Supreme Court of Canada Gives a Lesson in Insurance Contract InterpretationLedcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (CanLII)
On September 15, 2016, the Supreme Court of Canada decided certain damage to a building under construction was covered under the relevant builders’ risk policy in a decision that’s particularly relevant to builder’s risk (a.k.a construction all risk) and commercial general liability insurers across Canada. The decision reconfirms that just like any contract, a court will enforce the unambiguous wording of an insurance policy to determine what’s covered, excluded from that coverage, and the exceptions to those exclusions. If the question is whether damage excepted from an exclusion is “resulting damage”, the scope of work of the party that caused the damage will likely be determinative. And while the Court engaged in yet another legalistic discussion of “standard of review”, this time its decision that the interpretation of standard form contracts is subject to the “correctness” standard of review has some practical impact: trial decisions interpreting standard form contracts – like many insurance contracts – might be easier to appeal.
In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., an owner hired a general contractor to construct a building, including to supply and install the windows. The owner separately contracted with a cleaning services company to clean the windows. The cleaners used improper tools and methods and scratched the windows to the extent the general contractor had to replace them. The general contractor and the building’s owner claimed the cost of replacing the windows against a builders’ risk insurance policy issued in their favour and covering all contractors involved in the construction. But the insurers denied coverage on the basis of an exclusion contained in the policy for the “cost of making good faulty workmanship”. The general contractor and the owner sued the insurer on the basis that the “resulting damage” exception to the exclusion applied, bringing the claim back into coverage under the policy.
The trial court decided the exclusion clause was ambiguous. It used a contract interpretation rule that the court should interpret an ambiguous contract term against the party that wrote the contract (contra proferentem rule) and decided the insurers were liable. The Alberta Court of Appeal, however, reversed this decision. Applying the correctness standard of review to the policy interpretation, it decided the exclusion clause was not ambiguous at all, so the trial court incorrectly used the contra proferentem rule. The Appeal Court then devised and applied a new test - “physical or systemic connectedness” - to determine whether physical damage was excluded as the “cost of making good faulty workmanship”, or covered as “resulting damage”. It concluded the damage was physical loss excluded from coverage because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work, not accidental or fortuitous. The Supreme Court of Canada, however, disagreed and found the insurer liable for the cost of repairs to the windows.
The exclusion clause was ambiguous but general contract principles resolved the ambiguity & “resulting damage” is covered - here. The wording of both the exclusion and the exception were not defined elsewhere in the policy, resulting in two possible outcomes: the one the insureds promoted and the one the insurer promoted. However, the Court resolved the ambiguity by focussing on the wording of both the exclusion and the exception clauses in light of the parties’ reasonable expectations and the purpose behind the insurance policy, all with a view to avoiding unreasonable results. It decided the exclusion clause excludes only the cost of redoing the faulty work - the cost of re-cleaning the windows - so the window damage and thus their replacement cost was covered. Since the general rules of contract interpretation resolved the ambiguity, it wasn’t necessary to use the contra proferentem rule or the physical or systemic connectedness test.
Interpretation of a standard form contract is an exception. The general rule is that contract interpretation is subject to deference from an appeal court. But six of the seven Supreme Court Justices agreed that the interpretation of a “standard form” contract is an exception to this rule and “correctness” is the appropriate standard of review because it has precedential value and it advances the mandate of appeal courts to ensure consistency in the law.
This decision applies to and has an impact on the insurance and construction industries across Canada even though the case originated in Alberta. It’s particularly relevant to builder’s risk (sometimes called construction all risk) and commercial general liability insurance policies because each commonly incorporates exclusions and exceptions concerning workmanship and resulting damage.
Contract Interpretation 101. The decision reconfirms that if the language of the insurance policy is unambiguous then, like any contract, a court will enforce its clear wording to interpret its meaning and in particular, to determine what’s covered, excluded from that coverage, and the exceptions to those exclusions.
“Resulting damage”. In deciding whether the damage to which the exception to the exclusion refers is “resulting damage”, the scope of work of the party that caused the damage will likely be determinative. In this case, the cleaning contractor’s scope of work was limited to cleaning windows. But if the cleaning formed part of the general contractor’s work, the outcome would likely have been different because the general contractor’s “workmanship” - which is excluded from coverage - would have involved delivery of not only a clean, but also an undamaged, window.
Practical impact of standard of review. The Court engaged in yet another discussion of “standard of review”. The discussion itself is rather academic and legalistic and confusing and is of some (limited) interest to lawyers - and likely none to their clients. But the Court’s ultimate decision that the interpretation of standard form contracts is subject to the “correctness” standard of review does have some practical impact: trial decisions interpreting a standard form contract – like many insurance contracts – must be “correct”, and therefore may be easier to appeal.
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