The improper risk or design exclusion in an all-risk policy will not exclude coverage to well-designed, yet faulty, products

An insured is entitled to coverage under an all-risk policy against the possibility that a product design might fail even though not improper or faulty according to the state of the art.

Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada, [2008] S.J.C. No. 67, Supreme Court of Canada, McLachlin C.J., and Binnie, LeBel, Deschamps, Abella, Charron and Rothstein JJ, November 21, 2008

This case has also been summarized in Business Insurance and the Lawyers Weekly

Canadian National Railway designed and constructed the world’s largest tunnel boring machine of its kind to bore a tunnel under the St. Clair river on the border between Ontario and Michigan.  The project was insured under a builders’ all-risk policy written by Royal and Sun Alliance Insurance.  The policy excluded the cost of remedying faulty or improper design.  When the tunnel was partially completed, the tunnel borer’s seals were compromised due to excess differential deflection of the cutting head.  The problem was rectified by a design modification, but the project was delayed by 229 days as a result.  At issue was whether the delay was due to faulty or improper design and therefore excluded under the insurance policy.

The majority held, at para. 53 that:

…the words “faulty or improper” require the insurers to go beyond simply showing a failure in the circumstances of foreseeable risk.  The words “faulty or improper”, and in particular the word “improper”, require the insurers to establish that the design fell below a “realistic” standard.  Such a standard can require no more than that the design comply with the state of the art.  A standard of perfection in relation to all foreseeable risks, in my view, was not required by the words used by the parties.  It was for the insurers to demonstrate that the exclusion applies.

The majority held that the tunnel boring machine design was “state of the art” and therefore the exclusion for faulty or improper design did not apply.  The risk was covered under the policy.

Justice Rothstein, writing for the dissenting minority, held that the damage to the tunnel boring machine was a foreseeable incident of its intended use, due to a faulty or improper design, and that therefore the exclusion should apply.

This case was originally summarized by W. Jay Havelaar and originally edited by David W. Pilley.

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