCIPLES FOR INTERPRETATION OF INSURANCE POLICIES Insurance contracts have their own general principles of interpretation, some of which are derived from the general principles of contractual interpretation. The general principles concerning the interpretation of insurance policies were restated by the Supreme Court of Canada in Progressive Homes v. Lombard General Insurance Co. of Canada, 2010 SCC 33, where there was a key shift away from the purpose of a CGL to looking at its wording. These interpretive principles can be summarized as follows: (a) The primary interpretive principle is that when the policy is unambiguous, the Court should give effect to the clear language of the policy, reading the policy as a whole. The focus of the exercise is on the language of the policy; (b) Where the language of the policy is ambiguous, the general rules of contract construction are to be employed. These include preferring constructions that are consistent with the reasonable expectations of the parties, avoiding construction that would not have been in the contemplation of the parties and ensuring that similar policies are interpreted in a consistent fashion; and (c) Where these rules of construction fail to resolve ambiguity, the principle of contra proferentem is applied against the insurer. One corollary of this rule is that coverage provisions are to be construed broadly and exclusion clauses are to be given a narrow interpretation. 2. COMMERCIAL GENERAL LIABILITY POLICY The most common insurance policy issued by insurers for the construction industry is the Commercial General Liability Policy ( CGL ). The typical CGL policy protects insureds against liability for bodily injury or property damage. CGL insurance is placed on a yearly basis and covers all of the operations of the contractors, subcontractors, owners, etc. The purpose of the CGL policy is to protect the insured from a wide range of liability exposures that may arise from accidents during or as a result of the construction process. The policy is not intended to indemnify the insured for liability for defective or shoddy work. As with most insurance policies, a typical CGL policy contains numerous exclusions that must be understood. In this paper, we will touch upon the scope of coverage provided by the policy and some of the typical significant exclusions. 2

4 I. DEFINITIONS OF PROPERTY DAMAGE AND OCCURRENCE IN A CGL The most commonly litigated terms in coverage actions are property damage and occurrence. (a) Property Damage The standard definition of property damage in a CGL Policy is as follows: Property damage means: a. Physical injury to tangible property, including all resulting loss of use of that property; or b. Loss of use of tangible property that is not physically injured. The question of whether or not a particular loss constitutes property damage within the meaning of the insuring agreement has been the subject of extensive judicial commentary. Old Position Prior to the recent decision of the Supreme Court of Canada in Progressive Homes, it was widely accepted that the incorporation of a defective product in an otherwise sound structure did not, in itself, constitute property damage (Harbour Machine Ltd. v. Guardian Insurance Company of Canada (1985), 60 B.C.L.R. 360 (B.C.C.A.) at para. 21; Privest Properties Ltd. v. Foundation Co. of Canada (1991), 57 B.C.L.R. (2d) 88 (B.C.S.C.) at 160). The rationale for this interpretation was that the cost of replacing the policyholder s own defective work or product constituted pure economic loss rather than damage to property. The theory was that CGLs were not intended to provide cover for such losses and, as such, were excluded. Consequently, it was only where the faulty component: (1) caused resultant damage to other parts of the structure; or (2) could not be removed without causing resultant damage, that the insuring agreement was engaged. If the damage was limited to the faulty component itself, then there was no property damage within the scope of the definition. Current Position The decision of the Supreme Court in Progressive Homes has changed the law with respect to property damage. In Progressive Homes, the Supreme Court expressly rejected the approach of construing policy definitions in accordance with the general principles of tort law, and observed that the focus of insurance policy interpretation should first and foremost be on the language of the policy at issue. Accordingly, the common law distinction between property damage and pure economic loss is no longer of any consequence when construing the meaning of property damage under a standard CGL policy. The policy at issue in Progressive Homes was a standard form CGL policy, which defined property damage as (1) physical injury to or destruction of tangible property or (2) loss of use of tangible property which has not been physically injured or destroyed. The interpretive question before the court was whether the alleged damage in the Statement of Claim namely, rot, infestation and deterioration to a housing complex resulting from alleged design and construction defects fell within the meaning of property damage, as defined in the CGL policy. Lombard (the insurer) relied on a line of authority which held that damage to the insured s own work product (in this case, the structure itself) was not property damage, and that only resultant damage caused to the property of others would fall within the ambit of the definition. The court disagreed with this analysis, and opted for a broad definition of property 3

5 damage that would include damage to the insured s own work product. The court concluded its analysis as follows: I would construe the definition of property damage, according to the plain language of the definition, to include damage to any tangible property. I do not agree with Lombard that the damage must be to third-party property. There is no such restriction in the definition. The plain meaning of property damage is consistent with reading the policy as a whole. Qualifying the meaning of property damage to mean third-party property would leave little or no work for the work performed exclusion Consistency with the exclusion clauses is a further indicator that the plain meaning of property damage is the definition intended by the parties. The effect of the Progressive Homes decision is that damage to a structural component or part, caused by internal defects will likely constitute property damage within the meaning of a CGL policy, and the availability of coverage in such circumstances will depend on the application of the policy exclusions. (b) Occurrence The standard of definition of Occurrence in a CGL Policy is as follows: Occurrence means an accident, including continuous or repeated exposure to substantially the same harmful conditions. The Courts treat the words occurrence and accident as synonymous. In Canada, the prevailing judicial view is that the undefined term accident is to be interpreted in its popular and ordinary meaning as denoting an unlooked for mishap or an untoward event which is not expected or designed Fenton v. J. Thorley Co. Ltd. [1903] A.C An accident refers to the results of a particular course of conduct or event. Generally speaking, if the result was unintended then it will be considered an accident. In determining whether an accident has occurred, the Court will consider the sequence of events culminating in the loss from the view of the policyholder. If the policyholder did not intend to cause the loss, then the Court will be inclined to find the loss accidental, regardless of the carelessness of the policyholder s actions. Even a loss caused by an insured s intentional act may be covered, provided the result of the intentional act was not intended. In Canadian Indemnity Co. v. Walkem Machinery & Equipment Ltd. (1975), 53 D.L.R. (3d) 1, the policyholder was found liable for losses arising from the collapse of a marine crane that had been negligently repaired. The CGL insurer denied coverage in part on the ground that the collapse of the crane was not an accident within the meaning of the policy. The Supreme Court of Canada concluded that it was necessary to include the negligence of the policyholder within the concept of an accident in order to give effect to the underwriting intent behind the standard policy. I wish to add that, in construing the word accident in this policy, one should bear in mind that negligence is by far the most frequent source of exceptional liability which a businessman has to contend with. Therefore, a policy which would not cover liability due to negligence could not properly be called comprehensive. If calculated risks and dangerous operations are excluded, what is left but some exceptional cases of liability? 4

6 The analysis adopted by the Court in Walkem accords with the general interpretive principle that courts should aim to give effect to the reasonable expectations of the parties, and be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract: Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co. [1980] 1 S.C.R. 8 The Court in Progressive Homes directed that unless restrictive language is included in the policy definitions, accident should be interpreted according to its plain meaning, namely, an event neither expected nor intended by the insured. Accordingly, so long as an insured does not expect or intend for the damage to occur, the requirement of fortuity or accident will have been met. In Alie v. Bertrand, [2002] O.J. No (Ont. C.A.) the Ontario Court of Appeal considered the difficult problem of timing the occurrence of property damage in claims involving continuous and progressive structural damage resulting from design or construction deficiencies. In Alie, the defendant, Bertrand & Frére Construction Company Limited, had supplied concrete for the construction of about 140 homes in 1986, 1987 and Bertrand used a material known as type C fly ash supplied by the co-defendant, Lafarge Canada Inc. as one ingredient in its readymix concrete. The concrete used in the foundations of the homes proved defective and in 1992 it was determined that the foundations needed total replacement. The defect was traced to the use of the fly ash. Following the trial in the main proceeding, the liability insurers for Lafarge and Bertrand sought judicial determination as to who was bound to provide indemnity and in what amounts. The trial judge ultimately held that defence costs ought to be apportioned on a pro rata basis based on time on risk. This holding was ultimately affirmed by the Ontario Court of Appeal. In Alie, the trial and appellate courts identified four alternative approaches that had been used to determine the timing of property damage which is latent, or developing over time, and which does not become apparent immediately: para. 93. These approaches are: (a) (b) (c) (d) Exposure theory, which holds that coverage is triggered by the first exposure to the condition or conditions that ultimately cause the property damage. Manifestation theory, which holds that coverage is triggered when the insured or third party first becomes or could have become aware of the property damage. Injury in fact theory, which holds that coverage is triggered when the damage actually occurs, whether or not anyone was aware of it or could have been aware of it. Continuous Trigger or Triple Trigger Theory, which holds that coverage is triggered throughout the period from the initial exposure to the time when the damage becomes manifest or ought to have become manifest to the plaintiffs. The Court of Appeal observed that the proper approach to be applied will depend on the requirements of the policy language in issue together with the facts of the specific case, including the evidence of when the injury actually occurred, when it was manifest, and how many insurance policies are potentially available and liable to respond: para Consequently, there is no rule that any one particular theory will apply in all cases: para

7 The trial judge in Alie first considered the application of exposure theory, which depends on a finding that the property damage first occurred at a precise point in time, and that all subsequent deterioration following that initial exposure is merely the manifestation of the damage that has already occurred requiring repair or replacement. On the facts of the case, the trial judge found that it could not be said that the defective condition (namely, the gradual deterioration of the concrete footings owing to the incorporation of a defective additive) occurred at one point in time, and for this reason he rejected exposure theory as an appropriate mechanism for timing the occurrence of the damage. The trial judge next considered manifestation theory. He found that the cumulative evidence demonstrate[d] that the damage to these foundations [had taken] place between the years 1986 and 1992, and to conclude that all the damage had taken place prior to December 1, 1989 [as argued by one of the insurers] [was] not supported by the evidence. Like with exposure theory, the problem in applying manifestation theory to the facts was that the property damage had manifested itself at different times to the homeowners and the parties were not aware of the nature, extent and seriousness of the problem until the summer of 1992 when the entire structure required replacement. On appeal, Doherty J.A. rejected the submissions that the exposure or manifestation theories ought to be applied, and affirmed the approach taken by the lower court, where the trial judge concluded that a combined injury-in-fact and continuous trigger theory was applicable. According to the trial judge, injury-in-fact and continuous trigger were the most appropriate mechanisms for determining the timing of the damage given that: These theories were the most consistent with the language of the policies and the intentions of the parties; The result was the most equitable to the insured and the insurers; and They were the theories intended by the insurance industry drafting the wording of the policies, and in particular the definition of occurrence and accident which contemplated coverage for long tail claims. The decision in Alie holds that where the timing of the damage cannot be pinpointed, such that it is not possible on the evidence to determine how much of the damage occurred during any particular policy period, the application of the continuous trigger theory is appropriate to allow the trial judge to apportion the damages on a pro rata basis through the affected policy periods. In Alie, the result was that the trial judge divided the defence costs into seven equal segments, each segment representing one of the seven policy periods from initial construction to the final manifestation of the full extent of the problem in II. ALLOCATION OF DEFENCE COSTS BETWEEN INSURER AND INSURED A claim can be brought against an insured that raises multiple allegations which can result in there being both covered claims and uncovered claims, and this can give rise to the question of whether the insurer can allocate defence costs between the covered and uncovered claims and thus require the insured to pay for a portion of its defence. Further, a claim can be brought against an insured alleging damage that is ongoing over time, and in these so-called long tail claims, the question becomes whether the insurer is only obligated to pay for defence costs during the period of time it was on risk thereby allowing the insurer to allocate some of the defence costs to the insured. 6

8 Questions of if, when, and how defence costs can be allocated between an insurer and an insured have long been the subject of insurance jurisprudence, but recent cases in both Ontario and British Columbia have brought a new focus to these issues. These new cases, and the ones that came before it are built upon the fundamental insurance law principles of duty to defend and construction of insurance contracts. (a) Allocation between covered and non-covered claim In cases of a liability claim against an insured where there are both covered and non-covered claims, the scope of the insurer s duty to defend will vary from province to province. In Ontario, based on the Ontario Court of Appeal decision in Hanis v. University of Western Ontario, 2008 ONCA 678, 67 C.C.L.I. (4th) 196 at paras , an argument can be made that a liability insurer is only obligated to defend the covered claims. The upshot of this case is threefold: First, an insurer is not obligated to pay the costs of defending claims that are clearly not covered; Second, an insurer is obligated to pay the costs of defending claims that are covered; Third, where there is overlap and the same costs relate to defending both covered and non-covered claims, then the insurer must pay those costs. In B.C., the courts have been clear that where there are both covered and uncovered claims, any issue of allocation should be left until after the trial or resolution of the underlying claim. The case of Intact Insurance Co. v. Keith Hart Holdings Ltd., 2010 BCSC 209, suggests that where there are both covered and non-covered claims, the liability insurer must defend all the claims. In that case, the argument that the insurer should only defend the covered claims, and that the insured should retain its own counsel to defend the uncovered claims, was rejected. The Court further held that after the action concluded, the insurer and the insured could then seek an assessment as to what defence costs should properly have been paid by the insurer and by the insured. The Intact case did not address how re-allocation is to be achieved if the insurer were to seek reallocation after the conclusion of the action, however, earlier B.C. cases have addressed this issue. For instance, in St. Andrews Service Co. v. McCubbin (1987), 22 B.C.L.R. (2d) (B.C.S.C.), the principle emerged that at the post-trial stage when dealing with allocation defence costs, unless there is a means of readily distinguishing what costs are attributable to uncovered claims, the defence costs should be paid by the insurer. In many respects, this is the same as the rule from the Ontario Hanis case that an insurer mush pay defence costs for covered claims and for mixed claims, and it is only the truly uncovered claims for which the insurer does not have to pay defence costs. (b) Allocation in long-tail claims based on time-on-risk A different scenario is in place for allocation of defence costs arises in long-tail claims. These are claims in which the loss is considered to have occurred over a period of time, rather than at a specific instance, thereby potentially triggering multiple policy periods. Examples can include environmental claims, defective product claims and construction related claims, a notable example of which are British Columbia s leaky condo claims. Where an insured has multiple insurers over the course of the loss period, it is often common practice for the insurers to share defence costs on a time-on-risk basis. This approach can work well where an insured has had continuous liability insurance coverage for the entire loss period. However, it is sometimes the case that an insured will have periods of time in which it had no 1 Leave to appeal to the Supreme Court of Canada refused, [2008] S.C.C.A. No

9 insurance coverage at all. The question then becomes whether the insurer or the insured is obligated to pay for the defence costs attributable to the uninsured period of time. A case that addressed these issues in B.C. was the B.C. Supreme Court case of Lombard v. General Insurance Company of Canada v B.C. Ltd. [2012] B.C.J. No This case arose out of underlying leaky condo litigation. The underlying proceeding was brought by the strata corporation on behalf of the owners of Strata Plan LMS 2599 against the developer of the strata complex. The pleadings alleged defective and deficient design and construction of the complex and resultant property damage. The strata complex was built in three phases. Phases 1 and 2 were completed in approximately November 1996 and Phase 3 was completed in approximately September Lombard issued three wrap-up CGL policies to the developer in relation to each phase of the development. The policies lapsed on November 26, 1996, February 28, 1997 and September 30, Each policy contained an endorsement which extended coverage for completed operations hazards for a further two years. The developer was uninsured thereafter, for a period of approximately ten years. While Lombard conceded that the leaky condo pleadings triggered its duty to defend the developer, it argued that where continuous or progressive damage is alleged, its responsibility to contribute to defence costs does not extend to claims in respect of property damage which is alleged to have occurred outside the period of coverage. The damage to the strata complex was alleged to have commenced from the moment the buildings were completed and continued until the time the pleading was filed. Lombard argued that to the extent that the damage was alleged to have occurred after the policies expired, it could not owe a duty to defend as there was no possibility that such claims could ever fall within coverage and, as a result, the defence costs should be shared pro-rata. While the developer recognized it is possible to apportion defence costs for covered and uncovered claims, it argued it was premature to do so before trial. The court reviewed case law from across Canada and the United States and concluded that there is no settled principle in the Canadian decisions regarding continuous damage claims that favours apportionment of defence costs based on time-on-risk. Defence costs can be apportioned and time-on-risk might assist the court in making an allocation but only if there is other evidence to support the conclusion that a time-on-risk approach is appropriate. In this regard, the court wrote: 52. In my view, time on risk is not a reasonable or practical means of apportioning defence costs in the absence of evidence from which it can be established or inferred that the costs of defence for periods of time when an insured did not have coverage will approximate that apportionment. The court rejected Lombard s argument that the equitable concept of fairness required the apportionment of defence costs in cases of continuous or progressive damage, and instead preferred a contractual interpretation approach. The court in Lombard then considered the question of whether allocation of defence costs could be made prior to the trial of the underlying action. It noted there is an almost insurmountable difficulty with apportioning defence costs at the pre-trial stage and held that allocation should not be made prior to the trial of the underlying action based solely on an assessment of the claims in the pleadings. Rather, the assessment should be made after the conclusion of the 8

10 underlying action and necessarily involves consideration of the circumstances at the time of bringing the application for allocation. In the result, the court in Lombard concluded that there was no reasonable or practical means of apportioning defence costs at this relatively early stage of the proceeding. The court concluded that a substantial amount of the defence costs would be costs associated with the defence of both the covered and uncovered claims. The court ordered that the developer was obligated to pay the costs of defence solely relating to damage claims falling outside of the coverage period. However, there was no reasonable basis upon which to pro-rate the defence costs between the developer and Lombard. As such, Lombard was obliged to pay the costs of the defence as they were incurred and the issue of allocation could be revisited by either party as the matter progressed. In the case of mixed claims, meaning those in which the costs to defend covered and uncovered claims are intertwined and cannot be separated, the issue of who must pay is determined by the policy language and not some notion of fairness or equity. Accordingly, as seen in the Ontario Court of Appeal decision in Hanis, in the absence of policy language which permits the insurer to allocate defence costs, the insurer is obligated to pay all of the costs associated with defending mixed claims. III. COMMON EXCLUSIONS Once the policyholder has established that the loss falls within the terms of the coverage grant, the onus shifts to the insurer to prove that coverage is excluded by operation of an exclusion clause. The task of proving the application of an exclusion clause is often more difficult, given the Court s tendency to interpret covering provisions broadly and exclusion clauses narrowly, in favour of coverage. Two of the most common exclusions are the own product and own work exclusions. The typical wording of these exclusions is as follows: This insurance does not apply to: i. Property damage to your product arising out of it or any part of it. ii. Property damage to your work arising out of it and included in the products-completed operations hazard. The recent British Columbia case of Bulldog Bag Ltd. V. AXA Pacific Insurance Company, 2011 BCCA 178, addressed the own product/loss of use exclusion and in doing so restricted its potential application. (a) Your Product Exclusion In Bulldog, the plaintiff was a plastic and paper packaging manufacturer who manufactured over 1 million printed plastic bags for a customer to use. After using a third of the bags, the customer observed that the printing was coming over. Bulldog credited the customer for the unused defective bags and supplied replacements. The customer transferred the contents of the already filled defective bags to the new bags, and sought the cost of this from Bulldog. Axa Pacific Insurance, Bulldog s CGL insurer, refused to cover the claim. The trial judge ruled that the AXA CGL policy covered only the value of the lost contents, which amounted to $12,000, Bulldog appealed. Between the Bulldog trial and the appeal, the Supreme Court of Canada issued its decision in 9

11 Progressive Homes. As a result, Axa accepted that Bulldog s faulty workmanship was an occurrence that resulted in property damage under the CGL. However, Axa argued that that the policy s work and product exclusion removed coverage for the cost of transferring the goods from the defective bags into the new bags. Axa argued that the exclusions should be read as this insurance does not apply to claims for physical injury (including loss of use) to Bulldog s bags. The BCCA disagreed, stating that cases such as Carwald Concrete and Gravel Co. v. General Security (1985) 24 D.L.R. (4 th ) 58 (Alta. C.A.) and Gulf Plastics Ltd. v. Cornhill Insurance (1990) 47 B.C.L.R. (2d) 379 (B.C.S.C.) established that exclusions did not apply to loss incurred by the insured s customer as a result of defects in the insured s own product. The BCCA went on to find that the exclusion clause did not exclude the claim because it was not for loss of use of Bulldog s product but was instead for the cost of salvaging and transferring the soil and manure. According to the BCCA, the distinction was that the claim was for salvage and transfer costs that flowed from the loss of use of the bags rather than a claim for the loss of use itself. The B.C. Court of appeal resoundingly recognized that the Supreme Court s decision in Progressive Homes had fundamentally changed the law relating to the coverage in a CGL policy. In the very first paragraph of the Court of Appeal s decision, it said: In its recent decision in Progressive Homes the Supreme Court of Canada reversed a line of insurance cases that had taken a narrow view of the scope of coverage under commercial and general liability ( CGL ) policies commonly used in Canada and the U.S..the Court determined that property damage in such policies is not limited to damage to third-party property and can include damage from part of a building to another part, previously regarded as irrecoverable pure economic loss (para. 36); that the term accident may, depending on the facts of each case, include the consequences of defective workmanship (paras. 39, 46); and that, again depending on context, the own product/work exclusion is to be construed narrowly or contra proferentem, such that it may be limited to damage caused by the insured to its own work and not extend to resulting damage. (emphasis added) (b) The Work Exclusion Exclusions with respect to work performed are common in CGL policies. They are also expressed in different ways in different policies, and in the Progressive Homes case, there were two different forms of work performed exclusions. In Progessive Homes, the first version of the policy included the original work performed exclusion which was modified by what was called a General Liability Broad Form Extension Endorsement. The original policy excluded property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith. That clause was replaced by clause (Z) in the Broad Form Extension Endorsement, which excluded property damage to work performed by the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith. Justice Rothstein found that the clause (Z) exclusion did not apply to property damage caused by a subcontractor, or to the subcontractors work, whether caused by the subcontractor, another subcontractor or the insured contractor. He reasoned as follows: The clause (Z) exclusion is limited to work performed by the insured. Unlike the clause that it replaced, it does not apply to work performed on behalf of the 10

12 insured. The plain language is unambiguous and only excludes damage caused by Progressive to its own completed work. Justice Rothstein said that he would have arrived at the same result by the application of the contra proferentem principle, especially since the insured would have expected different coverage from different wording. 3. WRAP-UP LIABILUTY INSURANCE Most construction major construction projects in Canada are insured by a Wrap-Up liability policy. The Course of Construction policy (discussed below) covers damage to the project during construction operations. The Wrap-Up policy is liability insurance for the owner, contractor, architects and engineers (excluding professional liability) and all subcontractors who have participated on the project. It will pay on behalf of the insured all sums which the insured shall become legally obligated to pay for bodily injury and property damage to third parties. Generally speaking, wrap-up liability policies exclude coverage for damage to the project during construction. They also provide coverage for Completed Operations for a number of years after the work is completed. While the coverage provided is similar to that provided under a CGL, it is not always identical. For example, wrap-ups traditionally do not include the Broad Form property coverage found in the standard CGL policy. Importantly, most wrap-up policies exclude damage to the project while construction is ongoing. This exclusion does not apply after the construction operations are completed. A. Completed Operations Hazard As set out above, Wrap-Up liability policies typically exclude damage to the project during construction. However, there is an exception to this exclusion for damages to the project during the Completed Operations period. Typical policy wording defines the completed operations hazard as follows: Completed Operations Hazard means liability arising out of the Insured s Work in connection with the Insured Project because of Bodily Injury or Property Damage, but only if such Bodily Injury or Property Damage results from an Occurrence after the Insured s Work has been completed or abandoned. The Insured s Work shall be deemed completed at the earliest of the following times: a) When all of the Insured s Work to be performed under the Insured s Contract is completed b) When all of the Insured s Work to be performed for the Insured Project is completed c) When that portion of the Insured s Work out of which the Bodily Injury or Property Damage arises has been put to its intended use by other than another Contractor or Subcontractor engaged in performing operations for the Named Insured as part of the same Insured Project d) When the Insured s Work has been accepted by or on behalf of the owner B. Cross Liability and Severability of Interests Given that there are many insured entities covered under a Wrap-Up policy, the cross liability clause is important and typically reads as follows: Coverage provided by this policy applies individually to the interest of each Insured covered by this policy and coverage shall apply in the same manner and to the same extent as though a separate policy had been issued to each Insured. 11

13 Any breach of a condition of this policy by any Insured shall not affect the coverage provided to any other Insured not party to such breach of condition. Nonetheless, this clause shall be deemed to increase neither the Limit of Insurance stated in the Declarations, nor the amount of the loss. The inclusion herein of more than one Insured shall not operate to increase the Limit of Liability under this policy. The Severability of Interests clause ensures that each insured has the same rights and protection as if separate policies had been issued to each insured. C. Exclusion for Property Damage to Property Owned by the Insured Wrap-Up liability policies exclude damage to property owned by the insured. A typical exclusion is generally worded as follows: This policy does not apply to any liability for injury to, or destruction of, or loss of use of property owned or occupied by or rented to the Insured, property held by or on behalf of the Insured for sale or property entrusted to the Insured for storage or safekeeping. However, once the property is transferred (i.e. turned over to the end user), this clause does not exclude coverage for former owners of the property. D. Wrap Up vs. CGL Coverage In some circumstances, instead of obtaining a wrap-up liability policy, certain parties (often the owner, its consultants) are added to the contractor s standard CGL policy. Most CGL policies differentiate between adding a party as an additional named insured and an additional insured. Where a party is added as an additional named insured, the party typically has coverage for its own negligence. However, were a party is only added as an additional insured, coverage may be limited to liability arising from the named insureds operations, meaning that the additional insured may not have any coverage for its own independent negligence. Where wrap-up coverage is in effect, coverage under a CGL may be excess to the Wrap-up or excluded altogether. It is important to review the other insurance clauses of both policies to determine the effect of overlapping coverage. Typically, wrap-up policies are placed for the period of time when construction of the project is ongoing and during the completed operations period. Disputes often arise between wrap-up insurers and liability insurers as to who is responsible for long tail claims for progressive damage. Standard CGL insurers claim that there was an accident or occurrence during the wrap-up policy period and it should respond to the claim. Wrap-up insurers say that their liability is limited to the few years that the policy was in effect and that the bulk of the obligation to respond lies with the CGL insurers who are on the risk while the progressive damage occurred. Allocation between insurers is discussed above. 4. BUILDER S RISK PROPERTY INSURANCE Property insurance on construction projects is usually referred to as Builder s Risk Insurance, sometimes known as Course of Construction Insurance and less frequently as All Risks Insurance. A builder s risk policy is the main vehicle for providing first party property coverage for structures under construction. 12

14 For coverage to apply under a builder s risk policy, there must be physical loss of or damage to property. Builder s risk policies typically contain exclusions for any type of consequential or indirect loss. This would include losses due to delays in construction caused by the structure being damaged by an insured. Owners can incur significant damages if the project is delayed. These time element or soft cost damages can be covered under loss of use insurance, which can be purchased by way of an endorsement to the builder s risk policy. A. Who is an Insured under a Builder's Risk Policy? Over the past few decades, Canadian courts have expanded the scope of coverage under builder s risk insurance policies. The law has developed to the point that today, if an owner or general contractor of a construction project purchases a builder s risk policy, that policy will in most instances include as unnamed insureds all contractors and sub-contractors who supply materials or labour to the project. As a consequence, the builder s risk insurer typically cannot bring a subrogated claim against any of the contractors or sub-contractors involved in the project. In other words, an insurer who pays out on a policy cannot then recover its losses from a party who should have been covered in the first instance. The starting point for this development is the Supreme Court of Canada case Commonwealth Construction Company v. Imperial Oil Limited (1976), 69 D.L.R. (3d) 558 (S.C.C.) which held that all contractors and subcontractors have an insurable interest in a construction project, and as a result, they may be considered unnamed insureds in a builder s risk policy. The Supreme Court of Canada held that, in a project such as this, the interests of the principal contractor and the subcontractors were so inseparably interconnected that they were all considered as one (or at least joint insureds) for the purposes of insurance. Consequently, an action between two of the joint insureds would be tantamount to a party suing itself and this would not support a right of subrogation. The next significant case on the issue of who is an insured is C.P. Limited v. Base-Fort Security Services (B.C.) Ltd. (1991), 52 B.C.L.R. (2d) 393 (C.A.). C.P. Limited, a company hired to provide security services to a construction site, sought to be included as an unnamed insured in a builder s risk policy. The Court held that the security company was not an unnamed insured because its services were not an integral part of the project. As reasoned by the British Columbia Court of Appeal, although Commonwealth Construction dealt with insurable interests, the principles regarding the issue of whether a sub-contractor is an insured within the policy are the same as those on the issue of insurable interest. The Court of Appeal looked to what the contracting parties must have had in mind at the time the insurance was obtained, based on the words in the construction contract, and reasoned that the insureds are those persons without whose contribution to the project in its entirety, the project itself could not be completed. To be deemed an insured, that party s contributions must therefore be an integral and necessary part of the construction process. The British Columbia Court of Appeal reaffirmed this evolving test in the case of Sylvan Industries Ltd. v. Fairview Sheet Metal Works Ltd. (1994), 89 B.C.L.R. (2d) 18 (C.A.) by ruling that subcontractors are, by necessary implication, unnamed insureds in a builder s risk policy issued to an owner as the only named insured. Even though the sub-contractor in this case had a contractual responsibility to obtain builder s risk insurance, and failed to do so, it was still found to be an insured under the owner s builder s risk policy (which did not specifically include subcontractors). The case Janeland Development Inc. v. Michelin Masonry Inc., [1996] I.L.R (Ont. Gen. Div.) appears to have further extended the scope of unnamed insureds under a builder s risk policy. This case involved the collapse of a wall during the construction of a commercial building. The 13

15 general contractor obtained a builder s risk policy and after the loss, its insurer brought a subrogated action against the masonry sub-contractor. The policy did not expressly extend to sub-contractors. The Court did not focus on whether the sub-contractor owned any of the property or not. Rather, the Court simply concluded that the sub-contractor was an unnamed insured under the builder s risk policy. In closing, the Court wrote (Janeland Development, at 3925): This determination is in keeping with the court s desire to reduce litigation which flows from losses of this type. It also recognizes the reality of complex industrial life and provides comfort and security to owners, builders and sub-contractors involved in commercial projects. A further case which affirmed the foregoing line of cases is Madison Developments Ltd. v. Plan Electric Co. (1997), 152 D.L.R. (4th) 653 (Ont. C.A.). In that case, the general contractor took out a builder s risk policy, as he was required to do under the terms of the construction contract with the owner. The builder s risk policy did not expressly extend to sub-contractors. The contract which the general contactor had with its sub-contractor required the latter to obtain its own insurance to cover its own materials. Notwithstanding this term in the sub-contract, the Court still held that both the sub-contractor and its employees were unnamed insureds in the builder s risk policy. In Alberta Ltd. v. Thibeault Masonry Ltd., [2001] A.J. No (QL) (Alta. Q.B.), the Court held that a masonry sub-contractor was an unnamed insured in a builder s risk policy by necessary implication even though the policy did not specifically list contractors or subcontractors as unnamed insureds. The significance of this decision is that it asserts a general proposition that all sub-contractors on all construction projects have the benefit of a builder s risk policy taken out by the owner or general contractor. A glimpse of what the future may hold in terms of further expansion of the principle of waiver of subrogation in construction cases was provided in Saskatchewan Institute of Applied Science and Technology v. Hagblom Construction (1984) Ltd. (2003), [2005] 1 W.W.R. 390 (Sask. Q.B.). In that case, the Court recognized a defendant s right to plead that custom and industry practice preclude subrogation, even in the absence of a builder s risk policy. That case dealt with an application by the defendants to amend their statement of defence to plead that there was a custom in the construction industry for the owner to carry insurance for the benefit of all parties involved in a project and that this custom included an agreement of waiver of subrogation. Finally, a case that takes the waiver of subrogation principle outside the realm of subrogated claims by insurers is Active Fire Protection 2000 Ltd. v. B.W.K. Construction Co., [2005] O.J. No (QL) (Ont. C.A.). In that case, the Court held that a contractor s contractual obligation to obtain insurance, even though it did not carry through with purchasing insurance coverage, precluded the contractor from bringing a claim against a sub-contractor in relation to a loss that occurred during construction. B Consultants Trizec Equities Ltd. v. Ellis-Don Management Services Ltd., [1988] Carswell Alta. 143 (Alta. Q.B.) addressed the issue of whether a consultant was afforded coverage under a builder s risk policy. In this case, the consultant sought coverage as an unnamed insured under an all risks/course of construction policy. The Court held that the consultant was not entitled to coverage under the course of construction policy, as this policy was a property based policy. Insurance for professionals, such as engineers, is based on liability arising out of an error, omission or negligent act in design or advice. The Court reasoned that there are different underwriting considerations 14

16 respecting property based coverage and errors and omissions based coverage and, as such, that the course of construction policy afforded no coverage to the consultant. It is important to note, however, that the terms of the construction contract may extend coverage under a builder s risk policy to consultants. As such, the policy, as well as the construction contract, must be reviewed in order to determine whether coverage is afforded to consultants. C. Expansion of what is insured In Medicine Hat College v. Starks Plumbing and Heating Ltd., [2008] A.W.L.D. 552 the Alberta Court of Appeal addressed what is covered for a project involving an addition to an existing structure. Medicine Hat College decided to expand its existing facilities by undergoing a series of renovations. A builder s risk policy was obtained which provided coverage for property loss up to $9.5 million, which reflected the cost of construction for the addition and renovation project. During the course of construction, a main source gas line and gas regulator was relocated to permit the construction of a new entrance. An explosion then occurred in the mechanical room, caused by the improper reconnection of the new gas line. The problem was that the mechanical room that was destroyed was part of the original structure and did not form part of the renovation project. It was argued that since the mechanical room was not part of the construction project (there were no changes made to the mechanical room), it was not covered under the policy. It was further argued that the limit of $9.5 million in coverage reflected only the cost of new construction and therefore the parties must have contemplated only new construction was covered. The Court held, however, that the original structure was covered. The Court of Appeal relied on the general principle that a builder s risk policy is insurance from which owners, contractors and subcontractors can derive comfort and security when participating in these types of projects. All parties involved in the construction of the project therefore had an insurable interest not only in the addition being undertaken to the existing structure but the existing structure itself. If the damage was caused to an entirely separate existing structure, the result would likely differ. D. Termination of the Policy Typically, builder s risk insurance remains in place during construction. While this period of time is often readily ascertainable, this issue can become more difficult where the construction contract provides for things such as warranty periods, performance guarantees and further contemplated work. The potential difficulties with determining whether coverage under a builder s risk policy has terminated are illustrated in Sherritt Gordon Ltd. v. Dresser Canada Inc., (1996) 41 Alta. L.R. (3d) 135 (Alta C.A.). At issue in this case was whether the policy barred subrogation. Sherritt involved the expansion of an ammonia plant. The defendant installed a compressor in the fall of The plant expansion became operational in May After an incident on October 5, 1983, the compressor began to operate in an unusual manner. The plant was shut down on October 14, 1983, with operations resuming on October 22, On March 27, 1984, a part failed in the compressor, causing property damage and business interruption loss. At the time of the loss, the defendant had a number of ongoing performance guarantees and warranties under the original construction contract that were not yet fulfilled (in other words, the original construction contract was not yet complete). 15

17 The trial judge held that the defendant was not a named insured for the purposes of the action on the basis that construction was virtually complete. The Alberta Court of Appeal overturned the trial judge's decision on this issue. In the Court of Appeal's view, the facts showed the construction was still ongoing at the time of loss. The Court of Appeal reasoned that due to the fact that the defendant had continuing contractual obligations to remedy deficiencies, construction was not complete at the time of the breakdown. The Court of Appeal also stated the following: So long as some construction was still ongoing, everyone had every motive to keep the insurance alive for the benefit of all contractors and trades, even those who had finished. If one workman caused a fire or explosion, it would likely damage the work and materials furnished by all the other contractors and trades. A completed machine is as liable to be damaged by fire or explosion as an unfinished one. No company would want its entire insurance coverage to depend upon the mysteries of when title passed and risk ended under a construction contract (or a contract for sale of goods). The Alberta Court of Appeal further refined the above approach in Daishowa-Marubeni International Ltd. v. Toshiba International Corp., 2003 ABCA 257. In this case, the wording used in the policy was more restrictive in respect of coverage in that it only extended coverage during certain specified construction activities. Further, this decision suggests that in order to determine whether coverage is in effect at any given time, one must look at the policy, the construction contract and the current state of the construction. In Yukon Energy Corporation v. Narrow Gauge Contracting Limited, 2010 YKSC 38, the Court concluded that the definition of course of construction in that particular policy, read in conjunction with the warranty period language provided in the Instructions to Tenderers, extended coverage for at least one year after substantial completion. E. Faulty Work/Design Exclusion This exclusion has been broadly interrupted by the courts in Canada and specific issues have arisen as a result of recent case law, including Ledcor Construction Limited v. Northbridge Indemnity Insurance Company et al., 2013 ABQB 585, [2013] and Acciona Infrastructure Canada Inc. v. Allianze Global Risks US Insurance Company, 2014 BCSC Design and workmanship can include virtually any activity in connection with the project involving care and skill. Below is a list of examples as to the matters that would constitute design or workmanship for the purposes of the exclusion. (i) Interpretation of Design and Workmanship by the courts Design has been held include such matters as: (1) consideration of stability of underlying soils (BC Rail v. American Home Assurance Company, (1991) 79 DLR (4 th ) 729; (2) consideration of loads potentially to be imposed on parts of the structure by other parts of the structure or related structures (Poole Construction Ltd. v. Guardian Assurance Co., [1977] A.J. No. 784, [1977] I.L.R (S.C.) and Simcoe & Erie General Insurance Company v. Royal Insurance Company of Canada, [1982] 3 W.W.R. 628 (Alta. Q.B.)); and (3) consideration of loads potentially to be imposed by external forces, such as wind and ice loads (Simcoe & Erie General Insurance Company v. Willowbrook Homes (1964) Ltd., [1980] 16

18 I.L.R. 876; Collavino Inc. v. Employers Mutual Liability Insurance Co of Wisconsin (1984), 5 C.C.L.I. 94 (Ont. H.C.J.)). Workmanship has been held to include such matters as: (1) procedures used in erection of trusses as part of construction of a building (Bird Construction Co. Ltd. v. United States Fire Insurance Co. (1985), 18 C.C.L.I. 92 (Sask. C.A.)); (2) temporary and permanent bracing in connection with construction of a house(greene v. Canadian General Insurance Co. (1991), 5 C.C.L.I. (2d) 193 (Nfld. S.C.), upheld on appeal [1995] N.J. No. 251 (C.A.), 23 C.L.R. (2d) 203); (3) steps taken (or not taken) to protect equipment during construction (Sayers & Associates Ltd. v. Insurance Corp. of Ireland Ltd. (1981), 126 D.L.R. (3d) 681 (Ont. C.A.)); (4) procedures used in testing portions of a building or other structure for purposes of contract acceptance (Pentagon Construction (1969) Co. Ltd. v. United States Fidelity and Guaranty Company, [1977] 4 W.W.R. 351 (B.C.C.A.); Ploutos Enterprises Ltd. v. Stuart Olson Constructors Inc., 2008 BCSC 271, 60 C.C.L.I. (4th) 59); (5) procedures used in cleaning portions of a building or other structure for purposes of contract acceptance (Ontario Hydro v. Royal Insurance, [1981] O.J. No. 215 (H.C.J.) and Ledcor, supra). With respect to the wording of the exclusions, there are several variations in use. The most common wording used in use in Canada refers to cost of making good, faulty design or workmanship, followed by a resulting damage exception. The cost of making good wording has been considered many times by Canadian courts. Some wordings, instead of cost of making good, refer to damage caused by or attributable to faulty design or workmanship. In some cases, the exclusion refers to none of the above, and refers only to the excluded perils themselves. For example, in British Columbia v. Royal Insurance Co. of Canada (1991), 4 C.C.L.I. (2d) 206 (B.C.C.A.), the wording provided: This policy does not insure: (i) faulty or improper material; (ii) faulty or improper workmanship; (iii) faulty or improper design; provided, however, to the extent otherwise insured and not otherwise excluded under this policy, resultant damage to the property shall be insured. In some case, courts have found other exclusions to have the same effect as an exclusion for faulty design. In Triple Five Corp. v. Simcoe & Erie Group (1994), 29 C.C.L.I. (2d) (Alta. Q.B.) upheld on appeal (1997), 42 C.C.L.I. (2d) 132, the exclusion did not mention design but the Court found that the mechanical breakdown, latent defect, and inherent vice wording operated to exclude the cost of making good the faulty design. The Canadian National Railway case adds a further gloss to the analysis of faulty design. The trial judge found that despite the machine s failure (the case involved a tunnel boring machine), the innovative design accommodated within the limits of the state of engineering knowledge at the time all foreseeable risks encountered in the digging of the tunnel. The trial judge acknowledged that the design proved to be defective, but found that it was not improper or 17

19 faulty according to the state of the art at the time the design was finalized. The trial judge concluded that the design not only addressed all reasonably foreseeable risks but all foreseeable risks however unlikely or remote. The Ontario Court of Appeal in a 2-1 decision reversed the trial judge, holding that in the circumstances there was a failure attributable to design, and accordingly the exclusion applied. The Supreme Court of Canada divided 4-3 in reversing the Ontario Court of Appeal stating the following: The insurers take the view that a design that fails in circumstances of foreseeable risk would per se trigger the exemption In my view, the words faulty or improper require the insurers to go beyond simply showing a failure in circumstances of foreseeable risk. The words faulty or improper, and in particular the word improper, require the insurers to establish that the design fell below a realistic standard. Such a standard can require no more than that the design comply with the state of the art. A standard of perfection in relation to all foreseeable risks, in my view, was not required by the words used by the parties. It was for the insurers to demonstrate that the exclusion applies. While the majority endorses a context-specific approach to the test for faulty design, it is evident from the reasons that the exclusion will apply in the vast majority of claims involving a flawed design. Binnie J. s comments at para. 55 of the decision make this clear: The insurers are entitled to the benefit of the exemption unless the design [meets] the very highest standards of the day and failure occurred simply because engineering knowledge was inadequate to the task at hand. In the recent case of Ledcor, the court held that the cost of making good faulty workmanship is restricted to the cost of properly carrying out the work in question and does not include the cost of repair to the property damaged by the faulty workmanship. Ledcor, concerned a builder s risk policy issued to owners in connection with construction of an office tower in Edmonton. Subcontractors, in carrying out a final construction clearing of project exterior glass, did not use proper techniques. As a result, some of the exterior glass was scratched. The insured made a claim under the policy for the costs potentially to be incurred in remedying the exterior glass. Insurers denied cover on the basis of the faulty workmanship exclusions. This matter was heard by Clarkson, J., on the basis of an agreed statement of facts. Clarkson J. held that the poor cleaning constituted faulty workmanship, and went on to consider whether the cost of making good that faulty workmanship included cost of repair or remediation of the windows (the insurer s agreement) or was restricted to cost of carrying out the cleaning properly (as argued by the insured). Clarkson, J. said: In my view, either of the proffered interpretations presented by the parties in this case appears on its face to be reasonable. The policy does not clearly suggest one 18

20 alternative in preference to the other. Returning to the Supreme Court of Canada s guidance in Progressive Homes, it appears, therefore, that the language of the exclusion is ambiguous. In the context of what is an all risk or builders policy stipulating coverage for virtually any event which might occur by way of negligence, third party action or act of God, one could conclude that an exclusion as suggested by the defendants is inconsistent All of that suggests broad coverage inconsistent with what the defendants say is the effect of the exclusion. On that basis the Court held that the cost of making good the faulty workmanship was restricted to the cost of properly carrying out the construction clear of the exterior glass, and did not apply to the cost to repair the scratching. (ii) The DE and LEG Wordings Both the DE and LEG wordings involve a graduated series of exclusions of decreasing breadth. Thus, the wording can be tailored, depending on the scope of the exclusion desired (and the premium the insured wishes to pay). These wordings have been in use for many years in Canada, and are becoming increasingly common. While there are many potential variations on the wording of the exclusion, all have some features in common: (1) a description of the matters to which the exclusion applies (design, workmanship, materials, plans, specifications, etc.); (2) reference to scope by the scope of the exclusion ( cost of making good, loss of damage caused by ); (3) a description of the standard which applies ( faulty, faulty or defective, or error in ) and (4) some form of resulting damage exception. Until recently, none of these wordings had been given any judicial consideration in Canada. Now, one of these wordings, the LEG2/96, has been considered in Acciona. Acciona involved a project to construct a new hospital wing. Construction utilized cast-in-place reinforced concrete slabs. Over time, the concrete slabs, began to exhibit excessive cracking and over deflection. The deflection and cracking did not raise a structural or safety issue but the concrete slabs did not meet the standards set out in the governing contracts. As a result, substantial remedial works had to be undertaken. The policy at issue contained a design and workmanship exclusion closely based on LEG2/96 wording. Underwriters denied the claim on the basis of the exclusion. The insured argued that there was no defective design or workmanship within the meaning of the exclusion. Expert evidence was provided at trial by both sides concerning the specific cause of the cracking and over deflection. The evidence accepted by Skolrood J. was to the effect that the construction involved slabs that were thinner than would generally be the case. That would be acceptable, so long as certain specific procedures were followed in connection with the formwork and reshoring of the concrete during construction. Those procedures were not followed and the Court held that this was inadequate. In those circumstance, Skolrood J. had little difficulty in concluding that there were defects in workmanship within the meaning of the exclusion. Skolrood J. in considering the scope of the exclusion, said this at para 221: Read in its entirety, I find that the intent of the clause 5(b) is to exclude those costs rendered necessary by one of the named defects, but is limited to costs which would have been incurred if replacement or rectification of the Insured 19