Canadian National Railway Co. et al. v. Royal and Sun Alliance Insurance Co. of Canada et al., (2007) 222 O.A.C. 129 (CA)

• Judge: Rosenberg, Cronk and Lang, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: March 26, 2007
• Jurisdiction: Ontario
• Citations: (2007), 222 O.A.C. 129 (CA)

CNR v. Royal & Sun (2007), 222 O.A.C. 129 (CA)

MLB headnote and full text

Temp. Cite: [2007] O.A.C. TBEd. MR.083

Canadian National Railway Company, Grand Trunk Western Railroad Incorporated and St. Clair Tunnel Company (plaintiffs/respondents/appellants by cross-appeal) v. Royal and Sun Alliance Insurance Company of Canada, AXA Assurances Inc., The Continental Casualty Company of Canada, Reliance Insurance Company, Aviva Canada Inc. and St. Paul Fire and Marine Insurance Company (defendants/appellants/respondents by cross-appeal)

(C42591)

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

Ontario Court of Appeal

Rosenberg, Cronk and Lang, JJ.A.

March 26, 2007.

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, 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.

Insurance - Topic 6536

Multi-peril property insurance - The risks or perils - "Sue and labour" clauses - A builder's risk insurance clause contained a "sue and labour" clause providing that "it shall be lawful and necessary for the Insured ... to sue, labour and travel for in and about the defence, safeguard and recovery of the property insured hereunder" and "the insurer(s) will contribute ... towards any reasonable and proper expenses in connection with the foregoing" - The Ontario Court of Appeal held that a sue and labour clause covered mitigation of damage resulting "from the contingency that has occurred as opposed to being the consequence of another contingency that has yet to occur" - The court agreed that "such clauses oblige an insurer to contribute to reasonable and proper expenses incurred to prevent further damage. They do not ... apply to indemnify the insured for expenses incurred to minimize or mitigate an uninsured loss" - See paragraphs 141 to 144.

Insurance - Topic 6592

Multi-peril property insurance - Contractor's or builder's policies - Exclusions - Faulty work, materials or design - 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 "the cost of making good ... faulty or improper design" - The trial judge found that the machine was damaged due to unforeseeable "excess differential deflection" between components in the machine, which resulted in the sealing system failing - Since the design accommodated all foreseeable risks, the exclusion did not apply - The Ontario Court of Appeal held that the faulty or improper design exclusion applied to exclude coverage - The trial judge's foreseeability findings were tainted by palpable and overriding error where he failed to consider evidence that the manufacturer was aware of the risk of excess differential deflection that could compromise the machine's sealing system and had concluded, wrongly, that the anticipated differential deflection would not be of sufficient magnitude to compromise the sealing system - Additionally, the trial judge's foreseeablility findings were supported by a misapprehension of other evidence - On the evidence, 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 - See paragraphs 53 to 119.

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 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" - The trial judge held that the applicable standard to determine whether there was faulty or improper design was whether the equipment involved was designed to withstand all foreseeable risks, even if the risk was unlikely or remote - The judge rejected the prima facie standard and the reasonably foreseeable standard used in other jurisdictions - The Ontario Court of Appeal held that whether the appropriate standard was foreseeability or reasonable foreseeability need not be determined for the purposes of the appeal - However, the court stated that "we agree that the foreseeability standard mandates that the relevant design 'take into account', 'accommodate', 'provide for' and 'withstand' all foreseeable risks" - The court stated that "we do not accept that a faulty design or improper design exclusion in an 'all risks' builders risk insurance policy is to be construed in accordance with a negligence-based reasonable foreseeability standard" - A finding of faulty design was concerned with the equipment's shortcomings in its attributes or character, not with the conduct of the designer - See paragraphs 56 to 68, 127 to 133.

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 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" - However, the exclusion also provided that "to the extent otherwise insured and not otherwise excluded under this Policy, resultant loss or damage under any Section of the Policy shall be insured" - The Ontario Court of Appeal discussed the scope of this clause and agreed with the trial judge that the exclusion applied to all loss or damage caused by faulty or improper design of the equipment at issue (including delayed startup costs) and was not limited to excluding coverage for the costs incurred in repairing or modifying the faulty or improper design - See paragraphs 134 to 140.

Insurance - Topic 6594

Multi-peril property insurance - Contractor's or builder's policies - Exclusions - Error in design, plan or specification - [See all 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 - See paragraphs 120 to 126.

Cases Noticed:

Foundation Co. of Canada Ltd. v. American Home Assurance Co. (1995), 25 O.R.(3d) 36 (Gen. Div.), affd. [1997] O.A.C. Uned. 327 (C.A.), refd to. [para. 58].

Algonquin Power (Long Sault) Partnership et al. v. Chubb Insurance Co. of Canada et al., [2003] O.T.C. 446 (Sup. Ct.), refd to. [para. 58].

Queensland Government Railways and Electrical Power Transmission Property Ltd. v. Manufacturers Mutual Insurance Ltd., [1969] 1 Lloyd's Rep. 214 (Aust. H.C.), refd to. [para. 58].

Willowbrook Homes (1964) Ltd. v. Simcoe and Erie General Insurance Co. (1980), 22 A.R. 95 (C.A.), refd to. [para. 58].

British Columbia Rail Ltd. v. American Home Assurance Co. (1991), 79 D.L.R.(4th) 729 (B.C.C.A.), refd to. [para. 58].

Keljanovic Estate, Re (2000), 132 O.A.C. 19; 186 D.L.R.(4th) 481 (C.A.), leave to appeal denied (2000), 265 N.R. 395 (S.C.C.), refd to. [para. 91].

Waxman v. Waxman (2004), 186 O.A.C. 201 (C.A.), refd to. [para. 91].

Employers Casualty Co. v. Holm (1965), 393 S.W.2d 363 (Tex. Civ. App.), refd to. [para. 121].

Dawson Creek (City) v. Zurich Insurance Co. (2000), 135 B.C.A.C. 129; 221 W.A.C. 129; 75 B.C.L.R.(3d) 131 (C.A.), leave to appeal denied (2000), 264 N.R. 200 (S.C.C.), refd to. [para. 122].

C.C.R. Fishing Ltd. and Bank of Montreal v. British Reserve Insurance Co. et al., [1990] 1 S.C.R. 814; 109 N.R. 1, refd to. [para. 122].

Soya G.m.b.H Mainz Kommanditgesellschaft v. White, [1983] 1 Lloyd's L.R. 122 (H.L.), refd to. [para. 124].

British Columbia v. Royal Insurance Co. of Canada et al. (1991), 7 B.C.A.C. 172; 15 W.A.C. 172; 60 B.C.L.R.(2d) 109 (C.A.), leave to appeal denied (1992), 39 N.R. 395, refd to. [para. 136].

Benson & Hedges (Canada) Ltd. v. Hartford Fire Insurance Co. et al., [1978] 2 S.C.R. 1088; 21 N.R. 279, refd to. [para. 143].

Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888; 32 N.R. 488, refd to. [para. 159].

Collavino Inc. v. Employers Mutual Liability Insurance Co. of Wisconsin (1984), 5 C.C.L.I. 94 (Ont. H.C.), affd. [1985] O.J. No. 227 (C.A.), refd to. [para. 174].

Boucher et al. v. Public Accountants Council (Ont.) et al. (2004), 188 O.A.C. 201; 71 O.R.(3d) 291 (C.A.), refd to. [para. 223].

Celanese Canada Inc. v. Canadian National Railway Co. (2005), 196 O.A.C. 60 (C.A.), refd to. [para. 224].

Walker v. Ritchie et al. (2005), 197 O.A.C. 81 (C.A.), refd to. [para. 224].

Schaible Electric Ltd. v. Melloul-Blamey Construction Inc. et al. (2005), 201 O.A.C. 71 (C.A.), refd to. [para. 224].

Graham et al. v. Rourke (1990), 40 O.A.C. 301; 74 D.L.R.(4th) 1 (C.A.), refd to. [para. 227].

Counsel:

Earl A. Cherniak, Q.C., Kirk F. Stevens and David E. Liblong, for the appellants/respondents by cross-appeal;

Richard H. Shaban and Sharon C. Vogel, for the respondents, appellants by cross-appeal.

This appeal and cross-appeal were heard on September 11-12, 2006, before Rosenberg, Cronk and Lang, JJ.A., of the Ontario Court of Appeal.

On March 26, 2007, the judgment of the Court of Appeal was released and the following opinions were filed:

Rosenberg and Cronk, JJ.A. - see paragraphs 1 to 149;

Lang, J.A., dissenting - see paragraphs 150 to 231.