In large construction projects, it is not unusual for a contractor or the owner to take out a “wrap-up” insurance policy. A “wrap-up” policy generally serves as all-encompassing insurance, which protects all contractors and subcontractors working on the project.
Like most insurance policies, wrap-up policies can contain certain exclusions to ensure that coverage does not operate to render the policy a performance bond. In the recent decision of PCL Constructors Canada Inc. v. Encon Group, the issue was whether an insurer was obliged to defend its insured under a policy that excluded coverage for defective workmanship. In particular, the Court was asked to determine whether the work in question was damaged due to defects or to an “occurrence” as a result of the work performed by PCL Constructors Canada Inc.(“PCL”).
PCL acted as the general contractor for the construction of a 34-story residential condominium. The condominium corporation sued PCL for damages arising from alleged defects and deficiencies in construction. PCL had Specific Project Wrap-Up liability insurance from Temple Insurance Company (“Temple Insurance”), who declined to defend PCL on the basis that there was no coverage for the claims asserted. Temple Insurance argued that the policy was intended to cover PCL’s tortious liability to third parties and not its own defective work. In particular, Temple Insurance contended that because PCL was the general contractor, the completed condominium project was properly considered the “work” of PCL. As such, building damage caused by poor workmanship or defective materials was not covered as the policy was not intended to enable PCL to recover indemnity for correcting its own deficient work.
The Court held that Temple Insurance did not discharge the onus of demonstrating that the damaged work in question was due solely to PCL’s own defective work and not to physical injury to, or destruction of, tangible property caused by an “occurrence”, which is covered. The Court focused on the plain meaning of the words and held that nothing in the policy restricted its application to certain types of property damage. The Court held that the “work performed” exclusion must be interpreted narrowly, and in situations where it is difficult to determine the source of damages claimed, or if there is any ambiguity, it must be resolved against the insurer. In this particular case, because the cause of the damaged building envelope was unclear, the Court held that it could not properly be excluded on the basis that it was solely the result of PCL’s work.
In coming to its decision, the Court relied on the Supreme Court of Canada decision in Derksen v. 539938 Ontario Ltd, where the Supreme Court held that exclusion clauses must be interpreted in accordance with the general principles of interpretation of insurance policies, including:
- The contra proferentem rule (that an ambiguous contractual term will be interpreted against the interests of the party that insisted on its inclusion in the contract);
- The principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and
- The desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.
Single project general liability insurance is a critical component of any large construction project, aimed at protecting all teams involved against third party and general liability exposures. At the same time, these cases highlight the fact that such policies are not intended to operate as a performance bond for insured parties by allowing them to seek indemnity for their own defective work. These decisions suggest that any ambiguity regarding the scope of exclusions will likely fall in favour of the insured, making it increasingly important for insurers to consider the nature of the project and the trades involved when determining exclusions.