Standard LEG Exclusion Clauses In Builders' Risk Policies

As is common for construction contracts in Ontario, builders' risk policy insurance agreements frequently use standard form contracts. The Supreme Court of Canada has recognized the purpose of these policies as providing broad coverage for construction projects, which are "singularly susceptible to accidents and errors."¹

A feature of some of these "all-risk" policies are common exclusion clauses developed by the London Engineering Group ("LEG"), a consultative body for insurers of engineering class risks.

LEG exclusion clauses

LEG has developed three insurance-industry model exclusion clauses: LEG 1, LEG 2 and LEG 3.²

1. LEG 1/96 ' This "outright defects exclusion" clause excludes coverage for all loss or damage due to defects of workmanship, materials or design.
2. LEG 2/96 ' This "consequences defects exclusion" clause excludes the before-loss cost of remedying any defective workmanship, materials or design.
3. LEG 3/06 ' This "improvement defects exclusion" is the narrowest model exclusion clause, only excluding any costs incurred for improvements to the original design, material or workmanship.

There is relatively little Canadian case law interpreting these clauses. The Supreme Court of British Columbia and the British Columbia Court of Appeal did so in Acciona Infrastructure Canada Inc. v Allianz Global Risks US Insurance Co.³ These decisions concerned the interpretation of a LEG 2 exclusion clause. The BC Court of Appeal upheld the trial court decision, and the Supreme Court of Canada subsequently remanded the case to the Court of Appeal to be reconsidered for disposition in accordance with it holding in Ledcor.⁴

The Ledcor analysis

In Ledcor, the Supreme Court of Canada provides a framework for courts to interpret the scope of coverage for insurance policies subject to exclusion clauses, with the onus of proof shifting between the insurer and the insured.

1. First, the insured must establish that the damage or loss falls within the general scope of coverage of the policy.
2. Second, the insurer may prove that an exclusion clause applies to limit the insured's claim.
3. If an insurer succeeds in proving an exclusion, the insurer may then prove that an exception to the exclusion applies.⁵

The Court further advised in Ledcor that where there is ambiguity in the language of the insurance policy, it must be resolved following the general principles of contractual interpretation to best represent the parties' reasonable expectations.⁶ Because builders' risk policies...