Canadian National Railway Co. et al. v. Royal & Sun Alliance Insurance Co. of Canada et al., (2008) 381 N.R. 332 (SCC)

• Judge: McLachlin, C.J.C., Binnie, LeBel, Deschamps, Abella, Charron and Rothstein, JJ.
• Court: Supreme Court of Canada
• Case Date: November 21, 2008
• Jurisdiction: Canada (Federal)
• Citations: (2008), 381 N.R. 332 (SCC);2008 SCC 66

CNR v. Royal & Sun (2008), 381 N.R. 332 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2008] N.R. TBEd. NO.005

Canadian National Railway Company, Grand Trunk Western Railroad Incorporated and St. Clair Tunnel Company (appellants) v. Royal and Sun Alliance Insurance Company of Canada, Axa Assurances Inc., Continental Casualty Company of Canada, Reliance Insurance Company, Aviva Canada Inc. and St. Paul Fire and Marine Insurance Company (respondents)

(32062; 2008 SCC 66; 2008 CSC 66)

Indexed As: Canadian National Railway Co. et al. v. Royal & Sun Alliance Insurance Co. of Canada et al.

Supreme Court of Canada

McLachlin, C.J.C., Binnie, LeBel, Deschamps, Abella, Charron and Rothstein, JJ.

November 21, 2008.

Summary:

The plaintiffs undertook to construct a railway tunnel under a river, using a custom- designed tunnel boring machine constructed by Lovat. The machine broke down after two months, causing a 229 day delay in the project. The plaintiffs held a builder's risk insurance policy issued by the defendant insurers, which covered "all risks of direct physical loss or damage ... to all real and personal property", but excluded coverage for "the cost of making good ... faulty or improper design" and "inherent vice". The plaintiffs sued for recovery under the policy. The insurers relied on the exclusions.

The Ontario Superior Court of Justice, in a judgment reported [2004] O.T.C. 851, allowed the action. The machine was damaged due to unforeseeable "excess differential deflection" between components in the machine, which resulted in the sealing system failing. Neither exclusion applied. Absent foreseeability, there was no faulty or improper design. The insurers appealed. The insurers submitted that the trial judge erred in finding that the excess differential deflection was not foreseeable and that design error was not established. Alternatively, the insurers submitted that the trial judge erred in failing to find that the inherent vice exclusion excluded coverage. In the event that the insurer's appeal succeeded, the plaintiffs cross-appealed, submitting, inter alia, that the trial judge erred in interpreting the scope of the faulty or improper design exclusion.

The Ontario Court of Appeal, Lang, J.A., dissenting, in a judgment reported (2007), 222 O.A.C. 129, allowed the appeal on the ground that the faulty or improper design exclusion applied to exclude coverage. The court agreed that the inherent vice exclusion did not apply. The court dismissed the cross-appeal. The potential occurrence of the causative event of the failure of the sealing system was anticipated and the risk was not adequately accommodated in the design. The design was accordingly faulty and the exclusion clause precluded coverage. The plaintiffs appealed.

The Supreme Court of Canada, Rothstein, Deschamps and Charron, JJ., dissenting, allowed the appeal. The "all risks" policy afforded the plaintiffs greater protection than allowed by the Court of Appeal. The failure of the sealing system "is not the same thing as fault or impropriety". The insurers did not meet the onus of bringing the loss within the exclusion.

Insurance - Topic 6592

Multi-peril property insurance - Contractor's or builder's policies - Exclusions - Faulty work, materials or design - The plaintiffs constructed a railway tunnel under a river using a custom-designed tunnel boring machine (then the largest in the world) - The machine broke down after two months, causing a 229 day delay in the project - The plaintiffs' builder's risk insurance policy, issued by the defendant insurers, covered "all risks of direct physical loss or damage ... to all real and personal property", but excluded coverage for "faulty or improper design" - The trial judge found that differential deflection was a foreseeable risk that the design accommodated, but damage resulted from unforeseeable "excess differential deflection", which was a risk not foreseeable within the limits of engineering knowledge known at the time - Accordingly, there was no faulty or improper design and the exclusion did not apply - The design was modified and construction was completed without further interruption - The Ontario Court of Appeal held that the loss was excluded, effectively finding that the machine not only had to be designed to withstand all foreseeable risks (which the trial judge held that it was), but that the design must in fact, with the benefit of hindsight, be shown to have succeeded in withstanding all foreseeable risks (which it did not) - Since the potential occurrence of the causative event of the failure was anticipated and the risk was not adequately accommodated in the design, the design was faulty and the exclusion clause applied - The Supreme Court of Canada held that the Court of Appeal erred in greatly expanding the scope of the clause, effectively reading the qualifying words "faulty or improper" out of the exclusion (i.e. standard of perfect design) - The clause did not apply merely because there was a failure attributable to design - The court stated that "the policy did not exclude all loss attributable to the 'the design', but only loss attributable to a 'faulty or improper design'. The design exhausted the state of the art but left a residual risk. Failure is not the same thing as fault or impropriety. In my view, the insurers did not meet the onus of bringing the loss within the exclusion." - The court agreed that "a design is not faulty or improper simply because it does not meet a standard of perfection in relation to all foreseeable risks" - See paragraphs 1 to 68.

Insurance - Topic 6592

Multi-peril property insurance - Contractor's or builder's policies - Exclusions - Faulty work, materials or design - A builder's risk insurance policy, issued by the defendant insurers, covered "all risks of direct physical loss or damage ... to all real and personal property", but excluded coverage for "faulty or improper design" - The Supreme Court of Canada stated that "the words 'faulty or improper' require the insurers to go beyond simply showing a failure in circumstances of foreseeable risk. The words 'faulty or improper', and in particular the word 'improper', required 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 to all foreseeable risks, in my view, was not required by the words used by the parties. ... The 'industry' standard is too low" - See paragraphs 53, 54.

Insurance - Topic 6594

Multi-peril property insurance - Contractor's or builder's policies - Exclusions - Error in design, plan or specification - [See both Insurance - Topic 6592 ].

Insurance - Topic 6610

Multi-peril property insurance - Exclusions - Inherent vice - The plaintiffs undertook to construct a railway tunnel under a river, using a custom-designed tunnel boring machine - The machine broke down after two months, causing a 229 day delay in the project - The plaintiffs held a builder's risk insurance policy issued by the defendant insurers, which covered "all risks of direct physical loss or damage ... to all real and personal property", but excluded coverage for "inherent vice" - The machine was damaged by foreseeable "excess differential deflection" between components in the machine, which resulted in the sealing system failing, which the design did not properly accommodate - The Ontario Court of Appeal agreed with the trial judge that the "inherent vice" exclusion did not apply - The damage did not result from purely inherent qualities of the machine, but from external causes - Inherent vice required some internal decomposition that made deterioration of the machine inevitable because of qualities inherent in the machine - The Supreme Court of Canada agreed with the Court of Appeal - See paragraph 66.

Cases Noticed:

Foundation Co. of Canada Ltd. v. American Home Assurance Co. (1995), 25 O.R.(3d) 36 (Gen. Div.), refd to. [para. 28].

Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888; 32 N.R. 488, refd to. [para. 30].

Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 S.C.R. 252; 147 N.R. 44; 83 Man.R.(2d) 81; 36 W.A.C. 81, refd to. [para. 30].

Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 166 O.A.C. 233; 62 O.R.(3d) 447 (C.A.), refd to. [para. 30].

Parsons v. Standard Fire Insurance Co. (1880), 5 S.C.R. 233, refd to. [para. 32].

Stevenson v. Reliance Petroleum Ltd., [1956] S.C.R. 936, refd to. [para. 33].

Dalton Cartage Co. v. Continental Insurance Co. and St. Paul Fire and Marine Insurance Co., [1982] 1 S.C.R. 164; 40 N.R. 135, refd to. [para. 34].

Queensland Government Railways v. Manufacturers' Mutual Insurance Ltd., [1969] 1 Lloyd's Rep. 214 (Aust. H.C.), dist. [para. 38].

Poole-Pritchard Canadian Ltd. v. Underwriting Members of Lloyds (1969), 71 W.W.R.(N.S.) 684 (Alta. S.C.), refd to. [para. 41].

Homeco Investments Ltd. v. Canadian General Insurance Co., [1984] O.J. No. 920 (H.C.J.), refd to. [para. 41].

Lakeland Development Co. v. Anglo Gibraltar Insurance Group (1993), 10 C.L.R.(2d) 17 (Ont. Gen. Div.), refd to. [para. 41].

Willowbrook Homes (1964) Ltd. v. Simcoe & Erie General Insurance Co., [1980] I.L.R. ¶1-1236; 22 A.R. 95 (C.A.), dist. [para. 42].

Collavino Inc. v. Employers Mutual Liability Insurance Co. of Wisconsin (1984), 5 C.C.I.L. 94 (Ont. H.C.J.), dist. [para. 43].

British Columbia Rail Ltd. v. American Home Assurance Co. (1991), 79 D.L.R.(4th) 729 (B.C.C.A.), dist. [para. 44].

Kier Construction v. Royal Insurance (UK) Ltd. (1992), 30 Con. L.R. 45 (Q.B.), refd to. [para. 46].

Hitchens (Hatfield) Ltd. v. Prudential Assurance Co., [1991] 2 Lloyd's Rep. 580 (C.A.), refd to. [para. 46].

Algonquin Power (Long Sault) Partnership et al. v. Chubb Insurance Co. of Canada et al., [2003] O.T.C. 446; 50 C.C.L.I.(3d) 107 (Sup. Ct.), refd to. [para. 50].

Pense v. Northern Life Insurance Co. (1907), 15 O.L.R. 131 (C.A.), affd. (1908), 42 S.C.R. 246, refd to. [para. 73].

Cornish v. Accident Insurance Co. (1889), 23 Q.B. 453 (C.A.), refd to. [para. 75].

Scalera v. Lloyd's of London, [2000] 1 S.C.R. 551; 253 N.R. 1; 135 B.C.A.C. 161; 221 W.A.C. 161; 2001 SCC 24, refd to. [para. 76].

British and Foreign Marine Insurance Co. v. Gaunt, [1921] 2 A.C. 41 (H.L.), refd to. [para. 79].

Triple Five Corp. et al. v. Simcoe & Erie Group et al. (1994), 159 A.R. 1 (Q.B.), refd to. [para. 120].

Mellon v. Federal Insurance Co. (1926), 14 F.2d 997 (S.D.N.Y.), refd to. [para. 120].

Authors and Works Noticed:

Brown, Craig, Insurance Law in Canada (2002) (2008 Looseleaf Update) (Release 1), p. 20-32 [paras. 39, 122].

Koughan, James, The Collapse of the Tacoma Narrows Bridge, Evaluation of Competing Theories of its Demise, and the Effects of the Disaster of Succeeding Bridge Designs (1996) (online: http://web.archive.org/web/ 20010813084722; http:/www/me/utexas.edu/∼uer/papers/paper_jk.html), generally [para. 53].

Withey, P.A., Fatigue Failure of the de Havilland Comet 1, Engineering Failure Analysis (1997), vol. 4, No. 2, p. 147 [para. 53].

Counsel:

Guy Pratte, Richard H. Shaban and Sharon C. Vogel, for the appellants;

Earl A. Cherniak, Q.C., David Liblong and Kirk F. Stevens, for the respondents.

Solicitors of Record:

Borden Ladner Gervais, Toronto, Ontario, for the appellants;

Lerners, Toronto, Ontario, for the respondents.

This appeal was heard on May 14, 2008, before McLachlin, C.J.C., Binnie, LeBel, Deschamps, Abella, Charron and Rothstein, JJ., of the Supreme Court of Canada.

On November 21, 2008, the judgment of the Court was delivered in both official languages and the following opinions were filed:

Binnie, J. (McLachlin, C.J.C., LeBel and Abella, JJ., concurring) - see paragraphs 1 to 68;

Rothstein, J. (Deschamps and Charron, JJ., concurring), dissenting - see paragraphs 69 to 131.