Are EAR and Car covers the widest possible?

The salient features of these policies include all risk coverage, minimal exclusions such as inventory losses, unexplained shortages, gradual deterioration due to atmospheric conditions, wear and tear including rusting etc. There can be optional extensions – Clearance and Removal of Debris, TPL, Additional Customs duty etc. Anyone and everyone participating in the project are considered as insured. There are any number of add on covers. All these make construction insurance offer the widest possible cover just short of being a construction warranty.

These policies are similarly worded and international. Many courts all over the world have given a variety of awards on cases clarifying issues.

In the case Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada, [2008] 3 S.C.R. 453, 2008 SCC 66, the Canadian Supreme Court stated: (para 120) “However, as Rosenberg and Cronk JJ.A. noted for the Court of Appeal at para. 118, an all risks insurance policy is not a warranty of soundness or fitness for purpose.?See also Triple Five Corp. v. Simcoe & Erie Group (1994), 159 A.R. 1 (Q.B.), at para. 297, and Mellon v. Federal Ins. Co., 14 F.2d?997 (S.D.N.Y. 1926), at p. 1002.?Construing the policy as a warranty, in my view, is an “unrealistic result” given “the commercial atmosphere in which the insurance was contracted” (to quote Consolidated Bathurst, at p. 901).”

The Court of Appeal of Alberta in the case Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 stated: “[24] Both parties agree that the policy is intended to cover some element of unforeseen losses, and is not intended to be a construction warranty: Triple Five Corp. v Simcoe & Erie Group (1994), 159 AR 1 at paras. 179-80, 29 CCLI (2d) 219.”

Unfortunately, there are not many relevant case laws in India but one can refer to many cases from other countries. The UK case Feasey v Sun Life Assurance Company of Canada & Ors [2003] EWCA Civ 885, England and Wales Court of Appeal records that “the definition of that (insurable) interest relied on in those authorities comes originally from a judgment in the Canadian Supreme Court, Commonwealth Construction Co v Imperial Oil (1976) 69 D.L.R. (3rd ) 558 which in terms recognised the insurable interest of sub-contractors "having its source in the very real possibility of liability, considering the close relationship of the labour performed by the various trades under their respective agreements …. ". They held further that sub-contractors can recover from insurers the full value of the works holding (where appropriate) the balance beyond their interest in trust for the owner. They further held most relevantly that sub-contractors can defeat a subrogated claim based on the sub-contractor's liability in negligence to the owner because the insureds were pursuing a claim in relation to the loss covered by the policy.

The Exclusions in the policy have been diluted; only the uninsurable perils such as wear and tear including rusting by ordinary action of nature etc are excluded. An important exclusion is “loss or damage due to faulty design, defective material or casting, bad workmanship other than faults in erection.” This exclusion is diluted in the next lines as being limited to the items immediately affected and shall not be deemed to exclude loss or damage to other insured items resulting from such excluded perils.

The faulty workmanship exclusion has been examined by the Supreme Court of Canada (SCC) in the case Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23. In that case, the owner of a project hired another contractor to clean the windows of the high rise being built. Unfortunately, the independent contractor wrongly cleaned and thus damaged the windows.

After reaffirming the general rules for interpreting insurance policies, the SCC held that the exclusion was ambiguous. To resolve this ambiguity, the SCC reviewed the purpose of the Policy to determine the parties' reasonable expectations as to the scope of the Exclusion.

According to the SCC, the purpose of a builders' risk policy is to provide certainty, stability and peace of mind for construction projects through broad coverage. Given this purpose, the insurers' interpretation of the Exclusion would "essentially deprive insureds the coverage for which they contracted", and therefore: “[T]he faulty workmanship exclusion serves to exclude from coverage only the cost of redoing the faulty work, as the resulting damage exception covers costs or damages apart from the cost of redoing the faulty work”.

As to faulty design the court specifically stated in para 92: “Indeed, in faulty design cases, a contractor is obligated to design a given item, with the design being integral to the whole of that item. Thus, the cost of repairing the damages caused to that item will be included within the cost of redoing the faulty work, and the resulting damage exception will necessarily apply to damages caused to items other than the item being designed.

How the court arrived at a conclusion in favour of the insured (paras 95 &96)

“As outlined above, the language of the Exclusion Clause, read in light of the Policy as a whole, does not provide a clear answer to the question raised before us. That said, the parties’ reasonable expectations, informed largely by the purpose of builders’ risk policies, point to the faulty workmanship exclusion serving to exclude from coverage only the cost of redoing the faulty work. This interpretation aligns with commercial realities and is consistent with prior jurisprudence. In the circumstances of this case, the cost of redoing the faulty work is the cost of recleaning the windows ― both parties agree that the recleaning falls under the Policy’s “cost of making good faulty workmanship” exclusion. The Insureds, however, have met their onus of demonstrating that the cost of replacing the damaged windows is covered under the “resulting damage” exception to that exclusion.”

However, the court agreed that there cannot be a generalised interpretation of ‘faulty workmanship’ exclusion clause. “The extensive jurisprudence cited to us tends to confirm the view that it is difficult to define the scope of the exclusion in general terms. The line basically has to be drawn on a case-by-case basis.”

It may be noted that insurers generally agree to such wider cover. Traditionally insurers saw faulty design and workmanship as entrepreneurial, i.e., uninsurable risks. However, it was not always easy to establish a clear line between the truly uninsurable exposure and the traditional insurance hazards. As a result, market practices evolved to the point where it is the usual practice to exclude the defective part, but cover the resultant damage if caused by a covered peril. Leading insurers, especially ?in the London market, desired to establish a more standard version of the exclusions to address the five (5) alternative levels of coverage need. The famous DE Clauses and LEG Clauses were drafted to clarify underwriter's intent in relation to defective design, plan materials or workmanship.

Consequential Loss Exclusion

There is a further exclusion relating to ‘consequential loss of any kind’. In the case Deepak Fertilisers & Petrochemical Corporation v Davy McKee (London) Ltd & Anor [1998] EWCA Civ 1753, the UK Court of Appeal stated in para 92: “The extra cost claimed is the cost which has now become necessary in order to ensure and enable the plant safely to produce the methanol in those quantities which the plant was supposed to. In other words, we would hold that this extra cost is akin to any other cost (such as an additional piece of plant or part) which achieved the same result. This could not be categorised as an indirect or consequential loss or damage nor could its cost be categorised as constituting a loss of profit.”

This again tallies with the Canada Supreme Court that interpretation has to be made based on “the parties’ reasonable expectations, informed largely by the purpose of builders’ risk policies.”