Last Week’s Court Rulings from the Alberta Court of Queen’s Bench, Court of Appeal and SCC.
Condominium Corporation No. 9312374 v Aviva Insurance Company of Canada, 2020 ABCA 166
Contractual Interpretation | Faulty Workmanship
The issue in this case was the interpretation of a multiperil policy, and specifically “whether damage to the structural integrity of the Condo Corp’s parkade, resulting from faulty workmanship” was covered under the policy.
In the course of a parking rehabilitation and maintenance project, a subcontractor cut too deeply into the parking membrane, which caused damage to the structural integrity of the parkade. The Insurer denied coverage on the basis of an exclusion in Section 1, paragraph 6(G)(b) of the Policy, which provided:
G. Other Excluded Losses
Coverage A of section I does not insure:
(b) the cost of making good:
(i) faulty or improper material;
(ii) faulty or improper workmanship;
(iii) faulty or improper design.
This exclusion does not apply to loss or damage caused directly by a resultant peril not otherwise excluded in Coverage A of Section I;
The term “resultant peril” was not defined.
The Court accepted that generally, coverage extends to risks related to resulting problems arising from faulty workmanship, but not the quality of the workmanship:
 As the Supreme Court of Canada explains, “insurers ‘are prepared to insure risks relating to problems caused by faulty … workmanship, but they are not prepared to insure the quality … of the workmanship in a construction project per se. The argument is that the contractor is responsible for doing [its] job right and the insurance company is not there to provide compensation for inadequate performance by a contractor for the very work the contractor agreed to perform’”: Ledcor at para 70, citing Canadian College of Construction Lawyers, report of the Insurance & Surety Committee, “‘Covered for What?’: Faulty Materials and Workmanship Coverage under Canadian Construction Insurance Policies” (2007), 1 JCCCL 101 at 104.
 The intent behind the exclusion is to discourage contractors from cutting corners and being careless in order to save money and then relying on the insurer to pay the cost of correcting their mistakes: Poole Construction Limited v Guardian Assurance Company, 1977 CanLII 39 (SCC),  ILR 1-879,  AJ No 784 at para 69 (QL) (Alta SC) [Poole Construction]; see also Craig Brown, Insurance Law in Canada (Toronto: Thomson Reuters, 2002) (loose-leaf updated 2017, release 6), at IF-213.
 As this Court noted in Poole Construction, the faulty workmanship exclusion makes clear “that the insurer will not indemnify the insured for costs caused by the insured’s own use of faulty workmanship, materials or design. To do otherwise would give the ensurer [sic] carte blanche to use faulty materials, workmanship or design”: para 69.
In this case, the contract between the parties expressly excluded work that could affect the structural integrity of the parkade:
 The agreed statement of facts is clear that the contractor and engineer were retained to effect repairs and perform remediation work to the parkade membrane. In order to remediate the membrane, the contractors were required to cut into the parkade topper; however, they cut too deeply, cutting into the concrete slab. It was expressly agreed that their scope of work did not include any work that would impact the structural integrity of the concrete slab. Therefore, the consideration of what constitutes faulty or improper workmanship is limited to the scope of the contract—that is, remediation and repair work to the parkade membrane. Accordingly, the parties agree (as they did in Ledcor) that the cost of making good the repair and remediation work to the parkade membrane is not covered under the Policy.
 The analysis moves to whether repairing the excessively deep cut that pierced the concrete slab causing the loss of the structural integrity falls within the “cost of making good faulty or improper workmanship” and is thus excluded, or whether it is covered because it is “loss or damage caused directly by a resultant peril not otherwise excluded in Coverage A of Section 1.” Notably, the parties agree that damage to the structural integrity of the parkade is a loss not otherwise excluded in the Policy. In other words, subject to the faulty workmanship exclusion, damage to the structural integrity of the parkade is a loss covered under the Policy.
In this case the Court concluded that the resultant damage was the risk of structural collapse:
 In our view, the resultant peril, or consequence, that causes a risk of loss to property, is the loss of structural integrity to the parkade; in other words, the risk of structural collapse.
 In essence, Aviva’s broad reading of the exclusion clause would exclude the cost of making good the consequences of faulty workmanship. Such an interpretation does not accord with the reasonable expectation of the parties, the commercial reality nor the wording of the exclusion clause itself.
 The analytical framework to resolve insurance contract ambiguity as outlined in Ledcor is appropriate here. The parties reasonably expected that the cost of making good the faulty or improper workmanship (determined by the scope of work contracted for) would be excluded, but that the consequences of that faulty workmanship would be covered. This interpretation does not create unrealistic results because, among other reasons, loss of structural integrity to the parkade (and the building itself) is a loss covered by the terms of the Policy. Further, this interpretation is consistent with the jurisprudence. It is not necessary to resort to contra proferentum to resolve the ambiguity, but if we had, the same result would follow.
On an appeal over whether an Insurer had a duty to defend, the Alberta Court of Appeal affirmed the following test:
 The principles to be applied when deciding whether a duty to defend is owed are not disputed. Intact is required to defend the claims of BHJ and Bonduelle where the facts alleged in the plaintiffs’ pleadings, if proven true, would require Intact to indemnify Clauson for the claims. As set out in Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33 at paras 19-20,  2 SCR 245 [Progressive Homes]:
An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v American Home Assurance Co., 1990 CanLII 144 (SCC),  1 SCR 801, at pp. 810-11, [Nichols]; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49,  2 SCR 699, at para. 28 [Monenco]; Jesuit Fathers of Upper Canada v Guardian Insurance Co of Canada, 2006 SCC 21,  1 SCR 744, at paras. 54-55). It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).
In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff (Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24,  1 S.C.R. 551, at paras. 79 and 81 [Scalera]). The use or absence of a particular term will not determine whether the duty to defend arises. What is determinative is the true nature or the substance of the claim (Scalera, at para. 79; Monenco, at para. 35; Nichols, at p. 810).
 The duty to defend is broader than the duty to indemnify. As stated by McLachlin J speaking for the Court in Nichols at 812: “. . . considerations relat[ing] to insurance law and practice, as well as the authorities, overwhelmingly support the view that the duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims which may be argued to fall under the policy. That said, the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy”.
 With this, it is trite that coverage provisions are to be interpreted broadly, while exclusion provisions are to be construed narrowly: Progressive Homes at para 24; Monenco at para 31. Moreover, courts favour contractual interpretations consistent with the reasonable expectations of the parties, provided that interpretation can be supported by the text of the policy: Progressive Homes at para 23; Tien Lung Taekwon-Do Club v Lloyd’s Underwriters, 2015 ABCA 46 at para 25.