CONSTRUCTION LAW 2014 PAPER 4.1 Insurance and Post Project Dispute Resolution These materials were prepared by Craig A. Wallace, P.Eng., and Matthew Stainsby, both of Shapiro Hankinson & Knutson Law Corporation, Vancouver, BC, for the Continuing Legal Education Society of British Columbia, May 2014. Craig A. Wallace, P.Eng., and Matthew Stainsby
4.1.1 INSURANCE AND POST PROJECT DISPUTE RESOLUTION I. Property Insurance... 1 II. Builders Risk Insurance... 2 III. CGL Policies... 2 A. Faulty Workmanship as an Occurrence... 3 IV. Wrap-up Liability Insurance... 3 A. Completed Operations Hazard... 3 V. Professional Liability Insurance (or Errors and Omissions E & O )... 4 VI. Conclusion... 5 There are a number of different types of insurance policies available to parties involved in a construction project. Each type of policy differs in the extent of coverage, the commencement of the coverage period, and the duration of the coverage. This can make it difficult to determine which policy is triggered by a dispute. This paper will explain the different types of insurance commonly applicable to construction projects. These include: Property Insurance; Builders Risk Insurance; Commercial General Liability Insurance (CGL); Wrap-up Liability Insurance; and Professional Liability Insurance (E&O). I. Property Insurance A Property Insurance policy insures tangible property against either named perils or all risks. When a policy insures against name perils, it insures the tangible property only from those dangers that are included in the policy itself. Anything that is not specifically included in the policy will be excluded from coverage. For example, if a named perils policy provides coverage for damage from fire and lighting and the property is damaged by a flood, the insured would not be covered. In such a policy, it is imperative that the insured know exactly what types of perils or hazards they are protected from and even more importantly, to know what hazards they aren t. Conversely, an all risks policy would provide coverage to tangible property that suffered damage resulting from any peril or hazard except those that are specifically excluded from coverage. For example, an all risks policy may exclude coverage for damage resulting from snow load or wind.
4.1.2 As with any policy, an insured should be made aware of all of the exclusions that limit their coverage. In Tilden Rent-A-Car, 1 Dubin J.A. found that: In the case at bar, Tilden Rent-A-Car took no steps to alert Mr. Clendenning to the onerous provisions in the standard form of contract presented by it. The clerk could not help but have known that Mr. Clendenning had not in fact read the contract before signing it. Indeed the form of the contract itself with the important provisions on the reverse side and in very small type would discourage even the most cautious customer from endeavouring to read and understand it. Mr. Clendenning was in fact unaware of the exempting provisions. Under such conditions, it was not open to Tilden Rent-A-Car to rely on those clauses Having paid the premium, he was not liable for any damage to the vehicle while being driven by him. II. Builders Risk Insurance A builders risk insurance policy is a specific type of property insurance that is applicable to contractors. This type of policy is often referred to as a Course of Construction policy ( COC ), since it generally will only be applicable during construction. The need for such a policy arises because, during the course of the project, the project is at the contractor s risk even though it is not owned by the contractor itself. This type of policy insures damage to the construction project itself. Depending on the wording of the policy, this may or may not include temporary structures such as shoring, formwork and scaffolding. There may also be specific exclusions present in certain policies, such as damages caused by a collapse due to excavation of the site or shoring. Builders risk policies are designed to transfer fortuitous contingent risks to the insurer and to avoid coverage for the insured s ordinary costs of doing business, often called business risks. These policies do not therefore cover construction delays, defects in workmanship or additional costs resulting from unforeseen weather conditions. III. CGL Policies Commercial General Liability ( CGL ) policies are commonly carried by most businesses. These policies allow businesses to manage the costs of risks in their commercial activities. In its most basic form, a CGL policy will cover the insured s liability to others due to an occurrence or accident. For example, coverage under a CGL policy could be triggered if a customer trips and falls on the insured s premises or, in the construction context, if a bucket of concrete fell from a high-rise building onto a passing truck. It is generally the case that CGL policies are not intended to be insurance against defective work. There are corresponding exclusions in a standard CGL policy that work to limit coverage. Examples of this are provisions excluding your work product, workmanship, and own property. However, if damage results from defective work, such as a wall that was incorrectly fastened falling onto someone s property, there is usually coverage. 1 Tilden Rent-A-Car Co. v Clendenning, [1978] 18 O.R. (2d) 601 (Ont. C.A.).
4.1.3 A. Faulty Workmanship as an Occurrence Generally, the occurrence must be an unlooked-for mishap or an untoward event which is not expected or designed. The court will also look to the policy exclusions. As stated by the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2 whether defective workmanship is an occurrence or accident is a case-specific determination. It will depend on both the circumstances of the defective workmanship alleged in the pleadings and the way accident or occurrence is defined in the policy. Where the insured acts with deliberation, the resulting loss may nevertheless still be accidental. When the loss is the natural and probable consequence of the insured s deliberate act, however, a number of courts have held that the loss is not caused by an accident. IV. Wrap-up Liability Insurance A wrap-up liability policy is a single project-specific policy that covers the liability of all parties to a construction project. It insures the owner, contractor, subcontractors and consultants. Generally, a wrap-up policy will cover the period during construction as well as a specified period after construction has completed. The length of such an extension will vary depending on the policy itself. One of the benefits of a wrap-up policy is that it provides consistency in coverage and avoids the necessity for cross-claims. Like CGL policies, wrap-up policies generally exclude your work product and workmanship. However, coverage under a wrap-up policy is narrower than that of a CGL as the whole project is the work product. Although consultants normally have coverage under the wrap-up, there is typically a professional services exclusion. A. Completed Operations Hazard Many wrap-up policies contain an exception to the work exclusion for damage to the work occurring after operations are complete. This is generally known as the completed operations hazard exception. In the case of Hearn/Actes v. Commonwealth Insurance et al., 3 the insured was a general contractor for the construction of a large student residence for the University of British Columbia. The wrap-up contained an exclusion for property forming part of or to form part of the Project insured. However, there was an exception for such coverage as is afforded under the Completed Operations hazard. The Completed Operations Hazard was defined as including, Bodily Injury (Definition 4(a)) or Property Damage arising out of operations on the Project, but only if the Bodily Injury or Property Damage occurs after such operations have been competed. Following completion of the project, the insured sued the University for the cost of extra work and delay allegedly due to errors by the University and its architect. The University counterclaimed for the cost of fixing deficiencies in the work done by the insured and its sub-trades. The insured then sued its insurer for refusing to defend the counterclaim. 2 Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33. 3 Hearn/Actes v. Commonwealth Insurance et al., 2008 BCSC 764.
4.1.4 The judge noted that his obligation was to construe the grant of coverage liberally and found the words accident, occurrence, and property were broad enough to encompass the counterclaim. He then turned to the exclusions and noted the completed operations hazard exception. He based his ruling on the reasonable expectations of the insured contractor and the contra proferentem rule. He wrote at para. 35: At best, the co-existence of the Completed Operations Hazard as defined in Clause 5 of the Definitions section of the Policy; the exception for Completed Operations coverage to the exclusion in Clause 11 of the Policy; and the Work/Product Exclusion within the same policy leads to confusion and ambiguity with respect to coverage. This was the situation in Commercial Union Assurance Cos. v. Gollan, 118 N.H. 744, 394 A. 2d 839 (1978). The court emphasized the complexity of the 17 page standard policy and found that the insurer s interpretation would require the unwary insured to understand a distinction [between the insured s work/product and the property of third persons] that the clauses do not clearly specify. The court found this interpretation unreasonable and thus found inherent ambiguity in the policy which it resolved in the insured s favour on the basis of the insured s reasonable expectations of coverage. The court declared that the insurer is required under the Policy to provide Hearn/Actes with a defence to the amended counterclaim brought against Hearn/Actes by UBC in the action. In addition, Commonwealth has a duty under the Policy to defend sub-contractors and subconsultants. V. Professional Liability Insurance (or Errors and Omissions E & O ) Coverage for professional negligence is usually excluded from other policies of insurance. A professional liability policy will cover negligent acts or omissions by consultants and construction managers. Practice policies those covering the professional s practice generally are typically claims made policies. Claims made policies are triggered by claims made against the insured during the policy period. A claim can be an error that the consultant discovers, despite no actual claim being made against them or advice that someone else will be holding the consultant responsible for a loss. Generally all of the consultants, employees, officers, and directors will be insured under the same professional liability policy. Because the policy is triggered by a claim, and because prior knowledge of a claim may void insurance, professionals must be careful to report to the insurer on risk as soon as they are aware of the claim. If ever in doubt, the consultant should report the possibility of a claim to their insurer. There may also be a professional obligation to tell others if they discover that the have made a mistake. As with any policy, material non-disclosure will void professional liability insurance. What constitutes material will of course depend on the facts of the specific case; however, failure to disclose a known claim to the insurer during the application process or misrepresenting a suspension from a licensing body will most likely result in the insurer voiding the coverage. Project professional liability policies that apply only to a specific project. These usually cover all consultants and sub-consultants under one limit. A third type of E & O policy is what s known as a Contractor policy. However, these cover the contractors design liability for design/build projects.
4.1.5 As with each of the above types of policies, there are exclusions in professional liability and E & O policies. Common exclusions are: liability that is assumed by contract between the consultant and another party; estimates of profits; and late work product, unless the delay resulted from an error or omission. VI. Conclusion As seen above, there are numerous types of policies that are triggered in different ways and provide protection against different hazards. Anyone working in the construction industry, or advising those working in the construction industry, should become familiar with the different types of insurance available to make sure that if a dispute arises, the appropriate insurer or insurers can be put on notice.