What is the scope of the exclusion for making good faulty workmanship under a builders risk insurance policy? If cleaners scratch the windows during the construction process, does making good just mean a repeat cleaning or does it also include repairs to the windows?
This was the issue that the Alberta Court of Queen’s Bench grappled with in Ledcor Construction Limited v. Northbridge Indemnity Insurance Company, 2013 ABQB 585.
Station Lands Ltd. is the owner of the newly constructed EPCOR Tower. Ledcor Construction Limited was the general contractor responsible for building the new office tower. As the building neared completion, Ledcor contracted with a cleaning company to have the exterior of the building cleaned to remove accumulated debris. This included cleaning the building’s exterior windows. While cleaning, the cleaners scratched those windows so badly that they had to be replaced at considerable cost.
The owner and the general contractor made a claim under their builders risk insurance policy for the cost of those replacements. Northbridge Indemnity Insurance Company denied the claim, applying an exclusion for “the cost of making good faulty workmanship”. The full exclusion stated:
This policy does not insure […] the cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shale [sic] insure such resulting damage.
The owner and the general contractor sued the insurance company, arguing that they were not claiming the cost of making good the cleaning, but rather were claiming the cost of damage done as a result of the cleaning.
The court resolved the case in favour of the owner and the general contractor, relying on the principles for interpreting insurance policies established by the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33.
It was conceded by the insurance company that but for the exclusion, the policy as a whole would have applied to this type of damage.
Turning to the exclusion, the court considered two aspects: whether the cleaning was “faulty workmanship” and if it was, what the “cost of making good” that cleaning would be.
On the first question, the court held that the cleaning was “work”: “[p]lainly, whether one is building something or doing something to something else, work is being done.” (para. 11) Concluding that “work” and “workmanship” were, in this context, synonymous, the court held that the cleaning was clearly faulty workmanship.
On the second question, the court considered two interpretations of “the cost of making good”: the cost of re-doing the cleaning or the cost of fixing the exterior of the building. The court held that both of these interpretations were reasonable. While some aspects of the policy, such as its generally broad scope, suggested that the policy should cover the cost of replacing the windows, the court was not satisfied that this was conclusive. As a result, the court found the exclusion to be ambiguous, and applied an interpretive presumption endorsed by the Supreme Court to construe the contract against the interest of the insurer (contra proferentem). The court held that the damage caused by the cleaners was not excluded from the builders risk policy.
This decision considerably narrows the application of the faulty design/work exclusion in builder’s risk policies. Policyholders are reminded that they should seek advice from an insurance coverage lawyer when their claims are denied by an insurer.