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Clear Wording Essential
Published in the October 2007 issue of Litigation Notes - View Article
Synopsis: The Ontario Superior Court of Justice considers “Your Work”, “Your Product” and “Rip and Tear” exclusions in a CGL policy
The Ontario Superior Court decision in Axa Insurance v. Ani-Wall Concrete Forming offers a lesson in the importance of clear drafting of insurance policies
Axa was the commercial general liability (CGL) insurer for Ani-Wall, which built concrete foundations for a group of new homes under construction. Ani-Wall subcontracted to Dominion Concrete the supply of the cement that it used. The concrete supplied was defective and extensive repairs were required to the foundations of the homes after they were completed. The home builders sued Ani-Wall, for breach of contract and negligence. Axa denied coverage for the loss, citing three exclusions in the CGL policy. Well before trial, Axa applied to the court for a declaration that coverage was excluded.
The first exclusion relied upon by Axa was the “your work” exclusion. “Your work” was essentially defined to include work performed by the insured. That exclusion stated that the policy does not cover property damage to “your work” where the cause of the damage is a defect in “your work”. The purpose of the exclusion is to extend coverage only to liability to a third party for property damage rather than serving as a performance bond to cover repair or replacement costs arising out of an insured’s own defective work. Providing insurance coverage for defective work is seen as creating a disincentive for doing quality work. The judge immediately dismissed Axa’s argument on this exclusion because the policy indicated that “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.” In this case, the damage arose from defective cement supplied by the subcontractor Dominion Concrete.
The second exclusion was the similar “your product” exclusion. “Your product” was defined to include any goods or products, other than real property, manufactured, sold, handled, etc. by the insured. The exclusion stated that “the insurance does not apply to property damage to your product arising out of it [i.e. your product] or any part of it.”
The judge found that the “your product” exclusion did not apply for two reasons. One was that Ani-Wall’s product formed part of the homes under construction. It therefore became real property and was exempted by the real property wording within the exclusion .
The second reason was more complicated. The judge relied on precedent cases which held that: “if the defective product becomes part of the whole of a third parties product, or is incorporated in a third parties product and can’t be removed or repaired without either rendering the third parties product useless or damaging it, the Courts have concluded that it is property damage and coverage will follow . . . In other words, when the insured’s own defective product becomes incorporated into the property of a third party, the damage is to the property of the third party.” In the previous cases cited, the Courts have generally held that there is coverage for the cost of effecting the total repair to the property, but only after deducting for the cost of repair to the defective product as part of the total expense. Applying that principle to the present case would mean that the cost of the repairing the foundation would not be covered but that the exclusion would not remove coverage for the cost of the damage to the houses that went beyond the cost of the foundation. However, the judge declined to include such a deduction in this case. He stated: “where the costs of repairing or replacing the insured’s defective product (the footings and foundations) likely approaches the costs of repairing the third parties’ damaged property (the homes), applying the Work Product exclusion in the manner suggested by Axa Insurance would be contrary to the reasonable expectations of the ordinary person as to the coverage purchased.” The judge found that Axa’s interpretation of the exclusion violated “the interpretative principle that an exclusion to coverage should not be enforced when the result would be to defeat the main object of the contract or virtually nullify the coverage sought for anticipated risks.” This conclusion regarding the reasonable expectations of the ordinary person is questionable given that the policy contains exclusions for the cost of repairing the insured’s own defective work.
Ani-Wall had argued that the “your product” exclusion should not apply because Ani-Wall provided a service rather than a product. The judge rejected this argument, noting that the contract for the project required Ani-Wall to supply and place footings and form walls which are tangible items.
The third exclusion which the judge refused to apply was the “rip and tear exclusion”. The policy provided that: “[t]his insurance does not apply to any liability for property damage for ripping and tearing expenses and restoration expenses.” These definitions were included: “Ripping and Tearing expenses shall mean the actual expenses incident to the intentional destruction and removal of concrete products which are found to be defective.” and “Restoration expenses shall mean such additional expenses as are necessary to place the structure in the same condition existing at the time such concrete product were determined to be defective . . .” The judge concluded the exclusion was unclearly worded and therefore unenforceable. He noted first that the definition of restoration expense was tautological. He stated: “the condition [of the structure] existing at the time such concrete products were determined to be defective is a defective structure. Restoring a property to a defective condition makes no sense.” Further, he could make no sense of the inclusion of the words “for property damage” in the exclusion. He said the provision would make sense if the words “for property damage” were deleted from the statement “This insurance does not apply to any liability for property damage for ripping and tearing expenses and restoration expenses.” As worded though, he found the exclusion too unclear to be given effect. Consequently, Axa must indemnify Ani-Wall for any liability to the home builders.
Axa Insurance (Canada) v. Ani-Wall Concrete Forming Inc. 2007 CanLII 44346