March 17, 2015
The August 19, 2014 decision of Acciona turns on the issue of coverage under a Course of Construction (COC or Builders Risk) Policy. The decision could be fundamental to the areas of construction and insurance law, and in particular the way in which the courts interpret the LEG2/96 clause – a design/workmanship – exclusion. Unfortunately, the case is currently being appealed and we will likely not know its true impact for quite some time. The forgoing is unfortunate given that this area of the law is rarely commented on by the courts.
In Acciona, the Plaintiff was a joint venture Design/Build Contractor for a hospital extension located in Victoria BC. During construction, it was discovered that the concrete slabs in the extension were experiencing deflections. The Court determined that the cause of the deflection was the formwork and re-shoring procedures used during construction. Although structurally sound, significant remediation was required to meet the design intention.
The Plaintiffs claimed recovery for the cost of remediation under the COC Policy. The Insurers denied coverage and argued that (1) the slabs were defective and as such were not physically damaged, and (2) that based on the operation of the LEG/96 clause in the policy the issue fell under the “defects in material workmanship or design” exclusion.
LEG 2/96 model ‘consequences’ defects exclusion is worded as follows:
The insurer(s) shall not be liable in respect of all costs rendered necessary by defects of material workmanship design plan or specification and should damage occur to any portion of the Insured Property (Contract Works) containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the said portion of the Insured Property (Contract Works) has been put in hand immediately prior to the said damage.
For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property (Contract Works) shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship design plan or specification.
The Court held that the slabs were not in essence defective but were physically damaged by the formwork and re-shoring procedures (i.e. the process of construction). Notwithstanding that the plaintiffs’ subcontractor constructed the slabs in the first place Skolrood J. found that the sagging and cracks fell within the perils insured clause as fortuitous damage. Consequently the Court held that the LEG2/96 clause did apply, as the covered “damage” consisting of over deflections and cracking of the concrete slabs, directly resulted from the improper formwork and shoring/reshoring procedures employed on site, which constituted a “defect in material workmanship”.
Thus, pursuant to the LEG2/96 clause, the excluded costs would be those costs associated with remediation or rectification of the defect before the cracking and over deflections occurred.
On appeal it is uncertain how the interpretive reasoning of Skolrood J, will hold. First, the Court’s reasoning can be interpreted to mean that a contractors own defective workmanship on an element of the project, which then subsequently results in damage to that same element, is excluded, but the resulting damage to that same element is not. This implies that for every defect/workmanship exclusion claimed by the insurer as a defence the courts will look to the construction process and determine, on a case by case basis, if the issue being denied coverage is itself the cause or the resulting damage within a single construction element. Given the nature of complex construction projects such an analysis could become very complicated.
Secondly, pursuant to the wording of LEG2/96, the excluded costs associated with remediating the damage are calculated based on what would have been incurred if replacement or rectification of the slab had “been put in hand immediately prior to the said damage.” Putting same plainly, the excluded cost of the repair should be calculated the day prior to the damage (cracking and deflection) occurring. Hence, it can be argued that in this case if no repair was possible immediately prior to the damage, the excluded cost would have been that of repairing the entirety of the slab.
On the other hand, Skolrood J. held that the exclusion applied only to the increased costs which would have otherwise been incurred over time if the construction of the slab had been carried out correctly in the first place. In essence this would limit the exclusion to those costs associated with implementing proper formwork and shoring procedures to prevent sagging and cracked slabs throughout the construction process.
The difference in interpretation is critical given that if nothing could have been done to stop the cracking/deflection immediately prior to the damage, the excluded costs would be the entire cost of the slab repair, rather than the minor additional costs associated with doing the job correctly in the first place. It is for this reason that a decision from the appeal court will be instrumental in shedding further light on how the LEG2/96 clause, and clauses similar to same, will be interpreted in the future.