Date: April 2016
Author: Scott W.K. Urquhart
Course of Construction Policies and Consequential Economic Losses – Acciona v. Allianz and Claims for Increased Expense.
Much ink has been spilled on the BC courts’ decisions in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company. But the lion’s share of the commentary has focussed on the defect exclusion at issue in that case, known as the LEG 2/96 exclusion, and the finding that it did not exclude damage to defectively constructed property. Garnering less attention are the courts’ rulings with respect to the economic claims presented by the insured. The plaintiff sought over $4 million for “increased sub-contractor costs” proximately caused by the damage to the property. But that part of the claim was rejected by BC’s courts as not triggering coverage in the first instance.
This case stands for the proposition that property policies such as a course of construction (builders risk) policy will not (subject to specific policy wordings, of course) provide coverage for consequential, economic losses.
The plaintiff insured was the design-build contractor for the new Patient Care Centre at Royal Jubilee Hospital in Victoria, BC. The structure was a four-wing, eight-story building to be built and operated as a “P3” project on a fixed price contract. The structure itself consisted of cast-in-place, suspended concrete slabs with a concrete sub-contract price of about $15 million.
The poured slabs were designed to be unusually long, wide and thin to allow for flexibility of operations over time. While slabs of this design are not in and of themselves defective, they do require construction methods designed to accommodate those features. Unfortunately, the shoring contractor employed a “simplified method” of reshoring that caused the slabs, poured with a pre-camber intended to deflect to level, to “over-deflect” leaving depressions and undulations. The slabs, while safe from the perspective of loading requirements, did not meet the serviceabiltiy requirements of a hospital with patients in wheelchairs and rolling beds.
The solution to the over-deflections was to grind down the sides of the slabs and fill in depressions. The cost to repair, clean, design and test the slabs was over $7 million. Indirect costs, management fees and profit totalled over $3.7 million. And finally, the insured claimed for “increased sub-contractor costs” in the amount of approximately $4 million.
Those sub-contractor costs arose from claims against the general contractor by its sub-trades for increased costs caused by delays occasioned by repairs to the slabs. Those sub-trades did not actually perform any work to directly repair, replace or remedy the slabs.
The insured sought approximately $15 million from its COC insurers. The claim was denied on the ground, inter alia, that the defect exclusion excluded the loss from coverage. The insurers also denied, before and at trial, the $4 million sub-contractor costs on the basis that the policy did not insure those losses.
The policy included fairly standard COC wording, insuring “against ALL RISKS of direct physical loss of or damage to the property insured” subject to exclusions.
It also included a standard wording for Expediting and Extra Expenses, subject to a $1 million sub-limit, as follows:
This Policy shall also pay for the reasonable extra cost of expediting the repair or replacement of Property Insured damaged by a Peril insured, including overtime and the extra cost of express or other rapid means of transportation. This Policy also provides Extra Expense beyond that payable under Section II – Business Interruption (if insured) as is necessarily incurred for the purpose of continuing as nearly as practicable the normal operation of the Business. Such Extra Expense shall include the expense of obtaining and using other property or facilities of other concerns or necessary emergency expenses.
Issues at Trial
The insureds argued that the issue to be decided was whether the economic losses occasioned by claims from sub-trades, although not working on the slab repair, were proximately caused by by the damage to the slabs. Interestingly, the plaintiff insureds argued that the Expediting and Extra Expense Clause did not apply as the subtrades did not work on the repairs.
The insurers argued, relying on long lines of judicial authority, that the policy language determined whether the increased costs to construction of undamaged parts of the building were covered. Given that the policy insured against all risks of direct physical loss of or damage to property, consequential economic losses, whether proximately caused by the property damage or not, could not trigger coverage.
At paragraph 238, Mr. Justice Skolrood held as follows:
In my view, this issue falls to be decided by reference to the specific wording of clauses 3 and 7. Both clauses make it clear that the losses covered by the Policy are the direct losses to the property insured. The property insured in this case are the damaged slabs and the direct losses are those costs associated with the assessment and remediation of the slabs.
I agree with the Insurers that the additional subcontractor costs are costs of a different nature and arise out of ALJV’s contractual obligations owed to the subcontractors and as such fall outside the scope of coverage.
The claim for management fees was denied on a finding that it was excessive and based on “at best, vague” evidence. The profit claimed at 12.6% was allowed at 4.9% as being the best actual profit the insured could have made on the project.
The insurers appealed the decision on the defect exclusion and the insureds cross-appealed on the issue of the economic losses.
On appeal, and in reliance on US authority, the insureds argued again that a property policy covers all losses directly caused by damage to property. But the American line of authority interpreted “all risks” as synonymous with “all losses”. In Canada, risks are synonymous with perils that constitute phenomena causing the loss to property, not the loss itself.
Keating, the principal authority relied on by the insureds,represents a significant departure from the Canadian approach to insurance contract interpretation. In Vantage Development Corp., Inc. v. American Environment Technologies Corp., cited with approval in Keating, the Court held, as follows:
In interpreting an insurance policy, a court may not ignore the clear and certain terms of a policy or change their meaning in an effort to construe them. When the policy is clear and unambiguous, the parties are bound by the language used and the court must accordingly give it effect.
That is consistent with the primary interpretive principle employed by Canadian courts – give effect to clear language. But where a policy’s terms might bear two interpretations, New Jersey courts appear to be compelled to apply the interpretation most favourable to the insured, notwithstanding any other factors. Judge Smith writes:
If, on the other hand, the language of a policy will support two interpretations, one favorable to the insured and the other favorable to the insurer, a court is obligated to apply that interpretation which favors coverage. … If there is any doubt, uncertainty or ambiguity in the phraseology of a policy, or if that phraseology is susceptible to two meanings, a construction favoring coverage must be adopted.
That “any doubt” approach is a stark departure from the Canadian interpretive principles which start with giving effect to clear language, read given clauses in the context of the policy as a whole, and prefer interpretations consistent with reasonable commercial expectations. It is only when these rules fail that the contra proferentem rule is employed.
The insurers argued that the language of the COC policy was clear, that the New Jersey “any doubt” doctrine could not be accepted, and that the property policy insured for damage to property, and not to purely economic consequences flowing from that damage.
The Court confirmed that an “all risks” property policy covers all perils, but not all property and agreed that the policy covers damage to property but not the consequential economic losses even if directly caused by that damage.
This case is important not only with respect to the defect exclusion, but also with respect to economic loss claims against property policies.
It is not unusual at all for insureds to suffer consequential economic losses when property damage occurs. Projects get delayed. Critical path schedules must be modified. Subtrades make demands following change orders. When a serious property loss occurs, as in this case, the consequential losses can be significant, running into the millions of dollars.
This case is one of the few in Canada to deal with the issue of whether such economic losses are covered at all under a Course of Construction policy. And in the absence of other policy language, it now seems clear that these economic losses are not covered. This represents a very large uninsured liability for general contractors going forward.
Leave to appeal this decision has been sought, and the Supreme Court of Canada may yet weigh in on the issue.
 2014 BCSC 1568, aff’d 2015 BCCA 347.
 See, for example, Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33,  2 S.C.R. 245
Zurich American Insurance Company v. Keating Building Corporation (2007), 513 F. Supp. 2d 55 (US District Court, New Jersey).
(1991), 251 N.J. Super. 516 (Super. Ct., New Jersey).
 Ibid, p. 522.
 Ibid, p. 522-3.