Court of Appeal Narrows "Inherent Vice" Exclusion

In March 2000, the British Columbia Court of Appeal ruled that "faulty construction" does NOT necessarily constitute "inherent vice" and it affirmed coverage under an all-risks property policy for a roof that collapsed under snow load.

In Dawson Creek v. Zurich Insurance the plaintiff claimed indemnity for loss suffered as a result of the collapse in 1997 of the roof of the city's ice arena.  The immediate cause of the collapse was a heavy snowload but the underlying cause was faulty construction of the roof some forty years earlier.  In denying coverage for the loss, the insurer argued that the faulty construction fell within the excluded peril of "inherent vice".

In a unanimous decision, which will be of interest to students of insurance law and industry members alike, the Court of Appeal ruled:

• coverage under an "all-risk" policy is not intended to cover all damage however caused but only damage which is caused by an accident or which is "fortuitous" in nature;  
• a loss is "fortuitous" if it would not have occurred "but for" an act or event which was not expected in the ordinary course of things;  
• it is unnecessarily dogmatic to hold, without more, that faulty construction constitutes "inherent vice";  
• rather, the expression "inherent vice" has a more limited scope in Canada than in the American case law and refers to qualities that are "necessarily incidental to the property rather than occasioned by an adventitious cause"; and  
• the faulty construction in this case was fortuitous in that it was not expected in the ordinary course of things and this fortuity meant the inherent vice exclusion did not apply.

There are a couple of other rulings in the case that are of interest.  Firstly, the Court of Appeal specifically agreed with the Trial Judge's holding that because the roof deficiencies were discoverable if a reasonable inspection had been made, any defect in the roof was not "latent".  This may substantially limit the application of the "latent defect" exclusion in many cases and an insured may be able to enforce coverage notwithstanding his own failure to inspect.

The case is also an interesting example of policy interpretation.  While the Court repeated the usual sentiments of construing coverage provisions broadly and exclusion clauses narrowly, it also employed the mechanism of "necessary implication" to find coverage for matters not expressly excluded.  For example, one of the policy exclusions was for "faulty workmanship/design error" but only with respect to "property in the course of construction".  The Court ruled that by limiting the exclusion to course of construction, the "necessary implication" was that faulty construction causing loss AFTER completion of the structure was an insured risk.