C.A. Adopts Broad Interpretation of “Subcontractor” in CGL “Your Work” Exclusion

This afternoon, the Court of Appeal released its decision in AXA Insurance v. Ani-Wall Concrete Forming. (We previously commented here on the decision of Perell J. from which the appeal was taken.)

The issue in the case was whether Ani-Wall was entitled to indemnity from AXA, its liability insurer, in relation to a claim against Ani-Wall for defective concrete footings supplied to some building projects. At first instance, Mr. Justice Paul Perell had ruled that the claim was covered. Today, the Court of Appeal dismissed  AXA’s appeal.

Because Ani-Wall does not manufacture concrete, it had entered into a contract with Dominion Concrete Group to supply the concrete that Ani-Wall had contracted to provide to its customers. This fact turned out to be key to the coverage issue.

AXA had sought to rely on three exclusions in the CGL policy: (1) “Your work”; (2) “Rip and tear”; and (3) “Your product”. On the appeal, it pursued only the first two of these.

The “Your work” exclusion in AXA’s policy, which excluded coverage for the cost of making good faulty work, contained an exception which, if applicable, restored coverage. The “your work” exclusion was stated not to apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor”. Justice Perell had held that the exception applied because the defective concrete had been supplied by Dominion, which he held to have been a subcontractor of Ani-Wall.

The Court of Appeal agreed. The main bone of contention on this aspect of the case was whether Dominion could be said to have been a “subcontractor” of Ani-Wall. Counsel for AXA urged the Court to adopt a three-pronged test that has been used by some American courts:

(1)        The product supplied should be custom made according to specifications identified in the prime contract;

(2)        The supplier should provide on-site installation or supervision services; and

(3)        The product supplied should form an integral or substantial part of the prime contract.

AXA argued that according to this test, Dominion was not a “subcontractor” of Ani-Wall and so, the exception did not apply. The Court of Appeal rejected that argument. Justice Michael Moldaver, writing for the Court, said:

I prefer to retain a degree of flexibility in the realm of insurance coverage, especially in cases like this, where coverage is acknowledged but the insurer seeks to rely on exclusionary provisions to limit its scope. As Ani-Wall points out, if insurers want to lay down hard and fast criteria, they can do so by defining the word “subcontractor” to their choosing. Insured persons who pay substantial premiums would then know where they stand and would not be left guessing about the extent of the coverage available to them. To date, for reasons unknown, AXA has chosen not to define the word “subcontractor” in the policy. Unless and until it does so, I believe the word should be construed broadly, lest it become a trap for the unwary.

(He went on to find that even if the three-part test were applied, he would still find that the exception applied.)

The Court then considered the “rip and tear” exclusion. Justice Perell had found that this exclusion was “unclear and therefore unenforceable”. The Court of Appeal agreed. In argument, counsel for Ani-Wall made use of a technique which we have found useful in coverage litigation: “exploding” policy provisions by replacing defined terms with the definition that appears in the policy. Justie Moldaver quoted the “exploded” version of the rip and tear exclusion, which read as follows:

This insurance does not apply to any liability for physical injury to tangible property, including all resulting loss of use of that property, or loss of use of tangible property that is not physically injured for the actual expenses incident to the intentional destruction and removal of concrete products which are found to be defective.

(The definitions of terms appearing in the exclusion are set out in bold print in the passage quoted above.) The Court of Appeal said that the exclusion was “incomprehensible” and refused to apply it.

(As a matter of interest, Justice Moldaver also sat as a member of the panel that heard Appin Realty v. Economical Mutual Insurance, where the Court was asked to interpret an “anti-concurrent causation” clause in a CGL policy. In that case too, the Court (particularly Justices Moldaver and Laskin) were quite strongly of the view that the wording upon which the insurer sought to rely was incomprehensible. The moral of the story for insurers is that they should ensure that their policies are clearly-worded if they want to rely on exclusionary language.)

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