CGL Exclusions Held Not to Apply

AXA Insurance (Canada) v. Ani-Wall Concrete Forming Inc. involved the familiar “your work”, “your product” and “rip and tear” exclusions in a CGL policy. A concrete forming contractor, Ani-Wall Concrete Forming, was alleged to have used defective concrete in constructing some foundations which then failed. Ani-Wall was sued. It sought coverage from its liability insurer, AXA Insurance. AXA denied the claim, relying on the above exclusions in the policy.

In this application to the court, AXA sought a declaration from Mr. Justice Paul Perell, that liability coverage under its CGL policy was excluded by any or all of the three provisions referred to above.

Ordinarily, in such circumstances, the court would be prepared to decide whether or not the insurer owes a duty to defend. That finding can be made on the basis of the pleadings, since the insured only has to show that there is a possibility that the claim will be within the coverage.

But deciding whether or not a particular exclusion applies is a different story. Usually, this can only be determined after a trial, because it depends on facts that are proved in evidence.

In this case though, Justice Perell took the somewhat unusual step of deciding on an application that none of the three exclusions upon which AXA relied was applicable to the claim. Accordingly, he dismissed AXA’s application. He said, “the case at bar is one of those cases where the coverage issue can be determined before trial. There is no appreciable controversy about the factual nexus, and I am told it would be helpful for the prospects of negotiating a settlement if the genuine dispute (which is to say, the not hypothetical dispute) about the three exclusions were resolved now.”

(Ironically, Ani-Wall and other parties involved in the underlying lawsuit had argued that it would be premature for the court to rule on the applicability of the exclusions prior to trial. Undoubtedly, they are now grateful that Justice Perell rejected their submissions.)

“Your work” exclusion

Justice Perell made short work of this exclusion. He referred to two well-known cases that have dealt with this exclusion: Alie v. Bertrand & Frère Construction Co. and Bridgewood Building Corp. v. Lombard General Insurance Co. His Honour noted that the AXA policy contained an exception to the exclusion, which provided 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”. On the facts of this case, Ani-Wall’s work had been performed by a subcontractor (Dominion Concrete), so the exception applied, thereby negating the effect of the “your work” exclusion.

“Your product” exclusion

His Honour said that this exclusion would have applied to remove coverage for Ani-Wall except for two factors. First, he relied on “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”. Secondly, the exclusion contained an exception for “an insured’s property that is ‘real property'” and Perell J. found that this exception restored coverage.

(Justice Perell’s reasons in relation to this exclusion are a bit confusing because they refer several times to the “your work” exclusion when it appears that His Honour meant to refer to the “your product” exclusion.)

Justice Perell concluded that applying the “your product” exclusion would be “contrary to the reasonable expectations of the ordinary person as to the coverage purchased”. He said that interpreting the exclusion as urged by AXA “reveals an enormous hole in the blanket of insurance coverage for property damage caused to third parties” and so, was unenforceable in this case.

Justice Perell also held that once Ani-Wall’s product (the concrete footings, form walls, etc.) was incorporated into buildings, the “real property” exception to the exclusion applied, restoring coverage.

“Rip and tear” exclusion

This exclusion sought to remove from coverage “liability for property damage for ripping and tearing expenses and restoration expenses”. The term, “ripping and tearing expenses” was defined to mean, “the actual expenses incident to the intentional destruction and removal of concrete products which are found to be defective”. The definition of “restoration expenses” was “such additional expenses as are necessary to place the structure in the same condition existing at the time such concrete products were determined to be defective; but in no event shall they include the cost of the ‘concrete products’ themselves or labour incidental to their replacement.”

Justice Perell held that the exclusion was “unclear and therefore unenforceable”. For example, he thought it “odd” to speak of restoration expense as being property damage. Also, while he agreed that “ripping and tearing” a property would constitute “property damage”, he again considered it “odd” to refer to it as such, when the ripping and tearing expense has been incurred in order to repair the property damage that triggered the insurance coverage in the first place.

He also felt that the rip and tear exclusion would leave “a gapping [sic] hole in the coverage”, such that it should not be enforced.

The result was that AXA’s application was dismissed. (We find this disposition a little surprising. Given that Justice Perell adjudicated on the effect of the three exclusions, we would have expected him to declare that they did not apply in this case. However, on its face at least, a simple dismissal of AXA’s application would not constitute a ruling as to the applicability of these exclusions. Presumably though, the parties will treat it as being the equivalent.)

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2 Responses to CGL Exclusions Held Not to Apply

  1. David Cheifetz says:

    Dear Colleagues:

    I’ll deal only with the “your product” exclusion, paragraphs 67-70 of the reasons, and what Mr. Justice Perell called the principle from Weston Ornamental Iron Works Ltd. v. Continental Insurance. Para. 68 of Justice Perell’s reasons is:

    [68] In Weston Ornamental, Lacourcière, J.A. stated at p. 479:

    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. Thus, even if the exemption clause were found to be clear and unambiguous, it 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 protection from anticipated risks.

    The important point that has to be accepted, first, is that Justice Perell was bound by the Court of Appeal decisions in Weston Ornamental Iron Works Ltd. v. Continental Insurance Co., Zurich Insurance Co. v. 686234 Ontario Ltd., and Alie v. Bertrand & Frere Construction Co. Ltd. That, for him, was the end of the matter. The first two cases, at least, require his conclusion. Whether the CA’s decision in Alie does is a fine point of stare decisis which I believe Justice Perell was right to stay away from, given Weston and Zurich.

    However, I make 3 points should the matter proceed to the next level where, perhaps, the Court of Appeal will take a fresh look at (another) jurisprudential morass and clean this one up. It’s not, I believe, a Herculean task.

    1. The first is that is that the effect of the Weston Ornamental “principle” is to rewrite the insurance policy. It creates a contract that the insurer did not intend to offer, at the premium paid (the consideration received) if at all. The “Weston Ornamental” principle is contrary to every other current Canadian principle of contract interpretation. That, I suggest, becomes clear if one tries to apply it to a contract which isn’t an insurance policy (even franchise agreements: though there are some … unusual … statements in that jurisprudence).

    2. The Weston Ornamental principle is, amongst other things sui generis and per incuriam. (At this point, I hope the the CA has become so inured to per incuriams from me that I can get get away with at least one more.) If one looks at the SCC cases that Weston cited as authority for the principle, it’s not there. Weston misinterpreted the SCC cases and that misreading has been missed, ever since. Start with 1955’s Indemnity Ins. v. Excel Cleaning Service and follow them forward. You’ll see what I mean. Here’s a hint. The exact quotation in Excel is:

    Such a construction would largely, if not completely, nullify the purpose for which the insurance was sold — a circumstance to be avoided, so far as the language used will permit.”(emphasis added) 

    It shouldn’t be too hard to guess what proviso somehow disappears in Weston Ornamental.

    If there is, now, “after the fact” authority for the Weston Ornamental principle applicable to insurance policy interpretation, it will have to be found in the combination of Hunter Engineering Co. v. Syncrude Canada Ltd. [1989] 1 S.C.R. 426, 57 D.L.R. (4th) 321, and Guarantee Company of North America v. Gordon Capital Corp, [1999] 3 S.C.R. 423, 178 D.L.R. (4th) 1. Professor Waddams wrote in Waddams, Law of Contract 4th at §483, at p. 348-49 that that Hunter Engineering stands for the proposition that “exclusion clauses should, prima facie, be enforced according to their true meaning” but the courts have the power to grant relief if the clause is “unconscionable” or, alternatively, if it would be “unfair or unreasonable to give effect to it.” An exclusion clause may be seen as a form exculpatory clause. GCNA v Gordon may be cited for the proposition that Hunter applies to insurance policies interpretation.

    3. The third, applicable to this case, is that the reasonable expectations doctrine [applied in para. 70] can’t apply. It cannot be used to interpret the meaning of a policy provision, unless it is first found that the wording of the provision is ambiguous. That’s the parol evidence rule and SCC law. There is no ambiguity in this exclusion.

    In Alie v. Bertrand & Frère Construction Co., the Ontario Court of Appeal stated: “This court has vigorously interpreted ambiguities in insurance contracts in favour of the insured. It has, however, stopped short of rewriting those contracts”. To the contrary, the Weston Ornamental principle explicitly rewrites the policy. The odd thing about Alie is that it was released just a few weeks after Zurich revived Weston Ornamental, which had been dormant in the province for about 20 years. It is difficult to match the Alie statement with Zurich, if one assumes (as one should) that the Alie panel was cognizant of Zurich. Adding to the oddity is that in 2002, a unanimous 5 judge panel of the Court of Appeal in Hope v Canadian General reminded the profession

    that coverage provisions in insurance policies should be construed broadly … and … that ambiguous provisions in a policy should be read so as to give effect to the reasonable expectations of the parties … operate, however, only where there is a genuine ambiguity as to the meaning of the impugned language. (my emphasis) 

    More than 70 years ago, Lord Tomlin wrote in Hillas & Co. v. Arcos Ltd. that “the problem for a court of construction must always be so to balance matters that, without violation of essential principle, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains.” The Weston Ornamental principle is such a destroyer.

    [Yeah, I’m plagiarizing myself from an unpublished paper that I might eventually complete and release. Or not.]

    David Cheifetz
    Bennett Best Burn LLP

  2. David Cheifetz says:

    Item number 3 should begin [new words are in bold]

    3. The third, applicable to this case, is that the reasonable expectations doctrine [applied in para. 70] can’t apply. It cannot be used to interpret the meaning of a policy provision, unless it is first found that the wording of the provision is ambiguous. That’s the parol evidence rule and SCC law.. There is no ambiguity in this exclusion. …

    DC

    Correction made: CW

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