Civil Engineering June 2022 | Vol 30 No 5

Civil Engineering June 2022 57 clause in the context of an assets all risks policy which provided broad coverage to the insured against “all risks” of direct physical loss or damage to the property. In coming to its decision, the court had regard to and applied the principles ad- opted in prior decisions of the Canadian courts, in the context of builders all risks covers. The following is a summary of the case. The contractor was employed to provide repair and remediation work to a parking surface in a parkade area. The scope of work included cutting into the membrane of the parkade’s surface. The contractor was not to perform any work that would impact the structural integrity of the underlying concrete slab. In stripping the membrane from the parkade surface, the contractor damaged the surface work to the parkade in cutting too deeply into the parkade slab, causing damage to the structural integrity of the parkade. The policy covered all risks of direct physical loss of, or damage to the insured property, but contained a faulty work- manship exclusion clause. The exclusion clause provided that coverage “does not insure the cost of making good faulty or improper workmanship”. The application of the exclusion clause was however limited by an exception (carve back) which read: “This exclusion does not apply to loss or damage caused directly by a resultant peril not otherwise excluded…” The insurer had denied coverage on the basis of the exclusion for “the cost of making good faulty or improper work- manship” for the entire claim, being: Q Q the cost of the repair and remediation work to the parkade membrane (the costs of which the parties agreed were excluded from cover by the policy) Q Q the damage caused to the structural integrity of the parkade (which damage was “not otherwise excluded” by the policy). The issue was whether the loss suffered by the insured as a result of the damage caused to the structural integrity of the parkade (as opposed to the damage caused by the contractor’s faulty workmanship to the parkade membrane itself) fell within the exception (carve back) to the exclusion clause for “loss or damage caused directly by a resultant peril not otherwise excluded”. The contractor argued that the loss of structural integrity was a consequence of its actions and had to be regarded as separate from the damage due to its faulty workmanship. The insurer argued that such a separation was artificial, and that the negligent cutting and resultant damage to the parkade were all attributable to the contractor’s faulty workmanship and therefore fell within the exclusion clause. The court held that any consideration of what constitutes faulty or improper workmanship was limited to the scope of the contract. The court accordingly inter- preted the words “resultant peril” in this instance to mean “the loss of structural integrity to the parkade”, in other words, the risk of structural collapse, and found that the resultant peril, or consequence (loss of structural integrity), was not excluded under the policy. COMMENT AND ANALYSIS Importantly, the division between defec- tive workmanship and the resultant damage was drawn with reference to the scope of the underlying contract. It should be observed that on the facts of this matter, the exact scope of work was easy to ascertain, but that is not always the case. A number of tests have been applied by the courts, but it is clear that there is no one extricable test or workable approach for all instances. In terms of Canadian law, there are three interpretive principles: Q Q the reasonable expectation of the parties Q Q the commercial reality Q Q that exclusion clauses are to be nar- rowly interpreted. In relation to the application of these principles to the policy in the present matter, the court disagreed with the broad reading of the exclusion clause, as maintained by the insurer, as such an interpretation “would exclude the cost of making good the consequences of faulty workmanship”, and held: “We agree that the interpretation advanced by the Condo Corp [the contractor] fulfils the reasonable expectations of the parties: broad coverage for fortuitous or unex- pected loss and damage. The cost of making good the faulty workman- ship – in this case, a significant sum of approximately $500 000.00 – is excluded from coverage. This achieves the commercial purpose of ensuring that the contractor and engineer are not paid twice for their faulty workmanship. However, the property damage (loss to the structural integrity of the building) is covered. This is not a situation where this court’s interpretation leads to coverage not otherwise contemplated by the terms of the policy read as a whole.” The interpretive principles in South African law are not dissimilar to those in the Canadian law. Accordingly, a South African court would be expected to take cognisance of a decision of a Canadian court and might even be persuaded to follow a decision of a Canadian court. A typical defective workmanship exclusion clause in the South African market might read as follows: “The policy does not cover insured property which is in a defective condition due to a defect in work- manship of such insured property or any part thereof, but this exception shall not apply to other insured property which is free of the defective condition but is damaged in consequence thereof.” In our view, based on such a wording and the facts in this matter, a South African court would be likely to come to a decision similar to that of the Canadian court.  The first four topics in the booklet are outlined in the January/February (Vol.30, No.1), March (Vol.30, No.2), April (Vol.30, No.3) and May (Vol.30, No.4) is- sues of Civil Engineering respectively. To access the full publication visit https://www.ensafrica.com/uploads/newsarticles/0_ensafrica%20insurance%20 newsletter%20final.pdf .