The "LEG2/96" Design/Workmanship Exclusion in Course of Construction Insurance ...

Page 1 of 3

Expertise

Team

Resources

UBC Eng. Program

Contact

604.684.0727

SEARCH SHK

THE LEG2/96 DESIGN/WORKMANSHIP EXCLUSION IN COURSE OF

CONSTRUCTION INSURANCE POLICIES (ACCIONA V. ALLIANZ)
Posted on Friday, October 3, 2014
Read an update on this article here.
Vanessa S. Werden
What is a Design/Workmanship Exclusion?
Course of construction insurance (COC Insurance also called builders risk or all risk insurance) is designed to
indemnify builders for repair or replacement costs while a project is under construction or for a specified period
after construction is complete. The Supreme Court of Canada has described COC Insurance as follows:

In England, it is usually called a Contractors all risks insurance and in the United
States, it is referred to as Builders risk policy. Whatever its label, its function is to
provide to the owner the promise that the contractors will have the funds to rebuild in
case of loss and to the contractors the protection against the crippling cost of starting
afresh in such an event, the whole without resort to litigation in case of negligence by
anyone connected with the construction, a risk accepted by the insurers at the outset.
This purpose recognizes the importance of keeping to a minimum the difficulties that are
bound to be created by the large number of participants in a major construction project,
the complexity of which needs no demonstration. It also recognizes the realities of
industrial life.[1]
If damage is to be covered, it must have been caused by a fortuitous event. In other words, the loss or damage
must have been caused by an accident. If the loss was intended, inevitable or expected, it will not be covered.
Generally, coverage of the property at a specified location is limited by an extensive list of exclusions. Even when
a loss is covered, the insurer may deny coverage if the loss falls within an exclusion. One common exclusion is for
faulty design, material or workmanship. Damage caused by faulty workmanship, however, may be covered when it
causes resultant damage. In some cases, it can be difficult to define the resultant damage separate and apart from
the excluded faulty workmanship. In the case of Acciona Infrastructure Canada Inc. v. Allianz Global Risks US
Insurance Company, 2014 BCSC 1568, the court, for the first time, interpreted a design/workmanship exclusion
called the LEG2/96 clause in the context of faulty workmanship .
LEG2/96 Exclusion Clause
The recent decision of the British Columbia Supreme Court in Acciona is the only Canadian precedent for the
interpretation of the LEG2/96 exclusion clause. The Court reaffirmed a number of principles of interpretation of
COC Insurance and provided clarification for the definition of damage.
In Acciona, the plaintiffs were the design-build contractors on the construction of a new 500-bed patient care
facility in Victoria, British Columbia. The project was an eight-storey reinforced concrete structure with a complex
structural design that required thin suspended slabs with large spans. During construction, the slabs overdeflected, which resulted in the slabs not being level throughout the facility.
At the trial, the plaintiff contractor presented expert evidence that the cause of the over-deflection was attributed
to the formwork and re-shoring procedures which did not accommodate the complexity of the slab design during
each successive pour. This overloaded the slabs while curing, and stretched the rebar beyond its yield point,
resulting in extensive cracking and permanent slab deflections. Extensive remediation was required to meet the
hospitals serviceability requirements of level floors. The COC Policy contained the typical clause covering all
risks of direct physical loss of or damage to the property insured. The plaintiffs claimed that the cracking and
permanent downward deflection of the slabs was damage and claimed recovery under the COC Policy for the
following costs:
Repair of cracks, levelling and topping;
Load tests;
Cleaning;
Costs arising from cracking and slab deflection;
Increased sub-contractor costs;
Additional consultant fees;
Site indirect costs; and
Increased management fee.
The Insurers denied coverage on the basis that:

http://www.shk.ca/the-leg296-exclusion-in-course-of-construction-insurance-policies/

10/19/2015

The "LEG2/96" Design/Workmanship Exclusion in Course of Construction Insurance ... Page 2 of 3

the slabs were merely defective and not physically damaged;

the loss was not fortuitous; and
the loss was excluded under the defects in material workmanship or design exclusion in the Policy,
specifically, the LEG2/96 clause.
The Court rejected the insurers argument that the slabs were merely defective and held that the slabs were left in
an altered physical state which rendered them unfit for their intended purpose, which constituted damage.
With respect to the fortuity of the loss, the Court affirmed the principles that negligent or defective construction
can be fortuitous depending on the particular circumstances in which the damage occurred. The Court held that
the extent of the deflection of the slabs and the severity of the cracking were unexpected or unintended.
The Court then considered the central question: whether coverage was excluded under LEG2/96. This exclusion
had not been interpreted by any court in Canada prior to Acciona. Clause 5 of the policy excludes from coverage:

(b)
all costs rendered necessary by defects of material workmanship, design, plan, or
specification, and should damage occur to any portion of the Insured Property containing
any of the said defects, the cost of replacement or rectification which is hereby excluded
is that cost which would have been incurred if replacement or rectification of the Insured
Property had been put in hand immediately prior to the said damage.
For the purpose of this policy and not merely this exclusion it is understood and agreed
that any portion of the Insured Property shall not be regarded as damaged solely by
virtue of the existence of any defect of material workmanship, design, plan or
specification.

(i)
settling or shrinkage of walls, floors, foundations or ceilings, but this
exclusion shall not apply to damage resulting from settling or shrinkage of walls,
floors foundations, or ceilings.
The Court held that:
LEG2/96 excludes any defects of material workmanship, design, plan, or specification which includes
defective design of component pieces of the work, including the formwork and shoring;
the failure to address the complex slab design by the use of suitable formwork and shoring procedures
constituted a defect in workmanship; and
the excluded costs were those that would have been incurred to remediate the defect before any consequential
or resulting damage occurred to the insured property.
Conclusion
In Acconia, the Court held that, read in its entirety, the intent of LEG2/96 is to exclude those costs rendered
necessary by one of the named defects, but is limited to costs which would have been incurred if replacement or
rectification of the Insured Property [the slabs] had been put in hand immediately prior to the said damage. In
other words, the cost excluded is the cost that would have been incurred to replace the formwork/shoring had it
been established that it was defective prior to causing the damage. LEG2/96 does not extend to exclude the cost
of rectifying or replacing the damaged insured property itself. The excluded costs crystallize immediately prior to
the damage occurring and are thus limited to those costs that would have prevented the damage from happening.
The plaintiffs were entitled to recover costs relating to slab repair, indirect costs and profit margin.
A notice of appeal was filed on behalf of the insurers on September 12, 2014.
Consider This Example
Clamps are designed to affix solar panels to five free-standing buildings for an industrial project. The designer
miscalculated the force on the clamps and, during the construction of the last building, the clamps failed on
building #4. Damage is caused to the partially completed roof on building #5.
Costs are incurred for:
redesign and replacement of all of the clamps on the project;
replacing the partially completed damaged roof on building #5; and
reconstruction of building #4.
The Courts interpretation of LEG2/96 means that the cost excluded is the cost that would have been incurred to
replace the clamps had it been determined that they were defective prior to the failure.

[1] Commonwealth Construction Co. v. Imperial Oil Ltd., [1978] 1 S.C.R. 317 at p. 328.

http://www.shk.ca/the-leg296-exclusion-in-course-of-construction-insurance-policies/

10/19/2015

The "LEG2/96" Design/Workmanship Exclusion in Course of Construction Insurance ... Page 3 of 3

LATEST NEWS

ADDRESS

ITS THAT TIME OF YEAR AGAIN:

THE POTENTIAL LIABILITY OF A
SOCIAL HOST

Shapiro Hankinson & Knutson

Law Corporation

UPDATE: Acciona Infrastructure

Canada Inc. v. Allianz Global Risks
US Insurance Company, 2015
BCCA 347

Suite 700, Two Bentall Centre

555 Burrard Street
Vancouver, BC V7X 1M8
Canada

The Duty of Honest Performance

and Tendering

Home

Expertise

Terms of Use

Team

Privacy Policy

Resources

CONTACT
604 684 0727
604 684 7094
EMAIL
FIND A LAWYER

MAP

Contact

Join Our Team

UBC Eng. Program

Site Map

2015 Shapiro Hankinson & Knutson Law Corporation. All rights reserved.

http://www.shk.ca/the-leg296-exclusion-in-course-of-construction-insurance-policies/

10/19/2015