Leahy v Canadian Northern Shield Insurance Co [2000] BCCA
Facts
- D issued all-risk homeowner’s policy for P’s newly constructed single fam dwelling
- Cracks began to occur in their garage and home, sprinkler system on adjacent property caused the damage, P sued D for coverage
- Policy: “all risks of direct physical loss or damage subject to exclusions”
Policy excluded types of damage and types of perils
- There was dispute over origin of cracks, TJ held for insured and determined none of exclusions applied, CA felt that it was not a result of neighbour’s leaky sprinkler system
- The type of damage---settling, expansion, contraction, moving, bulging, buckling or cracking—was excluded. The peril that caused the damage was irrelevant.
- If type of loss is excluded, don’t have to worry about the peril
Analysis
- The loss did not fall under a majority of exclusion clauses since they failed to exclude damage caused indirectly or directly from water
This type of damage fell directly within the words “settling” and “cracking” in the exclusion
The exclusion excluded specific types of damage, and did not indicate that the exclusion was in any way cause-dependent
i.e. language of exclusion clause didn’t limit damage to certain causes
- As a result, TJ was wrong to rely on contra proferentum rule where exclusion clause was not ambiguous or unclear, effect should have been given to its plain language
Conclusion
- Appeal dismissed, P’s damage excluded
Canadian National Railway v Royal & Sun Alliance Insurance [2008] SCC
Facts
- P established an elaborate and sophisticated process to design and construct a TBM for the construction of a railway tunnel, D issued all-risks insurance policy
- Design engineers anticipated that TBM would withstand pressure from soil and water, however due to differential deflection issues, machine was stalled with lengthy delay
- TJ held that innovative design did accommodate all foreseeable risks, within the then limits of state engineering knowledge. The TBM had been designed in accordance with the state of the art
While design was defective, it was not improper or faulty
Design addressed all reasonably foreseeable risks and those unlikely and remote
TJ accepted CNR expert’s finding that deflection was unforeseeable unanticipated, outside previous experience and evidence only with benefit of hindsight
- CA reversed TJ’s findings, held that a design must take into account, accommodate and withstand all foreseeable risks however unlikely or remote
Issues
- Whether the design was “faulty or improper”, thus falling under the exclusion
Rules
- “Faulty or improper” require that insurers establish the design fell below a “realistic standard”, this can require no more than that the design comply with the state of the art
Put another way, insurers are entitled to the benefit of the exemption unless the design met the highest of standards of the day and failure occurred simply because engineering knowledge was inadequate to the task at hand
Analysis
- Majority rejected Queensland principle that any time loss results from design, is prima facie proof that the design was faulty or improper because the product turned out to be unfit for the intended purpose
This goes more to negligence of design, rather than situation where design has failed but yet performed according to state of the art
- Insurers were not entitled to the exclusion just because, with the benefit of hindsight, it turns out that engineering knowledge and practice lacked a proper appreciation of the design problem
If a design is required to succeed in accommodating all foreseeable risks, it is required to meet a standard of perfection w.r.t. those risks – this would be unreasonable
- Majority accepted that investigation and accommodation of the risk had been conducted in accordance with state of the art
Also that additional computer modelling would not have disclosed the risk
- CNR purchased all risks policy recognizing that despite all efforts to achieve successful design, there was an inevitable element of risk with innovative design that it wished to insure against
Rothstein J. (dissent)
- “Faulty and improper design” is one that does not work for the purpose for which it was intended to be used
- A design must provide for and withstand all foreseeable risks, including extreme examples
- Because the risk of differential deflection had been identified, it was a foreseeable risk
The TBM did not achieve its intended purpose due to an inability to cope with the expected, foreseeable conditions of its use
- Should not introduce comparative standard of state of the art against which to measure the design since this turns a claim based in contract, into a claim in tort
Nothing in words of contract support the view that design in accordance with state of the art was in parties’ contemplation when they agreed to contract
This is especially the case when sophisticated commercial parties deliberately negotiated a manuscript policy
- Majority approach turns policy into a warranty
Conclusion
- Appeal allowed, CNR entitled to recover damages since exclusion did not apply
14 Statutory Conditions
Should know whether these apply to a particular problem
