Insurance law - All-risk insurance - Builder's risk policy - Policies and insurance contracts - Coverage - Exclusions - Interpretation of policy - defective workmanship - Resulting damage - Contra proferentum rule; Appeals - Standard of review

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.

Faulty workmanship exclusion in builder's risk policy excludes only the actual cost of redoing the faulty work.

[2016] S.C.J. No. 37

2016 SCC 37

Supreme Court of Canada

September 15, 2016

McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown JJ.

The insureds were the owner of the lands on which a new building was constructed and the general contractor for the project. During construction, the building's windows were scratched by the cleaners who had been hired to clean them. The cleaners had used improper tools and methods in carrying out their work and, as a result, the windows had to be replaced.

The insureds sought indemnity from the insurer for the cost of replacing the windows under a builder's risk insurance policy issued in their favor and covering all of the contractors involved in the construction. The insurer denied coverage on the basis of an exclusion in the policy for the "cost of making good faulty workmanship".

At trial, the insurer was found liable to the insureds on the basis that the exclusion clause was ambiguous and that the rule of contra proferentem applied against the insurer. The Court of Appeal reversed that decision holding that the trial judge had improperly applied the rule of contra proferentem because the exclusion clause was not ambiguous. The Court of Appeal devised a new test to determine whether physical damage was excluded. The insureds sought and obtained leave to appeal to the Supreme Court of Canada.

The Supreme Court of Canada held that where an appeal involved the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the particular parties to assist the interpretation process. Therefore the interpretation of a standard form contract is a question of law subject to correctness review.

The Supreme Court of Canada went on to hold the appropriate interpretation of the faulty workmanship exclusion in an all builder's risk policy serves to exclude from coverage only the cost of redoing the faulty work. In this case, the cost of redoing the faulty work was the cost of recleaning the windows. Therefore, the windows replacement cost is covered under the policy.