The Court of Appeal’s leaves a significant practical question unanswered: If the most obvious liability risk is that the rafters will fail — how can such a loss be insured against? The answer, it would seem, depends on the exact wording of the insurance policy purchased.

Defective work exclusion in subcontractor’s CGL insurance policy extends to contractor-supplied materials

Construction insurance • Commercial General Liability (CGL) Policy • Duty to defend • Coverage • Defective work and work products exclusion • Exclusion applies • No Duty to defend

Hipperson Construction (1996) Ltd. v. H.J.H Steel Erectors

Hipperson Construction hired HJH Steel to erect a pre-engineered metal building at Regina Exhibition Park that Hipperson had purchased and supplied to HJH Steel.

During construction, on August 20, 2004, two of the building’s steel support rafters collapsed. It cost Hipperson $112,000 to repair the damage. Hipperson sued, claiming that HJH Steel caused the collapse by failing to cross-brace or properly support the rafters.

HJH Steel applied to the court for an order requiring its insurer Aviva to defend Hipperson’s lawsuit under HJH Steel’s Commercial General Liability policy.

Although it conceded responsibility to cover $5,000 to other parts of the building damaged when the support rafters collapsed, because they had been initially constructed by another of Hipperson’s subcontractors, Aviva denied coverage for the $107,000 cost of repairing the two rafters that HJH Steel had installed. It said that the policy’s “your work” and “your product” exclusions applied so that Aviva had no duty to cover these costs and thus no duty to defend HJH Steel.

HJH Steel and Aviva agreed that the Supreme Court of Canada in Monenco Ltd. v. Commonwealth Insurance Co. articulated the proper legal test for coverage:

Whether an insurer is bound to defend a particular claim has been conventionally addressed by relying on the allegations made in the pleadings filed against the insured, usually in the form of a statement of claim. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence. This remains so even though the actual facts may differ from the allegations pleaded….

HJH Steel and Aviva also agreed on the general principles of insurance policy interpretation:

1) the objective in construing the [policy’s] coverage of liability must be to give effect the [policy’s] dominant purpose of indemnity;

2) ambiguity in an insurance policy must be construed in favour of the insured;

3) the court should ordinarily strive to give effect to the objectively reasonable expectations of the insured.

Finally, everyone agreed that:

The purpose of an insurance policy must be determined from the policy itself … not upon general insurance principles, nor upon the general nature of the policies, but upon the exact terms of the insurance policies themselves.

The issue was whether the exact terms of Aviva’s policy might cover Hipperson’s costs to repair the rafters it had supplied and HJH Steel had allegedly negligently installed.

Aviva said that its “your work” or “your product” exclusions applied. The policy read:

This insurance does not apply to…

‘Property damage’ to… That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it….

‘Property damage’ to ‘your product’ arising out of it or any part of it.

Incorporating the policy’s definitions of “your work” and “your product” makes these two exclusions read:

‘Property damage’ to … That particular part of any property that must be restored, repaired or replaced because [work or operations performed by you or on your behalf; and … materials, parts or equipment furnished in connection with such work or operations] was incorrectly performed on it….

‘Property damage’ to [any goods or products … manufactured, sold, handled, distributed or disposed of by … you] arising out of [your work] or any part of it.

Justice Ball of the Saskatchewan Court of Queen’s Bench initially decided the issue on December 8, 2006. He concluded that neither exclusion applied.

For Justice Ball it was critical that Hipperson supplied the building’s components, including the steel rafters, not HJH Steel.

First, that led him to conclude that the “your work” exclusion did not apply. He said:

The steel support rafters were not ‘materials, parts or equipment furnished’ by HJH Steel in connection with the work it contracted to perform. They were furnished by Hipperson. Thus, they did not fall within the definition of ‘your work’ in the policy.

Secondly, he concluded that the “your product” exclusion also could not apply. He said:

…if HJH Steel had contracted to supply (that is to manufacture, sell, handle or distribute) the steel support rafters which were destroyed by its negligence, HJH Steel would be obligated under the ‘own product’ exclusion to repair or replace them at its own expense.

The mere fact that HJH Steel might have “handled” the steel rafters while erecting them did not intend to exclude damage to them from coverage. The steel rafters did not fall within the “your product” exclusion because the use of the word “handled” in the definition was intended to refer to goods or products that are supplied by an insured, either as principal or agent. He felt that “your product” had to be distinct from materials, parts and equipment furnished as part of the insured’s “your work.”

Interpreting the policy otherwise would “virtually nullify” the coverage sought to be provided by the CGL policy, and thus would be contrary to the general principle that the policy should be interpreted to accord with “…the objectively reasonable expectations of the insured.” Exclusions should not be interpreted so as to exclude from coverage the principal liability risk facing the insured. As the Ontario Court of Appeal said in Weston Ornamental Ironworks Ltd. v. Continental Insurance Company:

The exclusion clause should not be interpreted in a way which is repugnant to or inconsistent with the main purpose of the insurance coverage but so as to give effect to it…. [T]he exemption clause … should not be enforced by the courts when the result would be to defeat the main object of the contract or virtually nullify the coverage sought for the protection from anticipated risks.

Justice Ball said:

A similar concern exists here. When a contractor is engaged to install support rafters in a commercial building the most obvious liability risk (and the dominant purpose of indemnity) is that the rafters will fall. Coverage under a comprehensive liability policy would become illusory if it did not encompass the very risk one would expect to be insured.

He concluded that Aviva had a duty to defend its insured HJH Steel.

The Court of Appeal disagreed. It concluded that “damage of the kind alleged to the rafters is excluded by the policy” and that Justice Ball simply misinterpreted the “your work” exclusion.

It pointed out that the exclusion is not simply to the insured’s own work in the definition, but the whole phrase:

[Property Damage] to that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it. [Emphasis added.]

Thus, the “your work” exclusion in the policy excludes damage to any property — whether owned by HJH Steel or Hipperson that must be replaced because your — HJH Steel’s — work was incorrectly performed.

The Court of Appeal felt that, while such exclusion, by definition, reduces the policy’s coverage, it did not virtually nullify such coverage:

…[A]ny property damage other than to the property on which the insured’s work is performed was covered and such consequential damage in a collapse of this nature, for example, could have been very extensive.

The Court of Appeal felt that Justice Ball’s interpretation appeared to end on “your work” rather than on interpreting the exclusion clause containing that term in its totality.

Aviva was not required to defend.

While the Court of Appeal’s reading of the policy makes sense, this case leaves a significant practical question unanswered: If, as Justice Ball said, the most obvious liability risk is that the rafters will fail — how can such a loss be insured against?

The answer, it would seem, depends on the exact wording of the insurance policy purchased.

Saskatchewan Court of Appeal
   Gerwing, Lane, Smith JJ.A
   May 8, 2007