Pursuant to s. 132 of the Insurance Act, the plaintiff successfully recovered from the defendant insurer of a bankrupt insured damages that arose when the riding arena the insured was hired to construct at the plaintiff’s farm collapsed. Despite the fact that the plaintiff was not a party to the contract of insurance, there was no distinction between the reasonable expectation of the plaintiff and the reasonable expectation of the insured that there would be coverage for the damage claimed.

Amondsen v. General Accident Assurance Co., [2004] O.J. No. 5633, Ontario Superior Court of Justice

The plaintiff brought an action against the defendant, General Accident Assurance Co., (“General Accident”) pursuant to s. 132 of the Insurance Act, R.S.O. 1990, c. I.8. Pursuant to the Insurance Act, the plaintiff was entitled to step into the shoes of the bankrupt insured to recover damages from the insurer that arose when the riding arena the insured had been hired to construct at the plaintiff’s farm collapsed. The plaintiff claimed that the CGL policy held by the insured required General Accident to defend and indemnify the insured for the damages, interest and costs awarded in the summary judgment in the underlying action.

General Accident argued that coverage was excluded by the exclusion provisions found in the Broad Form Property Damage Endorsement to the policy which stated that:

This exclusion does not apply to … property damage … to … that particular part of any property, the restoration, repair or replacement of which has been made necessary by reason of faulty workmanship thereon by the insured …

The court found that the wording of the exclusions relied on by the insurer were not clear and unambiguous. It was therefore necessary to consider the reasonable expectations of the parties when interpreting the clause.

General Accident’s position was that only coverage for third party claims was provided and that there was no coverage for economic losses, or “business risks” associated with replacement of the damaged property.

All the experts considered that the damages found by the court after the summary judgment were covered under the policy. As a result, Croll, J. found that it was reasonable for the plaintiff to expect that this claim would be covered. Furthermore, the court was satisfied that it was proper to conclude that there is no distinction between the reasonable expectation of the plaintiff and the reasonable expectation of the insured despite the fact that the plaintiff was not a party to the contract of insurance.

General Accident also argued that its interpretation of the faulty workmanship provision is consistent with the established principle that the insured must bear the risk of his or her own shoddy workmanship. Because there was no Canadian case law on the subject, the court was referred to American authorities which held that an insurance policy is not a performance bond or guarantee of the work of the contractor. However, where the insured is responsible for assembling many components of a large structure, courts have interpreted exclusions such as this one to exclude coverage only for damage to the defective component itself, and not to the damage to the remainder of the structure. Moreover, if there is any ambiguity or uncertainty in the exclusion area provision, it should be resolved against the insurer.

The court found the wording of the exclusions was ambiguous and therefore must be read so as to give effect to the reasonable expectations of the parties. The court concluded it would be reasonable for both the plaintiff and the insured to expect that there would be coverage for the damage claimed. Because there was more than one reasonable interpretation of the exclusions, the interpretation that favours the insured should be selected, and the interpretation proposed by the insurer would negate the purpose for which the insurance was purchased.

Applying the overarching principles of the contra proferentum rule and the principle that coverage provisions should be construed broadly and exclusion causes narrowly, the court concluded that the exclusions in the Broad Form Property Damage Endorsement excluded only the cost of the defective or faulty bracing. The plaintiff was therefore entitled to recover the damages awarded in the summary judgment from the insurer.

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