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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