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“Making Good” Exception to the Normal Exclusion
Published in the May 2006 issue of Transportation Notes - View Article
The Ontario Court of Appeal has recently rendered a decision of interest in the interpretation of all insurance policies which contain an exclusion for any costs incurred by an insured in order to repair or replace its own defective work or product. In Bridgewood Building v. Lombard General Insurance Company of Canada, the question arose in the context of CGL policies issued to home developers, but the principles apply equally to all policies containing an analogous exclusion. In the transportation context, they would apply, for example, to a hanger keeper’s policy which typically excludes the costs of making good faulty workmanship.
The insurer certainly began, before a close analysis of the policy wording, with a strong position: CGL policies (as well as a number of other general liability policies) are not usually expected to respond to the costs of “making good”. Unfortunately for the insurer however, such general propositions will not be sufficient to override the apparent intent of the language of the insuring agreements themselves.
The difficulty for the insurers lay in an exception to the “making good” exclusion found in their own contract. After including the wording typically found in a CGL policy for the purpose of excluding coverage for the costs of repairing defective work, the policy continues:
“This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”
This exception to the exclusion appears to fit the facts of the case precisely, for here it was in fact the work of a subcontractor which exposed the insured to liability, in respect of which liability it sought coverage under the CGL policy. As the Court observed, a plain reading of this exception clause “would seem to indicate that coverage will be provided if the ‘damaged work or the work out of which the damage arises’ is performed on behalf of the insured by a subcontractor.”
In an attempt to avoid the apparent effect of the exception clause, the insurer first cited “sloppy drafting” which indeed may be the only real response. However, the burden of the argument at the appeal focused upon commercial consequences of a finding of coverage for poor workmanship. A CGL policy is not a Performance Bond and there is a public policy argument which serves as a caution against extending coverage to indemnify in respect of the consequences of shoddy workmanship. Such a coverage might be said to encourage poor workmanship and manufacturing. Furthermore, there is a floodgates argument. If coverage is found to exist, indemnity might be sought for “building code infractions, substitution of sinks, repair of chipped tiles, drywall repair and essentially all” of the insured’s work.
The insurer argued that these general considerations should lead to the conclusion that no coverage exists and that the troublesome clause, which appears to indicate that coverage will be provided where the poor work is that of a subcontractor, should be seen as an exception to an exclusion clause which cannot, of itself, restore coverage when coverage does not exist in the first place.
The Court found this last proposition sound, but unhelpful. The central question is whether coverage did exist “in the first place” and the use made of the proposition is one which begs that question.
In order to succeed, the insurer would have had to convince the Court to turn “the contra proferentem principle on its head” and construe ambiguities against the insured. This the Court refused to do, concluding:
“. . . if insurance companies do not wish to indemnify general contractors for the shortcomings of their subcontractors, they need only say so in clear and unambiguous language in their policies.
Bridgewood v. Lombard
Ontario C. A., Docket C43430