Foreseeable equipment failure is not covered under an all-risk insurance policy

Successful appeal by the Insurer from a decision of the trial judge granting judgment to the Insured for its claim under a builder’s all-risk insurance policy in respect of construction of a railway tunnel. The trial judge determined that the loss was the result of unforeseeable equipment damage. The Court of Appeal determined that the trial judge erred in this finding, and that the damage to the equipment was foreseeable.  Since the equipment damage was foreseeable the consequent damages were not covered by the policy.

Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada, [2007] O.J. No. 1077, Ontario Court of Appeal, M. Rosenberg, E.A. Cronk and S.E. Lang JJ.A., March 26, 2007

The Insured had a builder’s all-risk insurance policy with the Insurer that insured it against all risks of direct physical loss or damages in connection with the construction of a railway tunnel and also insured against the costs associated with delayed opening expenses.

During the course of construction of the tunnel, a tunnel boring machine (“TBM”) failed to perform as anticipated, resulting in substantial loss and damage to the Insured and a delay in the opening of the new tunnel. The Insured made a claim under the policy which was denied by the Insurer on the ground that the TBM was faulty and that the policy excluded coverage for any loss or damage caused by faulty or improper design. The trial judge found that the design of the TBM was not faulty or improper, as the excess differential deflection that caused the failure was not foreseeable and that the exclusionary clause therefore did not apply. The trial judge awarded the Insured a significant sum under the policy.

On appeal, the Court of Appeal was asked to consider whether the trial judge had erred in holding that the excess differential deflection that caused the TBM’s failure was not a foreseeable risk and that the faulty or improper design exclusion therefore did not apply. The Court of Appeal allowed the Insurer’s appeal, finding that the trial judge had erred in his conclusions. Specifically, the Court of Appeal noted that there was evidence given at trial, which the trial judge had ignored, to the effect that the designer of the TBM was aware that differential deflection posed a serious potential danger to the TBM’s sealing system. Further, the extent of this potential danger had been investigated by the designer and others on behalf of the Insured prior to the use of this machine on the tunnel project.

The Court of Appeal concluded that, contrary to the findings of the trial judge, the design of the TBM was inadequate to meet a known risk of possible failure of the TBM. As such, the design of the TBM was faulty and the exclusion in the policy applied. The Insurer was therefore entitled to deny coverage to the Insured on this basis. The Court of Appeal allowed the Insurer’s appeal and dismissed the Insured’s claim. The Insured’s cross-appeal was dismissed.

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