A faulty workmanship clause can exclude insurance coverage to contractors

The issuer of a builder’s risk policy (“Commonwealth”) was not required to indemnify contractors for deficiencies in the installation of a hardwood floor where the Court held that the faulty workmanship exclusion in the policy applied.

Ploutos Enterprises Ltd. v. Stuart Olson Contructors Inc., March 3, 2008, British Columbia Supreme Court, Martinson J.

Stuart Olson Constructors Inc. (‘Stuart Olson”) was a general contractor on a condominium project and retained Ploutos Enterprises Ltd. (“Ploutos”) as a flooring sub-contractor. Solid hardwood flooring installed in the condominium project failed and had to be completely removed and replaced using a different installation method. Both Stuart Olson and Ploutos were insured under the builder’s risk policy for the project issued by Commonwealth. Commonwealth agreed that the policy covered failures of this sort generally, but had an exclusion clause for “the cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this Policy results, in which event this Policy shall insure such resulting damage”. Commonwealth denied coverage saying that the exclusion clause operated in this case because of the faulty workmanship, faulty design and faulty construction materials.

The Court determined that the failure of the flooring was due to both faulty workmanship and faulty design. The Court agreed with Commonwealth’s interpretation of its exclusion clause which excluded coverage for defects caused by faulty workmanship and design. Only resulting physical damage would be covered and this was not claimed in the action. The Court noted that there were policy reasons to support Commonwealth’s position. It would not be an appropriate spreading of the risk if an insured were able to recover such a loss. The contractor or designer would theoretically be able to charge a full price for the work, save money by being careless and then rely on the insurer to pay for the cost of correcting the mistakes.

In the result, Commonwealth did not owe a duty to indemnify Stuart Olson or Ploutos with respect to the loss.

This case was digested by Jonathan D. Meadows and edited by David W. Pilley.

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