Case information

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Case summaries are prepared by the Office of the Registrar of the Supreme Court of Canada (Law Branch). Please note that summaries are not provided to the Judges of the Court. They are placed on the Court file and website for information purposes only.

Insurance - Property insurance - Builders all-risk insurance policy excluded coverage for cost of making good faulty or improper design - Machine failed - Foreseeability of damage - Whether the Court of Appeal erred in law in applying a standard similar to that applied in Manufacturers’ Mutual Insurance Co. v. Queensland Government Railways [1969] 1 Lloyd’s Rep. 214 (Aust. H.C.), rather than the one applied in Foundation Co. of Canada Ltd. v. American Home Assurance Co. (1995), 25 O.R. (3d) 36 (Gen. Div.), aff’d (1997), 71 A.C.W.S. (3d) 957 (C.A.) - Whether the Court of Appeal erred in law in interpreting and applying the foreseeability standard contrary to the rule that the insurer must prove the applicability of an exclusion - Whether the Court of Appeal erred in finding that the trial judge made a “processing error” which tainted his reasons.

In order to construct a large tunnel under a river, the Appellants or their predecessors contracted for the manufacture of a customized tunnel boring machine. An elaborate and sophisticated process was used to design and construct the machine, which was approximately 25 percent larger than the largest of the 124 tunnel boring machines previously built by the manufacturer. At the time, it was the largest tunnel boring machine of its kind in the world. The main bearing was critical to the functioning of the entire machine. To shield it from damage by contamination from soil and other materials, the machine had an extensive and unique sealing system. For the seals to work, a gap of 3-6 mm had to be maintained between the rotating cuttinghead and the static bulkhead. Various analyses predicted that parts of the machine might deflect, but not so as to threaten the main bearing.

The machine began boring the tunnel in November 1993. Approximately two months later, it broke down. The seals had been crushed due to excess differential deflection which the machine could not withstand. When the CN companies sought indemnity on a builders all-risk policy covering, inter alia, the machine, the Respondent insurers denied coverage based, inter alia, on an exclusion relating to “the cost of making good . . . faulty or improper design”. The CN companies sued for coverage. At trial, the failure was found not to be foreseeable, based on the standard enunciated in Foundation, and the insurers were required to indemnify the loss. The majority of the Court of Appeal found that the loss was foreseeable and overturned the award.