Top court widens scope for appeals of insurance contract disputes

The Supreme Court has clarified when an appeal court should defer to the trier of fact in interpreting standard form contracts, which are commonly used in insurance policies. Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., released today, overturned an Alberta Court of Appeal decision that had found an insurance company was not required to cover the cost of replacing windows that had been scratched by cleaners on a construction site.

During construction, window cleaners had used improper tools and methods and ultimately the windows had to be replaced. The building’s owner, Station Lands, and the general contractor in charge of the construction project, Ledcor Construction, claimed the cost of replacing the windows against a builders’ risk insurance policy. The insurers denied coverage on the basis of an exclusion contained in the policy for the “cost of making good faulty workmanship.”

The disputed clause in the insurance contract excluded the “cost of making good faulty workmanship” but made an exception to that exclusion for “physical damage” that “results” from the faulty workmanship. Justice Wagner, writing for the majority, found that the exclusion clause should only cover the cost of recleaning the windows, but it did not exclude the scratched windows’ replacement cost. This restored the trial decision’s finding that the replacement was covered. The Alberta Court of Appeal had overturned the trial judge’s decision and declared that the damage to the building’s windows was excluded from coverage, as the damage was “physically or systematically connected” to the work the contractor had performed.

Eugene Meehan, a lawyer at Supreme Advocacy in Ottawa who represented Ledcor Construction at the Supreme Court, says the decision is a “welcome, positive and necessary clarification to an increasingly complex yet fundamental area of insurance — the interpretation of coverage, exclusion, exception clauses.”

A key legal finding in the decision examined the application of the SCC’s 2014 Sattva decision. In that decision, the top court limited the ability of parties to appeal contractual interpretation by stating that most contractual disputes are questions of mixed fact and law. However, Justice Wagner created an exception to Sattva in today’s decision, stating, “In my view, where an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review.”

Greg Tucker of Owen Bird in Vancouver, who represented the insurance companies, says although he is disappointed with how the court applied the faulty workmanship exclusion to his client’s situation, he agrees with the top court’s creation of an exception to Sattva for standard form contracts.

“In a standard form contract, for purposes of insuring, consistency of interpretation obviously is a key factor, for the benefit of both insurers and insured. It is important that interpretation of standard form language be treated as a question of law and subject to a correctness standard. I think it is a sound decision on that point,” said Tucker.

Nina Bombier, a partner at Lenczner Slaght Royce Smith Griffin LLP in Toronto, said in an e-mail that since the decision widens the scope of which contractual disputes can be appealed, it may result in more insurance litigation in the short term.

“However, as appellate interpretation of standard form contracts will have greater precedential value, this should eventually reduce litigation and limit future contractual disputes around the standard form clauses,” said Bombier.

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