Insurance Coverage for Consequential Damage – A Reminder

Almost all condominium insurance policies contain a “faulty work” exclusion. That is, condominium insurance policies typically do not cover costs incurred to rectify faulty or improper material, workmanship or design. But a recent decision of the Alberta Court of Appeal provides a helpful reminder that consequential damage (resulting from faulty or improper material, workmanship of design) may still be covered.

In the case of Condominium Corporation No. 9312374 v Aviva Insurance Company of Canada, the condominium corporation had hired a contractor to provide “parking rehabilitation and maintenance work to the parking surface in the parkade area” of the complex. The work involved cutting into the membrane of the parkade surface. The contractor cut too deeply, causing damage to the structural integrity of the parkade. The question was whether required repair to the structure was covered by the corporation’s property insurance policy.

The insurance policy was an “all risks” policy that contained an exclusion for faulty or improper workmanship.  However, the exclusion said that it did “not apply to loss or damage caused directly by a resultant peril not otherwise excluded” in the policy.

So, in other words: Damage that resulted from faulty work was still covered by the condominium’s insurance.

The insurer argued that the contractor’s cutting too deeply into the parkade, and thereby causing serious structural risk, was all part and parcel of the contractor’s work – and therefore was caught by the “faulty work” exclusion.

The Court of Appeal disagreed. The Court of Appeal said that significant risks arose because of the contractor’s faulty work (namely the risk of structural failure or collapse); and these risks were a consequence of the faulty work. Therefore, the costs to address those risks were covered by the policy. The Court of Appeal said:

In our view, the resultant peril, or consequence, that causes a risk of loss to property, is the loss of structural integrity to the parkade; in other words, the risk of structural collapse.

In essence, Aviva’s broad reading of the exclusion clause would exclude the cost of making good the consequences of faulty workmanship.

This need to distinguish between “faulty work” and the “consequences of faulty work”

is notably important under Ontario condominium law, because of Section 99(3) of Ontario’s Condominium Act, 1998, which reads as follows:

An exclusion in the insurance required by this section is not effective with respect to damage resulting from faulty or improper material, workmanship or design that would be insured, but for the exclusion. 

The bottom line is that consequential or resulting damage may often be covered, even when the policy contains a “faulty work” exclusion.  As this case shows, the trick in many cases will be to distinguish between “faulty work” and the “consequences of faulty work”.

I have one last note before I conclude: A general principle of insurance law is as follows: If a provision in an insurance policy is unclear or ambiguous (and is therefore capable of different interpretations), the Courts will normally prefer the interpretation that favours the insured (because the policy has been crafted by the insurer). So, in cases of doubt, the doubt may well be resolved in favour of the insured.