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Supreme Court of Canada Broadly Interprets Exception to Faulty Workmanship Exclusion

In a recent policyholder-friendly decision, the Supreme Court of Canada found coverage under an exception to the faulty workmanship exclusion in an all-risk policy. The decision provided the insureds with millions to cover the cost of replacing the faulty work.

In Ledcor Construction v. Northbridge Indemnity Insurance Co., a subcontractor was hired to complete exterior cleaning of a high-rise building’s windows toward the end of construction. The subcontractor used improper tools and scratched the windows, which had to be replaced at a cost of Can$2.5 million. The project owner and the general contractor pursued coverage under the owner’s builders’ risk policy; however, the insurer denied the claim based on the policy’s faulty workmanship exclusion.

The issue before the court was whether the cost to replace the windows fell under the exclusion, which applied to “the cost of making good faulty workmanship . . . unless physical damage . . . results, in which case this policy shall insure such resulting damage.” The Supreme Court found the exclusionary language ambiguous and resolved the ambiguity in favor of the insured, holding that the exclusion applied only to the cost of redoing the faulty workmanship itself – that is, recleaning the windows – while the cost to replace the windows was covered as “resulting damage.”

This decision broadly interprets coverage under all-risk policies, and establishes that the faulty workmanship exclusion will only operate to exclude the cost of redoing the faulty work itself.

U.S. faulty workmanship exclusions include a similar exception for “ensuing loss” – that is, a covered loss ensuing from an excluded loss. Though the Ledcor holding is a win for Canadian policyholders, U.S. states are split on defective construction issues. For a review of U.S. treatment of defective construction, see our State by State Survey.

Did you know that SDV advises policyholders around the world? Check out our international practice information page to see how we can assist you with international insurance issues.

Nov 07, 2016

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