"Work Performed" Exclusion Sends Insured's Coverage Down The Tubes

In B.C. Master Blasters v. Aviva Insurance the Supreme Court of British Columbia recently revisited the concepts of "accident" and the "business risk" exclusions in a CGL policy. At the end of the day, the court ruled that physical damage caused by poor workmanship was not a covered claim.

B.C. Master Blasters was a power washing company retained to clean the interior of a boiler at the Weyerhaeuser Mill in Kamloops, B.C. The interior of the boiler comprised numerous steel tubes which had accumulated residue ("smelt") which had to be removed as part of the regular maintenance program.

In previous years the power washing procedure served to wash away the accumulated smelt from the floor tubes in the boiler. In 2004, however, changes in procedure resulted in a layer of smelt being left on the floor tubes which had to be removed. B.C. Master Blasters were given very specific instructions that the remaining smelt had to be removed by hand with the aid of shovels only. They were specifically warned that, in order to protect the tubes, no sledgehammers, chisels or power tools of any sort were to be used. In deliberate breach of these instructions, the Master Blasters work crew used a power jackhammer to loosen the smelt which resulted in damage to the tubes and a liability claim by Weyerhaeuser of approximately $1 million.

When the liability claim was first presented to Aviva for consideration under its CGL policy, coverage was denied on two separate grounds. First, it claimed that the deliberate flouting of prohibitions expressly designed to protect the tubes did not amount to an “accident” in the circumstances and hence the insuring agreement in the policy was not triggered. Second, in any event, it claimed that coverage was precluded under the policy’s two "work-performed" exclusions which read:

The court reviewed various cases which defined the word "accident" in the context of dangerous or risky activities. It noted there can be circumstances where a decision to court the risk of damage can at some point become equivalent to an intention to cause damage and that, in such circumstances, it would be proper to say "that was no accident". However, regardless of whether the conduct brings with it a high risk of damage, the test for "accident", and therefore whether or not the insuring agreement was triggered, was whether the damage was designed or expected:

In the case at bar, the court held that, although the use of the jackhammer on the smelt was risky and unwise, the work crew believed they could actually remove the smelt without damaging the tubes. In the absence of any intention to actually inflict damage to the tubes, "the damage was accidental and therefore the result of an "occurrence" for the purposes of the policy".

WORK-PERFORMED EXCLUSIONS

The court noted that the critical question here was what "particular part of property" was Master Blasters working on. Aviva argued that Master Blasters was working on the tubes or, more broadly, the boiler itself. The insured, on the other hand, argued that it was working on the smelt and not on the tubes and therefore the exclusions had no application.

Master Blasters invoked the usual principles of policy interpretation that coverage provisions are to be construed broadly and exclusion clauses narrowly, and that any ambiguity in the policy wording must be interpreted against the insurer. However, the court held that there was no real ambiguity in the wording of the exclusions in this case.

The court noted that the provisions were part of the "business risk" exclusions in a CGL policy which "are designed to restrict coverage so that defects in the very work that the contractor is employed to do is not covered by the insurance policy".

The court accepted that risks relating to the repair or replacement of an insured’s faulty workmanship are a normal, foreseeable and expected incident of doing business and should be reflected in the price of the product or service rather than as a cost of insurance to be shared by others. It cautioned that this rationale ought not be applied too broadly, but that it did represent a "principled basis for the own-work exclusions in CGL insurance and was of assistance in assessing the reasonable expectations of the parties".

The court noted that, although it was possible to say that Master Blasters was working on the smelt, such a distinction between the smelt and the tubes was "artificial":

In the result, because the damage was to the very tubes on which the insured was working, both of the "work-performed" exclusions applied and there was no coverage under the policy for the claim.

The decision in B.C. Master Blasters v. Aviva Insurance can be accessed on the B.C. Supreme Court website.

Readers with any questions regarding the "business risk" exclusions in a CGL policy are welcome to contact Nigel Kent, who tried the case on behalf of the insurer, at telephone: (604) 643-3135, email: npk@cwilson.com.