Law Times

Page 4 September 15, 2014 • Law Times www.lawtimesnews.com Insurance coverage for large infrastructure projects Decision on exclusion clause a shocker for construction bar By Julius Melnitzer For Law Times n a decision that has shocked the construction insurance industry across the country, the British Columbia Su- preme Court has given a narrow interpretation to an exclusion clause commonly used in large infrastructure projects domesti- cally and internationally. More particularly, Justice Ronald Skolrood concluded in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co. that slab def lec- tions that left a hospital facility with f loors that weren't as level as expected but were nonethe- less completely safe constituted "damage" included in the cover- age and not excluded by the "de- fects in material workmanship and design" exclusion. "This decision will not be welcomed by insurers and is sure to be appealed," says Dun- can Glaholt of Toronto-based construction law boutique Gla- holt LLP. "The exclusion endorsement was intended to constitute the be-all and end-all of such exclu- sions and the result is certainly an unexpected one." No court had previously in- terpreted the exclusion, known as LEG2/96 and developed by the London Engineering Group, a U.K. construction industry think-tank. Still, Glaholt concedes, Skolrood's conclusions are likely "counterintuitive" for some people. "In my view, however, the decision does commer- cial justice and amounts to a reasonable assessment of the relative risks undertaken in an insurance policy transac- tion," he says. "The reasons are a principled interpreta- tion of an important exclu- sion and not simply an exam- ple of a hard case making bad law. After all, this is a P3 proj- ect going after an insurer." In Acciona, the plaintiffs were the contractors on a $250-million public-private partnership to design and build a hospital extension in Victoria. The extension consisted of an eight-storey reinforced concrete structure that involved a com- plex design engaging thin sus- pended concrete slabs with large spans. During construction, the slabs "over-def lected" in the sense that the facility wasn't as level as anticipated. The plain- tiff 's expert evidence, accepted by the court, was that the cause of the "over-def lection" related to formwork and reshoring procedures that didn't accom- modate the slabs' complexity. The upshot was that the slabs, which met the design strength requirements and were completely safe, nonetheless re- quired extensive remediation to make them serviceable in a ma- jor hospital. The plaintiffs sought recov- ery of the remediation costs under its course of construc- tion, also known as a builder's risk, policy. The policy with Al- lianz covered all risks "of direct physical loss of or damage to the property insured" but also contained LEG2/96, which excluded "defects in material workmanship or design." The plaintiffs, represented by David Miachika, Grant Mayovsky, Christopher O'Connor, and Lauren Krist- janson of Borden Ladner Gervais LLP's construction and engineering group in Vancouver, argued that the yielding of the reinforcing steel, the permanent down- ward def lection of the slabs, and the extensive crack- ing amounted to "damage" covered under the all-risks clause. Richard Lindsay, Scott Urquhart, and Vania Kim of Vancouver's Lindsay LLP, an insurance defence firm, countered that the slabs were defective rather than damaged and that the cause of the loss related to defects in material workmanship and design that fell under LEG2/96. But Skolrood concluded that the def lections, cracking, and yielding all constituted "dam- age" as the significant over-de- f lection throughout the facility had rendered the slabs unfit for their intended purposes. While some degree of def lection and cracking was normal in con- crete slabs, the extent of the def lections here and their per- manent nature had left the slabs in an altered physical state that amounted to "damage." The court also ruled the ex- clusion clause applied to costs "which would have been in- curred if replacement or recti- fication of the Insured Property had been put in hand immedi- ately prior to the said damage." The exclusion didn't extend to costs arising from consequen- tial or resulting damage to the insured property. The only costs excluded in this case, then, were those re- lated to rectifying the improper formwork and reshoring (the defect in material workman- ship) before the over-def lection and cracking occurred. The only evidence available sug- gested, however, that these costs were minimal. As it turns out, the benefits insured parties generally may garner from the interpretation in Acciona of the policy may be on a short leash. "By the time this case gets to the B.C. Court of Appeal or to the Supreme Court of Canada for a leave application, I expect that the insurers will have draft- ed a differently worded exclu- sion clause to try to plug the gap created by Acciona," says Gla- holt. LT I Duncan Glaholt expects insurers will now draft a differently worded exclusion clause in light of the court's ruling. NEWS 12-month, part-time, executive LL.M. for lawyers and business professionals Advance your career to the next level! Learn important legal and business concepts that can be immediately applied to better serve your clients. Explore the implications of real-life cases in an increasingly complex global business environment. 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