A CGL policy may provide coverage to products provided by sub-contractors if the product is incorporated into the building

A commercial general liability policy may  include  coverage for materials constructed by a sub-contractor.  This is more likely if the product supplied by the subcontractor is inextricable linked to the building such that it cannot be removed without destroying the building.

Axa Insurance (Canada) v. Ani-Wall Concrete Forming Inc., [2007] O.J. No. 3989, Ontario Superier Court of Justice, P.M. Perell J., October 18, 2007

A number of sub-contractors supplied Ani-Wall with cement that was used to make concrete to construct the footings and foundations for the “Builders” whose homes suffered property damage when the footings and foundations failed. Ani-Wall was insured through a commercial general liability policy by Axa Insurance Company. Axa Insurance brought an Application to determine whether it is responsible for the sums that Ani-Wall is obliged to pay as compensatory damages due to the property damage under its commercial general liability policy. Axa Insurance took the position that Ani-Wall was not entitled to coverage because the prima facie coverage fell within three exclusions: Your Product Exclusion, Your Work Exclusion and the Rip and Tear Exclusion. The Court determined that it would be appropriate to determine whether appropriate insurance coverage was present in this case relying upon Bridgewood Building Corp. v. Lombard General Insurance Co. (2006), 266 D.L.R. (4th) 182 (Ont. C.A.)

In determining whether the “Your Work” exclusion applied, the Court relied upon Alie v. Bertrand & Frere Construction Company (2000), 30 C.C.L.I. (3d) 166 which states that the “Your Work” exclusion does not apply if the damaged work or the work out of which the damage arises, was performed by a sub-contractor. Thus, on a plain reading of the CGL policy, the exclusion did not apply since the concrete was supplied by sub-contractors.

Regarding the “Your Product” exclusion clause, Perell, J. noted that Ani-Wall’s product was the footings and foundations created from the concrete supplied by the subcontractors. The “Your Product” exclusion clause would remove coverage for the cost of Ani-Wall’s footings and foundations, but would not remove coverage for the cost of the damage to the house that went beyond the cost of the footings and foundations. However, since the cost of repairing and replacing the insured’s defective product (the footings and foundations), approached the cost of repairing the third-party’s damaged property (the homes), applying the “Work Product” exclusion in the manner suggested would be contrary to the reasonable expectation of the ordinary person as to the coverage purchased because the exclusion would subsume all of the coverage provided by the policy. Perell, J. noted that this would run contrary to the principle stated by the Ontario Court of Appeal in Weston Ornamental Iron Works Limited v. Continental Insurance Co., [1981] I.L.R. 1 – 1430 (Ont. C.A.). In addition, both Canadian and American courts have recognized that products incorporated into buildings are “real property” and therefore do not fall within the definition of “work product” exclusions.

In determining whether the “Rip and Tear” exclusion applied, Perell, J. noted that the exclusion applied to actual expenses “incidental” to the intentional destruction and removal of concrete products which are found to be defective. However, since the concrete products which are alleged to be defective are the same thing that is causing the property damage to the builder’s properties and the homes, removing the incidental expenses would exclude coverage to the entire loss. Perell, J. determined that applying the “Rip and Tear” exclusion to these facts would be repugnant to the insurance coverage, and should not be enforced.

In the result, Axa’s claim that the insurance coverage fell within the three exclusions was dismissed.

This case was originally edited by David W. Pilley.

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