By David Miachika, P.Eng., Grant Mayovsky, and Lauren Kristjanson
A recent case in British Columbia—Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company et al, 2014 BCSC 1568 (Acciona)—is an important decision for the construction and insurance industry, as it interprets a standard exclusion clause for the first time. It also clarifies the requirement of an unexpected or unintended loss and the definition of ‘damage’ under a course of construction (COC) policy. These issues are often raised by insurers in denying coverage, but not frequently litigated by Canadian or other courts. This decision is currently being appealed by the insurers.
The decision should be noted by Canadian construction and insurance lawyers, owners, contractors, subtrades, insurers, and brokers. It is also relevant to similar parties in the British Commonwealth and United States, as standardized policy language is used in construction project insurance policies around the globe.
In Acciona, the plaintiffs—represented by this article’s authors—were the design/build contractor of the $250 million public-private partnership (P3) hospital extension in Victoria. The project was an eight-storey concrete structure, comprising four wings connected to a central core. The structural design was complex with each floor consisting of thin suspended slabs (250 mm [10 in.] thick) with large spans (over 9 m [29 ½ ft]).
During construction, the slabs throughout the facility ‘over-deflected,’ which resulted in them not being level as planned. The slabs required extensive remediation to meet the project’s serviceability requirements of level floors. The contractor claimed recovery of all remedial costs under the project’s COC policy, and the insurers denied coverage.
Such policies protect those who have an insurable interest in a building or other property that is under construction, or an insurable interest in physical assets used in the construction process such as materials, equipment, and supplies at the site awaiting incorporation into the building or used to aid in the construction. The dispute in Acciona surrounded coverage under the COC policy, which required the court to interpret and apply its language.
Is it damage or a defect?
In order to establish coverage under a COC policy, the insured must show the loss falls under the “Perils Insured” provision in the policy. In Acciona, this provision contained a typical insuring agreement covering “ALL RISKS of direct physical loss of or damage to the property insured … except as hereinafter provided.”
In this case, coverage was disputed by the insurers, in part, as the parties disagreed as to whether the over-deflections and related effects to the suspended slabs constituted “damage” within the insuring agreement.
The court determined the slab over-deflections, cracking, and yielding of the supporting rebar all constituted “damage” as referred to in the policy, finding that the slabs experienced “significant and varying degrees of over-deflection and cracking throughout the facility that rendered the facility unfit for its intended purpose.” This included the serviceability requirements of a hospital to accommodate wheelchairs and numerous types of rolling equipment, as well as project specifications requiring level and flat floors appropriate for a hospital.
The court did not accept the insurers’ argument the over-deflections and cracking were merely defects in the slabs that did not constitute damage. Mr. Justice Skolrood, the judge presiding over the case, held:
[w]hile some degree of deflection and cracking is expected in concrete slabs, the extent of what occurred in this case and its permanent nature support the conclusion that the slabs were left in an altered physical state, which some courts have again held to be the touchstone for a finding of damage.
Possible occurrences versus intended consequences
Policies insure against possible occurrences, rather than certain events or intended consequences. However, in Acciona, the COC policy did not contain an express requirement that the loss or damage be an “occurrence” or an “accident.” As such, the contractors argued this was not required to trigger coverage under the policy. The court disagreed and ruled that in order for coverage to be triggered under the COC policy, the loss or damage must be fortuitous—in other words, unexpected or unintended. On this point, the judge stated:
[T]he requirement that loss or damage must be fortuitous in order to trigger coverage … is the very essence of insurance… [T]he concept of fortuity is, in any event, built into the Policy here. Again, the “Perils Insured” include “all risks” of direct physical loss or damage. Use of the term “risk” underscores that the Policy is intended to insure against possible occurrences, as distinct from certain events or intended consequences.
In this case, the court agreed with the contractors that the fortuity requirement was met, as the extent of the deflections and cracking were both “unexpected and unintended.” The slabs were not designed to deflect to such a degree as to render them unfit for their intended purpose. Further, the court determined the extent of the problem was not discovered until late in the project, and the actual cause was not determined until after construction was completed.
Consequently, it could not be said the contractors “courted a risk,” particularly given the evidence the concrete subtrade used formwork and shoring/reshoring procedures that were standard in the industry, had been utilized for many years, and were performed in accordance with the formwork engineer’s design and erection procedures.
Overall, the court found the contractor had established coverage under the insuring agreement. In particular, the court confirmed the over-deflection and cracking of the concrete slabs fell within the policy’s “Perils Insured” clause in that it constituted damage that was fortuitous. As such, the onus shifted to the insurers to establish an exclusion applied.
What risk are you taking on (and what are you paying for)?
Once the insured establishes coverage under a policy, the insurer may argue the loss or damage is excluded. Many COC policies use standard exclusion clauses, with premiums tied to the breadth of coverage the exclusion provides. It is therefore important for purchasers and providers of these types of policies to understand how the courts will interpret the exclusions.
A key issue in Acciona was the interpretation of a standard exclusion clause developed by the London Engineering Group—a U.K. think tank for the insurance industry that develops model policy wordings for its members for use in various insurance policies including COC and “All Risks” policies, referred to as LEG2/96. This is a “defects” exclusion clause that had not been interpreted by any court in the world, prior to Acciona, although it had been commented on in various articles and papers. As worded, the LEG2/96 clause excludes:
All costs rendered necessary by defects of material workmanship, design, plan, or specification, and should damage occur to any portion of the Insured Property 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 Insured Property had 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 any portion of the insured property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan, or specification.
The court made the following findings in interpreting the LEG2/96 exclusion:
- The exclusion is not limited to defective design of the work or facility as a whole, but rather includes any “defects of material workmanship, design, plan, or specification” that would include defective design of component pieces of the work, including the formwork and shoring/re-shoring.
- The two components of LEG2/96 do not operate in isolation, but must be read together as a single exclusion to give meaning to the clause as a whole.
- The excluded costs are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred.
- The exclusion does not extend to the cost of rectifying or replacing the damaged property itself.
- The excluded costs crystallize immediately prior to the damage occurring, and are thus limited to those costs that would have prevented the damage from happening.
Insurers must use language available
A takeaway point from Acciona is the court’s finding that where the insurers have language available to them that will remove an ambiguity from the meaning of an exclusion clause, or will clearly specify the scope of an exclusion, then they should incorporate such language. Otherwise, normal principles of interpretation will apply, including the principle that coverage provisions will be interpreted broadly and exclusion clauses narrowly.
Had the insurers intended the defects exclusion in the COC policy to be interpreted similarly to the more typical “resulting damage” clauses that appear in Canadian insurance policies, they should have incorporated such readily available language in the policy.
In Acciona, the court concluded the “damage” was the over-deflections and cracking of the concrete slabs. The “defect in material workmanship” was the improper formwork and shoring/re-shoring procedures that resulted in the damage to the slabs. As such, the LEG2/96 clause excluded only those costs that would have remedied or rectified the defect before the cracking and over-deflections occurred. In this case, the court held there was no evidence on which to quantify these costs except to say they would have been minimal (i.e. the additional cost to release and retighten the re-shores after each successive slab pour or incorporating additional camber into the formwork). As such, the insurers failed to meet their onus of establishing the exclusion applied, and all remedial costs to the concrete slabs, corresponding site General Conditions, and profit were covered, totalling $8.5 million.
Acciona illustrates that depending on the wording of the policy and the facts of the claim, notwithstanding a denial of coverage by an insurer, there may be coverage for a claim. Contractors must carefully read all their policies and any project policies to be aware of their potential coverage during and after construction operations.
In the event an issue arises, it is important to promptly notify all insurers of claims or losses. Construction professionals are recommended to seek legal advice on coverage before submitting a claim to ensure they obtain maximum coverage.
David Miachika, P.Eng., is a partner in Borden Ladner Gervais (BLG) LLP Construction and Engineering Group’s Vancouver office. He practices exclusively in the area of construction, real estate, and civil liability dispute resolution, including litigation, arbitration, and mediation of construction claims, engineering/architect liability, builders’ liens, building envelope claims, environmental claims, and insurance coverage. Miachika represents developers, purchasers, contractors, engineers, architects, suppliers, landlords, insurers, sureties, property owners, property managers, and strata corporations in all levels of court in British Columbia. He can be reached at firstname.lastname@example.org.
Grant Mayovsky is a partner in BLG’s Vancouver office, and focuses his practice on litigation and dispute resolution with an emphasis on construction, insurance, surety, warranty, creditors’ remedies, banking, and fraud loss recovery. Mayovsky has developed particular expertise in dealing with public/private infrastructure claims, defective work and deficiency claims, delay and productivity claims, and building warranty claims. He can be contacted via e-mail at email@example.com.
Lauren Kristjanson is an associate in BLG’s Vancouver office. She focuses on civil litigation with an emphasis on construction, insurance, surety, warranty, and engineering disputes. Kristjanson acts for clients with respect to surety claims and coverage issues, guarantee and indemnity claims, insurance coverage disputes, defective work and deficiency claims, and insurance regulation issues. She can be e-mailed at firstname.lastname@example.org.