Claims issues
Sabine Chaugny
Senior International Claims Manager
SCOR Global P & C
My main focus today will be to take
an International CAR policy
perspective
Course of Construction insurance:
demystifying the Defects Exclusion –
managing the claim
A global industry
Construction projects in simple
terms
In the main construction contracts concern two parties:
– The Employer (the person or organisation commissioning the work) and
– The Contractor.
BUT
• The contract work involves many parties. Some of these parties are appointed by the
contractor and others by the employer. So the employer appoints an architect and/or
consultant engineer who, amongst other tasks, nominates sub contractors.
Owner
Special features
Consulting
of construction Engineer
insurance
Contractor
Civil works
Suppliers
Banks
Contractor
Equipment
Design
offices
Design
offices
Sub
contractors
Sub
contractors
Insured value
Special features of
construction insurance
Hand
over
Maintenance
Inception
of the
project
Testing
commissioning
Construction /
Erection
Procurement
Insurance period
Transfer of ownership
from the Contractors
to the Owner
Design
Time
Course of construction cover
outline (CAR/EAR/Builder’s risks)
• Loss of or damage to the Contract Works described in
the Schedule anywhere in the Territorial Limits occurring
during the Period of Insurance
• a. Transit - while in transit other than by sea or air to and
from the contract site…..
• b. Contract Site - at the contract site until……..
• c. Maintenance - during the maintenance or defects
liability period caused by the Contractor……
3 main approaches to coverage
• LEG 1 - Outright broad based
exclusion
• LEG 2 - cover for loss consequent on
damage
• LEG 3 - Exclusion of betterment or
improvement
Cover exclusions – “LEG 1”
“The Insurer(s) shall not be liable for
• loss or damage due to defects of
material workmanship design plan or
specification”
LEG 2
• LEG2 is written to exclude cover for the defective
damaged part of the works, covering only the
consequential damage.
• The clause uses an approach based on
identifying and excluding cost to rectify defect if it
had been dealt with before the loss occurred
LEG 2 - the Insurers shall not be liable in
respect of:
•
•
All costs rendered necessary by defects of material, workmanship,
design, plan or specification and should any damage occur to any
portion of the Insured Property containing any of the said defects, the
cost of replacement or rectification which is hereby excluded is that
cost which would have been incurred if replacement or rectification of
the said portion of the Insured Property had been put in hand
immediately prior to the said damage.
For the purpose of this policy and not merely this exclusion it is
understood and agreed that any portion of the Insured Property shall
not be regarded as damaged solely by virtue of the existence of any
defect of material, workmanship, design, plan or specification.
LEG 2 in practice
•
•
•
•
Find and agree solution
Establish the cost of repairs – defect and overall
Deduct cost of defect repairs from overall costs
Note that access to defect costs are also
generally excluded
LEG3/06 - improvement or betterment defects
“The Insurers shall not be liable for:
All costs rendered necessary by defects of material, workmanship, design plan or
specification and should damage (which for the purposes of this exclusion shall
include any patent detrimental change in the physical condition of the Insured
Property) occur to any portion of the Insured Property containing any of the said
defects the cost of replacement or rectification which is hereby excluded is that cost
incurred to improve the original material, workmanship, design, plan or specification.
For the purpose of the policy and not merely this exclusion it is understood and
agreed that any portion of the Insured Property shall not be regarded as damaged
solely by virtue of the existence of any defect of material, workmanship, design, plan
or specification”.
LEG3/06
• LEG3 (and its equivalent DE5) provide the broadest cover available
within the market in respect of defects. A higher premium will be
generally be payable. LEG 3 cover will usually be written with a
much higher deductible than LEG 2. The policy terms will not
generally permit that separate losses be aggregated to exceed the
deductible, even when arising from the same cause or origin. In
effect the contractor has the benefit of a cover against their own
defective work.
LEG3/06
•
•
The occurrence of damage continues to be a requirement for the policy to respond.
The policy does not respond to the mere existence (discovery of) a defect.
But so long as resulting damage is suffered, the policy will respond to all repair and
reinstatement costs, including access costs.
– All that is excluded under LEG 3 is the extent to which the new installation
represents an “improvement” on that which went before.
– The improvement element can be calculated by establishing the original cost of
the defective installation and comparing that with the cost of installing the
replacement. The difference between these two numbers (taking into account
inflation) reflects the “improvement”, being the element excluded
Managing the investigation – key
areas
•
•
•
•
Circumstances and cause
– Circumstances up to and after the damage - time, day and date.
– Discovery and by whom. Cause of damage.
Nature and extent of damage
– Damage and outline of remedial works, costs of repair and access to defect
Contractual liability
– Liability under contract.
Policy liability
– Application of cover – exclusions
– Terms of policy relevant to loss: parties, policy period, risk locations, business
insured, basis of cover, exclusions, extensions
Investigation – what is damage?
• Often defined within the policy (e.g.
“accidental loss destruction or damage”)
– A physical change in the Insured Property
– A reduction in the value and usefulness of the
Insured Property
– A change in functionality
What is damage – investigating
cause
• A latent defect – 3 questions
– Was there damage to subject matter insured?
– Did that damage occur during the period
covered by the policy?
– Was that damage caused by a latent defect in
the subject matter insured?
What is damage – investigating
cause
• Example – floor slab cracks during use by
traffic
– If defect noticed before use not damage but
defect
– Making good as manifestation of effect under
ordinary usage a contractual not policy liability
– But conflict with LEG 3 wording
What is a defect – investigating
cause
• Can a defect exist without fault
– State of knowledge at time of design
– Unknown factors in design process
– Has there been negligence in design or
workmanship?
– The LEG clauses test defect NOT fault
Builder’s risk policies
• Direct physical loss
• Exclude faulty, inadequate or defective
design, specification workmanship,
materials…..
– Flawed product v flawed process
– Faulty or defective design by sub-contractors
– Efficient proximate cause
Facts
• Plaintiffs/Insured: the P3 Design/Build Contractor
• Project: the $250 million Royal Jubilee Hospital extension in Victoria,
B.C.
– Eight storey reinforced cast in place concrete structure
– Structural design was complex and each floor consisted of thin suspended slabs
•
$14M claim brought against the Insurers who issued a “course of
construction policy” (builder’s risk) in relation to the construction of the
Project.
Facts
• During construction, the floor slabs “over deflected” and therefore were
not as level as was planned.
• Expert evidence showed that the cause of the “over deflection” was the
formwork and reshoring procedures which did not account for the
complexity of the slab design which was an unusually thin design of
the slabs.
Insuring Agreement
• The “Property Insured” provision of the Policy covered:
(a) Property in the course of construction, installation, erection,
start up, testing and commissioning, reconstruction or repair
whilst at the risk of the Insured and whilst at the location of
the said construction, installation, erection, reconstruction or
repair …;
(b) Property of every kind and description (including but not
limited to materials and supplies…;
Insuring Agreement
• The “Perils Insured” provision of the Policy covered:
This Policy insures against ALL RISKS of direct physical loss
of or damage to the property insured (including general
average and salvage charges), except as hereinafter
provided.
LEG 2/96 (London Engineering
Group) Exclusion
•
This clause excludes:
All costs rendered necessary by defects of material workmanship, design,
plan, or specification, and should damage occur to any portion of the
Insured Property containing any of the said defects the cost of
replacement or rectification which is hereby excluded is that cost which
would have been incurred if replacement or rectification of the Insured
Property had been put in hand immediately prior to the said damage.
For the purpose of this policy and not merely this exclusion it is
understood and agreed that any portion of the Insured Property shall not
be regarded as damaged solely by virtue of the existence of any defect of
material workmanship, design, plan or specification.
The Claim
•
Yielding of the rebar due to overloading of the slabs along with the extensive cracking
and permanent downward deflection of the slabs were damage covered under the Policy.
•
Testing of the slabs showed that they were performing as expected and met applicable
standards and design load requirements.
•
Slabs were deficient from a functional standpoint: uneven floors were unusable.
•
Claimed damages for extensive remedial works.
Denial of Claim by Insurers
•
The Insurers denied coverage asserting that:
– The slabs were merely defective, but not physically damaged;
– The loss was not fortuitous; and
– Two exclusions in the Policy applied: a “settling” or “shrinkage” exclusion;
and the “defects of material workmanship or design” exclusion (the
LEG2/96 exclusion).
“Damage”
•
•
•
The slab “over-deflections” and cracking all constituted “damage” under the
Policy.
The slabs experienced “significant … over deflection and cracking … that
rendered the facility unfit for its intended purpose”.
Testing showed that the slabs were safe in that they met the design strength
requirements, but required extensive remediation to meet the Project’s
serviceability requirements of level floors.
“Damage”
• The over deflections and cracking was damage to the slab:
“While some degree of deflection and cracking is expected in
concrete slabs, the extent of what occurred in this case and its
permanent nature support the conclusion that the slabs were left in
an altered physical state, which some courts have again held to be
the touchstone for a finding of damage”.
Fortuity
–
–
The Policy did not contain an express requirement that the loss or damage be fortuitous.
The Court confirmed that the loss or damage must be fortuitous, in order for coverage to be
triggered under the Policy.
“…I do not read Progressive Homes as obviating the requirement that loss or damage
must be fortuitous in order to trigger coverage. That again is the very essence of
insurance…. [T]he concept of fortuity is, in any event, built into the Policy here. Again, the
“Perils Insured” include “all risks” of direct physical loss or damage. Use of the term “risk”
underscores that the Policy is intended to insure against possible occurrences, as distinct
from certain events or intended consequences.”
Fortuity
– The extent of the over deflection and cracking was both unexpected
and unintended.
– The slabs were not designed to deflect to such a degree as to
render them unfit for their intended purpose.
– The Plaintiffs did not “court a risk” as the concrete subcontractor
used formwork and shoring/reshoring procedures that were
standard in the industry and had been used for many years.
– Therefore, the fortuity requirement was met and the onus shifted to
the insurer to establish that an exclusion applied.
The Settling or Shrinkage
Exclusion
• Court accepted the evidence of the plaintiff’s experts that the slab over
deflections were not “settling” or “shrinkage”.
• The “shrinkage” exclusion did not apply.
LEG 2/96
•
•
First case in which LEG 2/96 wording has been considered.
The exclusion is not limited to defective design of the work or facility as a whole, but
rather includes defective design of component pieces of the work, including the
formwork and shoring/reshoring.
•
The failure to address the complex slab design with respect to the formwork and
shoring/reshoring procedures constituted a “defect in workmanship”, but not a defect in
the slab design itself as asserted by the Insurers.
LEG 2/96
•
•
•
Components of the exclusion do not operate in isolation, but must be read together as a single
exclusion to give meaning to the clause.
Intent of the clause is to exclude those costs rendered necessary by one of the named defects, but is
limited to costs “which would have been incurred if replacement or rectification of the Insured Property
had been put in hand immediately prior to the said damage”.
The excluded costs are only those costs that would have remedied or rectified the defect immediately
before any consequential or resulting damage occurred.
LEG 2/96
• The exclusion does not extend to the cost of rectifying or replacing the
damaged property itself.
• The excluded costs crystallize immediately prior to the damage
occurring and are thus limited to those costs that would have
prevented the damage from happening.
Damages
• After a 21-day trial, the Court held that the Plaintiffs’ loss was covered
by the Policy - $8.5 million recovered.
• Recovered damages for recovery of slab repairs and site general
conditions costs and profit margin.
Appeal
• BCCA rendered its decision on August 5th 2015 and upheld the trial
judgement.
• BCCA dismissed the appeal and the cross-appeal.
• CA rejected the Insurer’s submission that the trial judge erred I holding
that only “preventative or avoidance costs”, which in the case were nil,
were excluded from coverage under the Defects Exclusion.
Appeal
•
BCCA agreed with trial judge’s interpretation of the exclusion to exclude from
coverage the costs that would have been necessary to rectify a defect in
workmanship immediately before that defect caused damage to the insured
property
•
“there were no defects in the slabs that could have been rectified in order to
prevent the over-deflection, bending and cracking. The defect was in the
workmanship… if the defect in the workmanship had been identified early
enough, there would have been no material additional costs to implementing
appropriate workmanship.”
Appeal
•
Trial Judge’s reference to the costs that would necessarily have been incurred to rectify the
defective workmanship immediately before “consequential or resulting damage” occurred, is
descriptive of the effect of the application of the Defects Exclusion to the circumstances of the
case.
•
It was not, as the Insurer argued, inappropriate reliance upon “resulting damage” case law.
•
The trial judge did not err in interpreting the Defects Exclusion clause to exclude only those
costs of implementing proper workmanship immediately before the defective workmanship
caused the over-deflection. Those costs, in the case, were nil.
Appeal
• Acciona sought compensation in the amount of $4M for its “increased
contractor costs”
• Those costs were amounts that Acciona was required to pay its subcontractors, pursuant to the existing contracts, for the delays incurred
by those sub-contractors as a result of the repairs to the slabs.
• The Trial Court held that those costs were not covered by the policy.
• The costs do relate directly to the repairs of the concrete slabs and are
not a “direct loss” within clauses 3 and 7 of the Policy.
• BCCA upheld the finding.
Questions?