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Summary

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Insurance - Property insurance - Liability insurance - Contracts - Commercial contracts - Interpretation - Exclusion clauses - Appeal - Standard of review - What is the meaning to be found in the plain, ordinary language of the insurance provision - Is it appropriate to rely on third party contract provisions in order to ascertain the reasonable expectations of parties to an insurance contract - Do the reasonable expectations of the parties in this case conflict with or support the interpretation set out in the response to the first question - Does the damage caused by one contractor to the work of another necessarily constitute “resulting damage” as per the exception - What is the proper test to distinguish between the key concepts of “faulty workmanship” and “resulting damage” in comprehensive builders’ risk insurance policies - Should the new “physical and systemic connectedness test” developed by the Court of Appeal be adopted or rejected as the preferred analytical framework to be used in such cases - Do this Court’s positions in Commonwealth Construction Co. Ltd. v. Imperial Oil Ltd. et al., [1978] 1 S.C.R. 317 and Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245 with respect to insurance contracts generally, and Builder’s Risk insurance policies specifically, provide the necessary framework to resolve “faulty workmanship” disputes - Which approach best reflects the common thread that unites the long-standing jurisprudence on the distinction between faulty workmanship and resulting damage.

The two appellants are the construction manager and owners, respectively, of a building constructed in Edmonton Alberta. Near the end of construction, the appellants contracted to have debris cleaned from the exterior of the building, including the windows. While cleaning, the contractor scratched and damaged the windows, requiring their replacement at a considerable cost. When the appellants claimed on their insurance policies, their claims were denied on the basis of a clause excluding coverage for “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 shall insure such resulting damage”.

The Court of Queen’s Bench of Alberta held that the damage to the windows was not covered by the exclusion clause and was covered by the insurance policy. It did so on the basis that factors determining the reasonable expectations of the parties weighed in favour of the appellants’ interpretation. It also found the clause ambiguous and applied the contra proferentem rule. The Court of Appeal of Alberta allowed the insurers’ appeal and granted a declaration that the damage to the windows was not covered by the insurance policies.

Lower Court Rulings