In PCL Constructors Canada Inc. and Flynn Canada Ltd. v. Allianz Global Risks US Insurance Company et. al. 2014 ONSC 7480, the Ontario Superior Court made this bold statement about a faulty workmanship exclusion. In this article, I will take you through the decision and highlight the controversial findings.
In this case, Flynn Canada Ltd. (“Flynn”) was retained by PCL Constructors Canada Inc. (“PCL”) to construct and install aluminum frames (mullions) to support the outer-walls of a building in Toronto. The mullions corroded due to exposure to snow and ice melting materials that became trapped in the mullions.
Flynn and PCL spent $512,346 repairing the damaged mullions. They looked to their Builders Risk policy with the defendants for indemnification. The insurers denied coverage based on exclusions in the policy for loss or damage caused by corrosion and faulty workmanship.
Framework of Analysis
The court applied the typical analysis to determine coverage, summarized as follows:
- Does the damage fall within the insuring agreement (was the loss fortuitous)?
- Is the loss excluded elsewhere in the policy?
- Is there any exception to the exclusion?
There was no issue as to whether Flynn and PCL established coverage under the insuring agreement and the parties accepted that the loss was fortuitous.
The Exclusion Clauses
The court moved on to the crux of the case which was the interpretation of the following exclusions:
5(d) This Policy does not insure against faulty or improper workmanship…; however, in the event of loss or damage caused in whole or in part by…faulty workmanship…this exclusion shall apply only to the direct costs that would have reasonably been incurred to rectify such fault(s) immediately prior to the commencement of such loss or damage. Such loss or damage shall be deemed to be Resultant Damage as Defined in Clause 38 of Section I of this policy.
5(j) Loss or damage caused directly or indirectly by rust or corrosion, frost or freezing, pollution or contamination unless caused directly by a peril not otherwise excluded herein.
The Corrosion Exclusion
This exclusion is generally understood to relate to normal risk of wear and tear of property left exposed to the elements. Here the corrosion was brought on, in part, by PCL using snow and ice melting materials on the upper slabs of the building during construction and the mullions were exposed to this material. The corrosive liquid became trapped in the mullions because Flynn caulked the joints in such a way that prevented drainage.
The court held that the corrosion was brought on by untimely exposure to corrosive liquid rather than wear and tear due to exposure over time. The parties agreed that the corrosion in this case was covered by the policy unless it was excluded elsewhere.
Was the Corrosion “Otherwise Excluded”
The insurers argued that all of the causes of the corrosion were due to the plaintiff’s faulty workmanship, namely:
- PCL knew or ought to have known that pouring corrosive liquid down the sides of the building while under construction might expose the mullions to the corrosive liquid, and
- Flynn knew or ought to have known that caulking the mullion joints on all four sides would prevent any corrosive liquid in the mullions from draining.
On this basis, the insurers argued that the exclusion for faulty or improper workmanship applied to exclude coverage. The corrosion of the mullions was not caused by “a peril not otherwise excluded herein”.
Mr. Justice Myers disagreed and said that the “exclusion” for faulty workmanship is not actually an exclusion at all. He stated that it is a deeming clause that provides coverage for resulting damage caused by faulty workmanship but excludes coverage for the direct costs that would have reasonably been incurred to rectify the defect immediately prior to the commencement of the resulting damage.
Interplay between Two Exclusions
The insurers also argued that, regardless of how the faulty workmanship exclusion is interpreted, the fact that it applies is enough to prevent the exception from the exclusion for corrosion from being triggered.
Mr. Justice Myers disagreed stating that although the provision is called an “exclusion”, it preserves coverage for resulting damage. Accordingly, the exposure of the mullions to corrosive liquid was “caused directly by a peril not otherwise excluded herein” because resulting damage caused by faulty workmanship is not excluded from coverage by the policy.
The court held that Flynn and PCL were entitled to be paid the sum of $512,346 less the cost of rectifying or replacing the damaged property itself.
Critics of this judgment would go so far as to say that the decision is respectfully incorrect. The exclusion for faulty workmanship is exactly that, an exclusion. It simply provides a method to calculate repair costs for resultant damage. Further, the corrosion exclusion makes an exception for damage “caused directly by a peril not otherwise excluded herein”. Faulty workmanship is an excluded peril and the analysis should have stopped there. The fact that the faulty workmanship exclusion has an exception should have no bearing on the analysis.
The insurers plan to appeal the decision.